[Federal Register Volume 79, Number 157 (Thursday, August 14, 2014)]
[Rules and Regulations]
[Pages 47736-47983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17747]
[[Page 47735]]
Vol. 79
Thursday,
No. 157
August 14, 2014
Part II
Securities and Exchange Commission
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17 CFR Parts 230, 239, et al.
Money Market Fund Reform; Amendments to Form PF; Final Rule
Federal Register / Vol. 79 , No. 157 / Thursday, August 14, 2014 /
Rules and Regulations
[[Page 47736]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, 270, 274 and 279
[Release No. 33-9616, IA-3879; IC-31166; FR-84; File No. S7-03-13]
RIN 3235-AK61
Money Market Fund Reform; Amendments to Form PF
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is adopting amendments to the rules that govern money market
mutual funds (or ``money market funds'') under the Investment Company
Act of 1940 (``Investment Company Act'' or ``Act''). The amendments are
designed to address money market funds' susceptibility to heavy
redemptions in times of stress, 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,
their benefits. The SEC is removing the valuation exemption that
permitted institutional non-government money market funds (whose
investors historically have made the heaviest redemptions in times of
stress) to maintain a stable net asset value per share (``NAV''), and
is requiring those 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'' NAV. The SEC also is adopting amendments that will give
the boards of directors of money market funds new tools to stem heavy
redemptions by giving them discretion to impose a liquidity fee if a
fund's weekly liquidity level falls below the required regulatory
threshold, and giving them discretion to suspend redemptions
temporarily, i.e., to ``gate'' funds, under the same circumstances.
These amendments will require all non-government money market funds to
impose a liquidity fee if the fund's weekly liquidity level falls below
a designated threshold, unless the fund's board determines that
imposing such a fee is not in the best interests of the fund. In
addition, the SEC is adopting amendments designed to make money market
funds more resilient by increasing the diversification of their
portfolios, enhancing their stress testing, and improving transparency
by requiring money market funds to report additional information to the
SEC and to investors. Finally, the amendments require investment
advisers to certain large unregistered liquidity funds, which can have
many of the same economic features as money market funds, to provide
additional information about those funds to the SEC.
DATES: Effective Date: October 14, 2014.
Compliance Dates: The applicable compliance dates are discussed in
section III.N. of the Release titled ``Compliance Dates.''
FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Amanda
Hollander Wagner, Senior Counsel; Andrea Ottomanelli Magovern, Senior
Counsel; Erin C. Loomis, Senior Counsel; Kay-Mario Vobis, Senior
Counsel; Thoreau A. Bartmann, Branch Chief; Sara Cortes, Senior Special
Counsel; or Sarah G. ten Siethoff, Assistant Director, 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 adopting 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], 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 Part 270.
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Table of Contents
I. Introduction
II. Background
A. Role of Money Market Funds
B. Certain Economic Features of Money Market Funds
1. Money Market Fund Investors' Desire To Avoid Loss
2. Liquidity Risks
3. Valuation and Pricing Methods
4. Investors' Misunderstanding About the Actual Risk of
Investing in Money Market Funds
C. Effects on Other Money Market Funds, Investors, and the
Short-Term Financing Markets
D. The Financial Crisis
E. Examination of Money Market Fund Regulation Since the
Financial Crisis
1. The 2010 Amendments
2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of
2011 and 2013
3. Continuing Consideration of the Need for Additional Reforms
III. Discussion
A. Liquidity Fees and Redemption Gates
1. Analysis of Certain Effects of Fees and Gates
2. Terms of Fees and Gates
3. Exemptions to Permit Fees and Gates
4. Amendments to Rule 22e-3
5. Operational Considerations Relating to Fees and Gates
6. Tax Implications of Liquidity Fees
7. Accounting Implications
B. Floating Net Asset Value
1. Introduction
2. Summary of the Floating NAV Reform
3. Certain Considerations Relating to the Floating NAV Reform
4. Money Market Fund Pricing
5. Amortized Cost and Penny Rounding for Stable NAV Funds
6. Tax and Accounting Implications of Floating NAV Money Market
Funds
7. Rule 10b-10 Confirmations
8. Operational Implications of Floating NAV Money Market Funds
9. Transition
C. Effect on Certain Types of Money Market Funds and Other
Entities
1. Government Money Market Funds
2. Retail Money Market Funds
3. Municipal Money Market Funds
4. Implications for Local Government Investment Pools
5. Unregistered Money Market Funds Operating Under Rule 12d1-1
6. Master/Feeder Funds--Fees and Gates Requirements
7. Application of Fees and Gates to Other Types of Funds and
Certain Redemptions
D. Guidance on the Amortized Cost Method of Valuation and Other
Valuation Concerns
1. Use of Amortized Cost Valuation
2. Other Valuation Matters
E. Amendments to Disclosure Requirements
1. Required Disclosure Statement
2. Disclosure of Tax Consequences and Effect on Fund
Operations--Floating NAV
3. Disclosure of Transition to Floating NAV
4. Disclosure of the Effects of Fees and Gates on Redemptions
5. Historical Disclosure of Liquidity Fees and Gates
6. Prospectus Fee Table
7. Historical Disclosure of Affiliate Financial Support
8. Economic Analysis
9. Web site Disclosure
F. Form N-CR
1. Introduction
2. Part B: Defaults and Events of Insolvency
3. Part C: Financial Support
4. Part D: Declines in Shadow Price
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5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees
and Gates
6. Part H: Optional Disclosure
7. Timing of Form N-CR
8. Economic Analysis
G. 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. Operational Implications of the N-MFP Amendments
H. 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
I. Diversification
1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's
Five Percent Issuer Diversification Requirement
2. ABS--Sponsors Treated as Guarantors
3. The Twenty-Five Percent Basket
J. Amendments to Stress Testing Requirements
1. Overview of Current Stress Testing Requirements and Proposed
Amendments
2. Stress Testing Metrics
3. Hypothetical Events Used in Stress Testing
4. Board Reporting Requirements
5. Dodd-Frank Mandated Stress Testing
6. Economic Analysis
K. Certain Macroeconomic Consequences of the New Amendments
1. Effect on Current Investors in Money Market Funds
2. Efficiency, Competition and Capital Formation Effects on the
Money Market Fund Industry
3. Effect of Reforms on Investment Alternatives, and the Short-
Term Financing Markets
L. Certain Alternatives Considered
1. Liquidity Fees, Gates, and Floating NAV Alternatives
2. Alternatives in the FSOC Proposed Recommendations
3. Alternatives in the PWG Report
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. Compliance Dates
1. Compliance Date for Amendments Related to Liquidity Fees and
Gates
2. Compliance Date for Amendments Related to Floating NAV
3. Compliance Date for Rule 30b1-8 and Form N-CR
4. Compliance Date for Diversification, Stress Testing,
Disclosure, Form PF, Form N-MFP, and Clarifying Amendments
IV. Paperwork Reduction Act
A. Rule 2a-7
1. Asset-Backed Securities
2. Retail and Government Funds
3. Board Determinations--Fees and Gates
4. Notice to the Commission
5. Stress Testing
6. Web Site Disclosure
7. Total Burden for Rule 2a-7
B. Rule 22e-3
C. Rule 30b1-7 and Form N-MFP
1. Discussion of Final Amendments
2. Current Burden
3. Change in Burden
D. Rule 30b1-8 and Form N-CR
1. Discussion of New Reporting Requirements
2. Estimated Burden
E. Rule 34b-1(a)
F. Rule 482
G. Form N-1A
H. Advisers Act Rule 204(b)-1 and Form PF
1. Discussion of Amendments
2. Current Burden
3. Change in Burden
V. Regulatory Flexibility Act Certification
VI. Update to Codification of Financial Reporting Policies
VII. Statutory Authority
Text of Rules and Forms
I. Introduction
Money market funds are a type of mutual fund registered under the
Investment Company Act and regulated pursuant to rule 2a-7 under the
Act.\2\ Money market funds generally pay dividends that reflect
prevailing short-term interest rates, are redeemable on demand, and,
unlike other investment companies, seek to maintain a stable NAV,
typically $1.00.\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, 2014, there were approximately 559 money market
funds registered with the Commission, and these funds collectively held
over $3.0 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 NAV of $1.00, but
a few seek to maintain a stable NAV of a different amount, e.g.,
$10.00. For convenience, throughout this Release, the discussion
will simply refer to the stable NAV 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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Absent an exemption, as required by the Investment Company Act, all
registered mutual funds must price and transact in their shares at the
current NAV, calculated 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 (i.e., use
a floating NAV).\5\ In 1983, the Commission codified an exemption to
this requirement allowing money market funds 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 NAV 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 in its portfolio.\9\
Other types of mutual funds not regulated by rule 2a-7 generally must
calculate their daily NAVs using market-based factors and cannot use
penny rounding.
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\5\ 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 Accounting Series Release No. 219, Valuation
of Debt Instruments by Money Market Funds and Certain Other Open-End
Investment Companies, Financial Reporting Codification (CCH) section
404.05.a and .b (May 31, 1977) (``ASR 219''). We further discuss the
use of amortized cost valuation by mutual funds in section III.B.5
below.
\6\ See 1983 Adopting Release, supra note 3. Section 6(c) of the
Investment Company Act provides the Commission with broad authority
to exempt persons, securities or transactions from any provision of
the Investment Company Act, or the regulations thereunder, if, and
to the extent that such exemption is 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.
See Commission Policy and Guidelines for Filing of Applications for
Exemption, SEC Release No. IC-14492 (Apr. 30, 1985).
\7\ See current rule 2a-7(a)(2). See also supra note 5.
Throughout this Release when we refer to a rule as it exists prior
to any amendments we are making today it is described as a ``current
rule'' while references to a rule as amended (or one that is not
being amended today) are to ``rule.''
\8\ See current rule 2a-7(a)(20).
\9\ Today, 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 place like other mutual funds, and use
the amortized cost method so that they need not strike a daily
market-based NAV to facilitate intra-day transactions. See infra
section III.A.1.a.
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When the Commission initially established the regulatory framework
allowing money market funds to
[[Page 47738]]
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 focused on minimizing dilution of assets and returns for
shareholders.\10\ At that time, the Commission was persuaded that
deviations of a magnitude that would cause material dilution generally
would not occur given the risk-limiting conditions of the exemptive
rule.\11\ As discussed throughout this Release, our historical
experience with these funds, and the events of the 2007-2009 financial
crisis,\12\ has led us to re-evaluate the exemptive relief provided
under rule 2a-7, including the exemption from the statutory floating
NAV for some money market funds.
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\10\ 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.'').
\11\ See id., at nn.41-42 and accompanying text (noting that
witnesses from the original money market fund exemptive order
hearings testified 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).
\12\ Throughout this Release, unless indicated otherwise, when
we use the term ``financial crisis'' we are referring to the
financial crisis that took place between 2007 and 2009.
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Under rule 2a-7, 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. In exchange for the ability to rely on the exemptions
provided by rule 2a-7, money market funds are subject to conditions
designed to limit deviations between the fund's $1.00 stable share
price and the market-based NAV of the fund's portfolio.\13\ Rule 2a-7
requires that money market funds maintain a significant amount of
liquid assets and invest in securities that meet the rule's credit
quality, maturity, and diversification requirements.\14\ For example, a
money market fund's portfolio securities must meet certain credit
quality standards, such as posing minimal credit risks.\15\ The rule
also places restrictions 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, 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.\16\ Money market funds also
must maintain sufficient liquidity to meet reasonably foreseeable
redemptions, 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, as
defined under the rule.\17\ 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.\18\
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\13\ 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.
\14\ See current rule 2a-7(c)(2), (3), (4), and (5).
\15\ See current rule 2a-7(a)(12), (c)(3)(i).
\16\ Current rule 2a-7(c)(2).
\17\ See current rule 2a-7(c)(5). As we discussed when we
amended rule 2a-7 in 2010, the 10% daily liquid asset requirement
does not apply to tax-exempt funds. See Money Market Fund Reform,
Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR
10060 (Mar. 4, 2010)] (``2010 Adopting Release''). See infra section
III.E.3.
\18\ See current rule 2a-7(c)(4). Because of limited
availability of the securities in which they invest, tax-exempt
funds have different diversification requirements under rule 2a-7
than other money market funds.
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Rule 2a-7 also includes certain procedural standards 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'') \19\ 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 taken 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'').\20\
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\19\ See current rule 2a-7(c)(8)(ii)(A).
\20\ See current 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. Current 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 NAV. See rule 2a-7(c)(1).
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Different types of money market funds have been introduced to meet
the different needs of money market fund investors. Historically, most
investors have invested in ``prime money market funds,'' which
generally hold a variety of taxable short-term obligations issued by
corporations and banks, as well as repurchase agreements and asset-
backed commercial paper.\21\ ``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 their
holdings to 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.\22\
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\21\ See Investment Company Institute, 2014 Investment Company
Fact Book, at 196, Table 37 (2014), available at http://www.ici.org/pdf/2014_factbook.pdf.
\22\ Unless the context indicates otherwise, references to
``prime funds'' throughout this Release include funds that are often
referred to as ``tax-exempt'' or ``municipal'' funds. We discuss the
particular features of such tax-exempt funds and why they are
included in our reforms in detail in section III.C.3.
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We first 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.\23\ We
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then discuss money market funds' experience during the 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 2011 and 2013 U.S. debt ceiling impasses.
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\23\ 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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We used the analyses available to us, including the critically
important analyses contained in the report responding to certain
questions posed by Commissioners Aguilar, Paredes, and Gallagher
(``DERA Study''),\24\ in designing the reform proposals that we issued
in 2013 for additional regulation of money market funds.\25\ The 2013
proposal sought to address certain features in money market funds that
can make them susceptible to heavy redemptions, by providing money
market funds with better tools to manage and mitigate potential
contagion from high levels of redemptions, increasing the transparency
of their risks, and improving risk sharing among investors, and also to
preserve the ability of money market funds to function as an effective
and efficient cash management tool for investors.\26\
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\24\ 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
http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf. The Division of Risk, Strategy, and Financial Innovation
(``RSFI'') is now known as the Division of Economic and Risk
Analysis (``DERA''), and accordingly we are no longer referring to
this study as the ``RSFI Study'' as we did in the Proposing Release,
but instead as the ``DERA Study.''
\25\ See Money Market Fund Reform; Amendments to Form PF,
Release Nos. 33-9408; IA-3616; IC-30551 (June 5, 2013) [78 FR 36834,
(June 19, 2013)] (``Proposing Release'').
\26\ The 2013 proposal also included amendments that would apply
under each alternative, with additional changes to money market fund
disclosure, diversification limits, and stress testing, among other
reforms. See Proposing Release, supra note 25. We discuss these
amendments below.
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We received over 1,400 comments \27\ on the proposal from a variety
of interested parties including money market funds, investors, banks,
investment advisers, government representatives, academics, and
others.\28\ As discussed in greater detail in each section of this
Release below, these commenters expressed a diversity of views. Many
commenters expressed concern about the consequences of requiring a
floating NAV for certain money market funds, suggesting, among other
reasons, that it was a significant reform that would remove one of the
most desirable features of these funds, and would impose numerous costs
and operational burdens. However, others expressed support, noting that
it was a targeted solution aimed at curbing the risks associated with
the money market funds most susceptible to destabilizing runs. Most
commenters supported requiring the imposition of liquidity fees and
redemption gates in certain circumstances, suggesting that they would
prevent runs at a minimal cost. However, commenters also noted that
fees and gates alone would not resolve certain of the features of money
market funds that can incentivize heavy redemptions. Many commenters
opposed combining the two alternatives into a single package, arguing
that requiring money market funds to implement both reforms could
decrease the utility of money market funds to investors. Commenters
generally supported many of the other reforms we proposed, such as
enhanced disclosure, new portfolio reporting requirements for large
unregistered liquidity funds, and amendments to fund diversification
requirements.
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\27\ Of these, more than 230 were individualized letters, and
the rest were one of several types of form letters.
\28\ Unless otherwise stated, all references to comment letters
in this Release are to letters submitted on the Proposing Release in
File No. S7-03-13 and are available at http://www.sec.gov/comments/s7-03-13/s70313.shtml.
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Today, after consideration of the comments received, we are
removing the valuation exemption that permits institutional non-
government money market funds (whose investors have historically made
the heaviest redemptions in times of market stress) to maintain a
stable NAV, and are requiring those funds to sell and redeem their
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'' NAV. We also are adopting
amendments that will give the boards of directors of money market funds
new tools to stem heavy redemptions by giving them discretion to impose
a liquidity fee of no more than 2% if a fund's weekly liquidity level
falls below the required regulatory amount, and are giving them
discretion to suspend redemptions temporarily, i.e., to ``gate'' funds,
under the same circumstances. These amendments will require all non-
government money market funds to impose a liquidity fee of 1% if the
fund's weekly liquidity level falls below 10% of total assets, unless
the fund's board determines that imposing such a fee is not in the best
interests of the fund (or that a higher fee up to 2% or a lower fee is
in the best interests of the fund). In addition, we are adopting
amendments designed to make money market funds more resilient by
increasing the diversification of their portfolios, enhancing their
stress testing, and increasing transparency by requiring them to report
additional information to us and to investors. Finally, the amendments
require investment advisers to certain large unregistered liquidity
funds, which can have similar economic features as money market funds,
to provide additional information about those funds to us.\29\
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\29\ We note that we have consulted and coordinated with the
Consumer Financial Protection Bureau regarding this final 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
As we discussed in the Proposing Release, 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.\30\ Money market funds'
ability to maintain a stable share price contributes to their
popularity. The funds' stable share price facilitates their 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.\31\ Due to their
popularity with investors, money market fund assets have grown over
time, providing them with substantial amounts of cash to invest. As a
result, money market funds have become an important source of financing
in certain segments of the short-term financing markets. As a result,
rule 2a-7, in addition to
[[Page 47740]]
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.\32\
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\30\ See Proposing Release supra note 25, at section II.A.
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 money market fund managers' expertise. See infra
notes 63-64 and accompanying text.
\31\ See, e.g., Comment Letter of UBS Global Asset Management
(Sept. 16, 2013) (``UBS Comment Letter'') (``Historically, money
funds have offered both retail and institutional investors a means
of achieving a market rate of return on short-term investment
without having to sacrifice stability of principal. The stable NAV
per share also allows investors the convenience of not having to
track immaterial gains and losses, and helps facilitate investment
processes, such as sweep account arrangements . . .'').
\32\ See, e.g., Comment Letter of the Investment Company
Institute (Sept. 17, 2013) (``ICI Comment Letter'') (``Today over 61
million retail investors, as well as corporations, municipalities,
and institutional investors rely on the $2.6 trillion money market
fund industry as a low cost, efficient cash management tool that
provides a high degree of liquidity, stability of principal value,
and a market based yield.'').
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In order for money market funds to use techniques to value and
price their shares generally not permitted to other mutual funds, rule
2a-7 imposes additional protective conditions on money market
funds.\33\ As discussed in the Proposing Release, these additional
conditions are designed to make money market funds' use of the
valuation and 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.
---------------------------------------------------------------------------
\33\ See, e.g., ICI Comment Letter (``Money market funds owe
their success, in large part to the stringent regulatory
requirements to which they are subject under federal securities
laws, including most notably Rule 2a-7 under the Investment Company
Act.'').
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We understand, and considered when developing the final amendments
we are adopting 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
designed these amendments to make the funds more resilient, as
discussed throughout this Release, while preserving, to the extent
possible, the benefits of money market funds. But as discussed in
section III.K.1 below, we recognize that these reforms may make certain
money market funds less attractive to some investors.
B. Certain Economic Features of Money Market Funds
As discussed in detail in the Proposing Release, the combination of
several features of money market funds can create an incentive for
their shareholders to redeem shares heavily in periods of market
stress. We discuss these factors below, as well as the harm that can
result from such heavy redemptions in money market funds.
1. Money Market Fund Investors' Desire To Avoid Loss
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 less tolerant
of incurring even small losses, even at the cost of forgoing higher
expected returns.\34\ Such investors may be loss averse for many
reasons, including general risk tolerance, legal or investment
restrictions, or short-term cash needs. These overarching
considerations may create incentives for money market fund investors to
redeem and would be expected to persist, even if the other incentives
discussed below, such as those created by money market fund valuation
and pricing, are addressed.
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\34\ See, e.g., PWG 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 decisions and 64% ranked safety of
principal as the ``primary driver'' of their money market fund
investment).
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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 DERA 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.\35\
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\35\ 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 http://www.rhsmith.umd.edu/files/Documents/Centers/CFP/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 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'').
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2. Liquidity Risks
When investors begin to redeem a substantial amount of shares, a
fund can experience a loss of liquidity. Money market funds, which
offer investors the ability to redeem shares upon demand, often will
first use internal liquidity to satisfy substantial redemptions. 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.\36\ And because the secondary
market for many portfolio securities is not deeply liquid, funds may
have to sell securities at a discount from their amortized cost value,
or even at fire-sale prices,\37\ thereby incurring additional losses
that may have been avoided if the funds had sufficient internal
liquidity.\38\ This alone 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 the fund is left with fewer
liquid assets, necessitating the sale of less liquid assets,
potentially at a discount, to meet further redemption requests.\39\
Knowing that such liquidity costs may occur, money market fund
[[Page 47741]]
investors may have an incentive to redeem quickly in times of stress to
avoid realizing these potential liquidity costs, leaving remaining
shareholders to bear these costs.
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\36\ See, e.g., Comment Letter of Goldman Sachs Asset Management
L.P. (Sept. 17, 2013) (``Goldman Sachs Comment Letter'') (``A money
fund faced with heavy redemptions could suffer a loss of liquidity
that would force the untimely sale of portfolio securities at
losses.''). We note that, although the Investment Company Act
permits a money market fund to borrow money from a bank, see section
18(f) of the Investment Company Act, 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.''
\37\ Money market funds normally meet redemptions by disposing
of their more liquid assets, rather than selling a pro rata slice of
all their holdings. See, e.g., 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 http://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'').
\38\ The DERA 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. DERA Study, supra note 24,
at 37.
\39\ See, e.g., Comment Letter of MSCI Inc. (Sept. 17, 2013)
(``MSCI Comment Letter'') (``The need to provide liquidity provides
another set of incentives, as early redeemers may exhaust the fund's
internal sources of liquidity (cash on hand, cash from maturing
securities, etc.), leaving possibly distressed security sales as the
only source of liquidity for late redeemers.'').
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3. 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 for their entire portfolios. 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 in its
portfolio, and thus to maintain a stable $1.00 share price under most
market 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 when market conditions shift
due to changes in interest rates, credit risk, and liquidity.\40\ 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.\41\ Today, unless the fund ``breaks
the buck,'' market value differences 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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\40\ 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 most portfolio securities
such as commercial paper, repos, and certificates of deposit are not
actively traded in a secondary market. Accordingly, most money
market fund portfolio securities are valued largely through ``mark-
to-model'' or ``matrix pricing'' estimates, which often use market
inputs, as well as other factors in their pricing models. See
Proposing Release, supra note 25, at n.27. See also infra section
III.D.2.
\41\ The credit quality standards in rule 2a-7 are designed to
minimize the likelihood of such a default or credit deterioration.
---------------------------------------------------------------------------
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. But
if 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
reversed 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 and the tax
requirements for these funds.\42\
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\42\ In practice, a money market fund cannot use future
portfolio earnings to restore its shadow price because Subchapter M
of the Internal Revenue Code requires money market funds to
distribute virtually all of their earnings to investors. These tax
requirements can cause permanent reductions in shadow prices to
persist over time, even if a fund's other portfolio securities are
otherwise unimpaired.
---------------------------------------------------------------------------
If a money market fund's shadow price deviates far enough from its
stable $1.00 share price, investors may have an economic incentive to
redeem their shares. For example, investors may have an incentive to
redeem shares when a fund's shadow price is less than $1.00.\43\ 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 the remaining, 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.\44\ In times of stress, this 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.\45\
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\43\ See, e.g., Comment Letter of the Systemic Risk Council
(Sept. 16, 2013) (``Systemic Risk Council Comment Letter'') (``If
the fund's assets are worth less than a $1.00--and you can redeem at
$1.00--the remaining shareholders are effectively paying first
movers to run. This embeds permanent losses in the fund for the
remaining holders.'').
\44\ See, e.g., MSCI Comment Letter (``[W]hen a fund's market-
based NAV falls significantly below its stable NAV, an early
redeemer not only benefits from this price discrepancy, but also
puts downward pressure on the market-based NAV for the remaining
investors (as the realized losses on the fund's assets must be
shared across a smaller investor base).'').
\45\ For an example illustrating this incentive, see Proposing
Release, supra note 25, at text following n.31.
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We note that although defaults in assets held by money market funds
are low probability events, the resulting losses can lead to a fund
breaking the buck 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.\46\ And as discussed further in section III.C.2.a of this
Release, money market funds hold significant numbers of such larger
positions.\47\
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\46\ For a detailed discussion of the financial crises, see
generally DERA Study, supra note 24, at section 4.A.
\47\ The Financial Stability Oversight Council (``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 http://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., Comment Letter of Harvard Business School
Professors Samuel Hanson, David Scharfstein, & Adi Sunderam (Jan. 8,
2013) (``Harvard Business School FSOC Comment Letter'') (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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4. Investors' Misunderstanding About the Actual Risk of Investing in
Money Market Funds
Lack of investor understanding and lack of complete transparency
concerning the risks posed by particular money market funds can
contribute to heavy redemptions during periods of stress. This lack of
investor understanding and complete transparency can come from several
different sources.
First, 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.\48\ 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. Investors may respond by initiating
redemptions to avoid potential rather than actual losses in a ``flight
to transparency.\49\''
[[Page 47742]]
Because 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
the same or highly correlated positions.\50\
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\48\ See, e.g., DERA Study, supra note 24, 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''). As discussed in section III.E.9.c, a number of money
market funds have begun voluntarily disclosing information about
their portfolio assets, liquidity, and shadow NAV on a more frequent
basis than required, in part to address investor concerns regarding
the staleness of information about fund holdings. The final
amendments we are adopting today include a number of regulatory
requirements designed to enhance transparency of money market risks,
including daily disclosure of liquid assets, shareholder flows,
current NAV and shadow NAV on fund Web sites, and elimination of the
60 day lag on public disclosure of Form N-MFP data. See infra
section III.G.1.
\49\ 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.'').
\50\ See Comment Letter of Federal Reserve of Boston (Sept. 12,
2013) (``Boston Federal Reserve Comment Letter'') (``Investors in
other MMMFs may in turn run if they perceive that their funds are
similar (e.g. similar portfolio composition, similar maturity
profile, similar investor concentration) to the fund that
experienced the initial run.''); see infra notes 58-59 and
accompanying text. Based on Form N-MFP data as of February 28, 2014,
there were 27 different issuers whose securities were held by more
than 100 prime money market funds.
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Second, money market funds' sponsors on a number of occasions have
voluntarily chosen to provide financial support for their money market
funds.\51\ The reasons that sponsors have done so include keeping a
fund from re-pricing below its stable value, protecting the sponsors'
reputations or brands, and increasing a fund's shadow price if its
sponsor believes investors avoid funds that have low shadow prices.
Prior to the changes that we are adopting today, funds were not
required to disclose instances of sponsor support outside of financial
statements; as a result, sponsor support has not been fully transparent
to investors and this, in turn, may have lessened some investors'
understanding of the risk in money market funds.\52\
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\51\ In the Proposing Release we requested comment on amending
rule 17a-9 (which allows for discretionary support of money market
funds by their sponsors and other affiliates) to potentially
restrict the practice of sponsor support, but did not propose any
specific changes. Most commenters who addressed our request for
comment on amending rule 17a-9 opposed making any changes to rule
17a-9, arguing that the transactions facilitated by the rule are in
the best interests of the shareholders. See Comment Letter of the
Investment Company Institute (Sept 17, 2013) (``ICI Comment
Letter''); Comment Letter of the Dreyfus Corporation (Sept. 17,
2013) (``Dreyfus Comment Letter''); Comment Letter of American Bar
Association Business Law Section (Sept. 30, 2013) (``ABA Business
Law Comment Letter''). One commenter supported amending rule 17a-9,
arguing that these transactions can result in shareholders having
unjustified expectations of future support being provided by
sponsors. Comment Letter of HSBC Global Asset Management (Sept. 17,
2013) (``HSBC Comment Letter''). In light of these comments, we are
not amending rule 17a-9 at this time. See also infra section
III.E.7.a.
\52\ See, e.g., HSBC Comment Letter (``[A] level of ambiguity
about who owns the risk when investing in a MMF has developed
amongst some investors. Some investors have been encouraged to
expect sponsors to support their MMFs. Such expectations cannot be
enforced, since managers are under no obligation to support their
funds, and consequently leads some investors to misunderstand and
misprice the risks they are subject to.'') (emphasis in original).
---------------------------------------------------------------------------
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 support).\53\
But the financial crisis is not the only instance in which some money
market funds have come under strain, although it is unique in the
number of money market funds that requested or received sponsor
support.\54\ As noted in the Proposing Release, since 1989, 11 other
financial events have been sufficiently adverse that certain fund
sponsors chose to provide support or to seek staff no-action assurances
in order to provide support, potentially affecting 158 different money
market funds.\55\
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\53\ 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 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., http://www.sec.gov/divisions/investment/im-noaction.shtml#money. 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. 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 not necessary. See, e.g., Comment
Letter of the Dreyfus Corporation (Aug. 7, 2012) (available in File
No. 4 619) (``Dreyfus III Comment Letter'') (stating that no-action
relief to provide sponsor support ``was sought by many money funds
as a precautionary measure'').
\54\ See Moody's Investors Service Special Comment, Sponsor
Support Key to Money Market Funds (Aug. 9, 2010) (``Moody's Sponsor
Support Report''). Interest rate changes, issuer defaults, and
credit rating downgrades can lead to significant valuation losses
for individual funds.
\55\ See Proposing Release, supra note 25, at section II.B.3. We
note, as discussed more fully in the Proposing Release, 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 and because sponsor support
prevented any funds from breaking the buck.
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Finally, the government assistance provided to money market funds
during the financial crisis may have contributed to investors'
perceptions that the risk of loss in money market funds is low.\56\ If
investors perceive that money market funds have an implicit government
guarantee, they may believe that money market funds are safer
investments than they in fact are and may underestimate the potential
risk of loss.\57\
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\56\ For a further discussion of issues related to money market
fund sponsor support and its effect on investors' perception, see
Proposing Release, supra note 25, at nn.60-61 and accompanying text.
\57\ See, e.g., HSBC Comment Letter.
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C. Effects on Other Money Market Funds, Investors, and the Short-Term
Financing Markets
In this section, we discuss how stress at one money market fund can
be positively correlated across money market 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.\58\ Any resulting decline
in the shadow prices of other funds could, in turn, lead to a contagion
effect that could spread even further as investors run from money
market funds in general. For example, some 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 shadow prices.\59\
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\58\ 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 37; Markus
Brunnermeier, et al., The Fundamental Principles of Financial
Regulation, in Geneva Reports on the World Economy 11 (2009).
\59\ See, e.g., Boston Federal Reserve Comment Letter
(discussing the relative homogeneity of money market funds holdings,
and noting that as of the end of June 2013, the 20 largest corporate
issuers accounted for approximately 44 percent of prime money market
funds' assets); Comment Letter of Americans for Financial Reform
(Sept. 17, 2013) (``Americans for Fin. Reform Comment Letter'')
(discussing a study estimating that 97 percent of non-governmental
assets of prime money market funds consists of financial sector
commercial paper); 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.'').
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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 fund that could
own the security (e.g., redeeming from all prime funds).\60\ A
[[Page 47743]]
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.
---------------------------------------------------------------------------
\60\ See, e.g., Wermers Study, supra note 35 (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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As was experienced by money market funds during the financial
crisis, 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 the short-term financing
markets.\61\ Indeed, money market funds had experienced steady growth
before the financial crisis, driven in part by growth in the size of
institutional cash pools, which grew from under $100 billion in 1990 to
almost $4 trillion just before the financial crisis.\62\ Money market
funds' suitability for cash management operations also has made them
popular among corporate treasurers, municipalities, and other
institutional investors, some of which 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 the expertise of money market fund managers.\63\ For
example, according to one survey, approximately 16% of organizations'
short-term investments were allocated to money market funds (and,
according to this survey, 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 expired at the end of 2012).\64\
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\61\ See infra section III.K.3 for statistics on the types and
percentages of outstanding short-term debt obligations held by money
market funds.
\62\ See Proposing Release supra note 25, at nn.70-71.
\63\ See, e.g., U.S. Securities and Exchange Commission,
Roundtable on Money Market Funds and Systemic Risk, unofficial
transcript (May 10, 2011), available at http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm (``Roundtable
Transcript'') (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.''); see also Proposing
Release supra note 25, at n.72.
\64\ See 2013 Association for Financial Professionals Liquidity
Survey, at 15, available at http://www.afponline.org/liquidity
(subscription required) (``2013 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, almost 30% in the 2011 survey, and 16% in the 2012
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 http://www.afponline.org/pub/pdf/2008_Liquidity_Survey.pdf
(``2008 AFP Liquidity Survey''), to 50% of organizations' short-term
investment allocations in the 2013 survey. The 2012 survey noted
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 in which
assets have remained despite the expiration of the insurance. See
2013 AFP Liquidity Survey. As of February 28, 2014, approximately
67% 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 http://www.afponline.org.
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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 other markets. 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.\65\ 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 financial crisis illustrates the impact of heavy
redemptions, as we discuss in more detail below.
---------------------------------------------------------------------------
\65\ See supra text preceding and accompanying note 36. 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 as a stressed fund
may be unlikely to be receiving significant investor purchases
during such a time.
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Heavy redemptions in money market funds may disproportionately
affect slow-moving shareholders because, as discussed further below,
redemption data from the financial crisis show that some institutional
investors are likely to redeem from distressed money market funds far
more quickly than other investors and to redeem a greater percentage of
their prime fund holdings.\66\ This likely is because some
institutional investors generally have more capital at stake, along
with sophisticated tools and professional staffs to monitor risk.
Because of their proportionally larger investments, just a few
institutional investors submitting redemption requests may have a
significant effect on a money market fund's liquidity, while it may
take many more retail investors, with their typically smaller
investments sizes, to cause similar negative consequences. 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 to obtain liquidity to satisfy redemption requests. In both
cases, redemptions leave the fund's portfolio more likely to lose
value, to the detriment of slower-to-redeem investors.\67\ 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.\68\
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\66\ See Money Market Fund Reform, Investment Company Act
Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)]
(``2009 Proposing Release''), at nn.46-48 and 178 and accompanying
text.
\67\ See, e.g., DERA Study, supra note 24, at 10 (``Investor
redemptions during the 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.'').
\68\ 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 Department
of Treasury's (``Treasury Department'') temporary guarantee program
for money market funds, which may have prevented heavier shareholder
redemptions among generally slower-to-redeem retail investors. See
infra note 80.
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D. The Financial Crisis
The financial crisis in many respects demonstrates the various
considerations discussed above in sections B and C, including the
potential implications and harm associated with heavy redemption
[[Page 47744]]
from money market funds.\69\ On September 16, 2008, the day after
Lehman Brothers Holdings Inc. announced its bankruptcy, The Reserve
Fund announced that 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.\70\ At the same time, there was turbulence in the market for
financial sector securities as a result of other financial company
stresses, including, for example, the near failure of American
International Group (``AIG''), whose commercial paper was held by many
prime money market funds.\71\
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\69\ See generally DERA Study, supra note 24, at section 3. See
also 2009 Proposing Release supra note 66, at section I.D.
\70\ See also 2009 Proposing Release, supra note 66, 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. See, e.g., 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). A class
action suit brought on behalf of the Reserve Fund shareholders was
settled in 2013. See Nate Raymond, Settlement Reached in Reserve
Primary Fund Lawsuit, Reuters (Sept. 7, 2013) available at http://www.reuters.com/article/2013/09/07/us-reserveprimary-lawsuit-idUSBRE98604Q20130907.
\71\ In addition to Lehman Brothers and AIG, there were other
stresses in the market as well, as discussed in greater detail in
the DERA Study. See generally DERA Study, supra note 24, at section
3.
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Heavy redemptions in the Reserve Primary Fund were followed by
heavy redemptions from other Reserve money market funds,\72\ and soon
other institutional prime money market funds also began to experience
heavy redemptions.\73\ During the week of September 15, 2008 (the week
that Lehman Brothers announced it was filing for bankruptcy), investors
withdrew approximately $300 billion from prime money market funds or
14% of the assets in those funds.\74\ 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.\75\ 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.\76\
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\72\ See 2009 Proposing Release, supra note 66, at section I.D.
\73\ See DERA Study, supra note 24, at section 3.
\74\ See Investment Company Institute, Report of the Money
Market Working Group, at 62 (Mar. 17, 2009), available athttp://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 financial
crisis was over 64% of the fund's assets.
\75\ See Philip Swagel, ``The Financial Crisis: An Inside
View,'' Brookings Papers on Economic Activity, at 31 (Spring 2009)
(conference draft), available at http://www.brookings.edu/~/media/
projects/bpea/spring%202009/2009a--bpea--swagel.pdf; Christopher
Condon & Bryan Keogh, Funds' Flight from Commercial Paper Forced Fed
Move, Bloomberg, Oct. 7, 2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5hvnKFCC_pQ.
\76\ See 2009 Proposing Release, supra note 66, 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). 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 financial
crisis. See, e.g., Comment Letter of Investment Company Institute
(Jan. 24, 2013) (available in File No. FSOC-2012-0003) (``ICI Jan.
24 FSOC Comment Letter'').
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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 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.\77\ The aggregate level of retail
investor redemption activity, in contrast, was not particularly high
during September and October 2008, as shown in Figure 1.\78\
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\77\ As discussed in section III.C.1 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 have lower credit default risk and greater liquidity
than non-government portfolio securities typically held by money
market funds.
\78\ 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, which does not necessarily correlate with how we define
retail funds in this Release.
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[[Page 47745]]
[GRAPHIC] [TIFF OMITTED] TR14AU14.000
On September 19, 2008, the U.S. Department of the Treasury
(``Treasury Department'') 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.\79\ These programs successfully slowed
redemptions in prime money market funds and provided additional
liquidity to money market funds. As discussed in the Proposing Release,
the disruptions to the short-term markets detailed above could have
continued for a longer period of time but for these programs.\80\
---------------------------------------------------------------------------
\79\ See 2009 Proposing Release, supra note 66, 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.
\80\ See Proposing Release supra note 25 at n.91.
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E. Examination of Money Market Fund Regulation Since the Financial
Crisis
1. The 2010 Amendments
After the events of the financial crisis, in March 2010, we adopted
a number of amendments to rule 2a-7.\81\ These amendments were designed
to make money market funds more resilient by reducing the interest
rate, credit, and liquidity risks of fund asset portfolios.\82\ More
specifically, the amendments decreased money market funds' credit risk
exposure by further restricting the amount of lower quality securities
that funds can hold.\83\ The amendments, for the first time, also
required that money market funds maintain liquidity buffers in the form
of specified levels of daily and weekly liquid assets.\84\ These
liquidity buffers provide a source of internal liquidity and are
intended to help funds withstand high levels of redemptions during
times of market illiquidity. The amendments also reduce money market
funds' exposure to interest rate risk by decreasing the maximum
weighted average maturities of fund portfolios from 90 to 60 days.\85\
---------------------------------------------------------------------------
\81\ 2010 Adopting Release, supra note 17.
\82\ Commenters have noted the importance of the 2010 reforms in
enhancing the resiliency of money market funds. See, e.g., Comment
Letter of Invesco Ltd. (Sept. 17, 2013) (``Invesco Comment Letter'')
(``In evaluating the reforms contained in the Proposed Rule it is
also important to take into account the significant impact of the
reforms implemented by the Commission in 2010, which amounted to a
comprehensive overhaul of the regulatory framework governing
MMFs.'').
\83\ 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 current rule 2a-7(a)(24) (defining ``second tier
security''); current rule 2a-7(a)(12) (defining ``eligible
security''); current rule 2a-7(a)(23) (defining ``requisite
NRSROs''). Today, in a companion release, we are also re-proposing
to remove NRSRO rating references from rule 2a-7 and Form N-MFP.
\84\ 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 current
rule 2a-7(c)(5)(ii) and (iii).
\85\ 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
current rule 2a-7(c)(2)(ii) and (iii).
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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
Commission monthly information on their portfolio holdings using Form
N-MFP.\86\ 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 also 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.\87\
---------------------------------------------------------------------------
\86\ See current rule 30b1-7.
\87\ See current rule 2a-7(c)(12).
---------------------------------------------------------------------------
Finally, the 2010 amendments require money market funds to undergo
stress tests under the direction of the board of
[[Page 47746]]
directors on a periodic basis.\88\ 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.\89\
---------------------------------------------------------------------------
\88\ See current rule 2a-7(c)(10)(v).
\89\ See 2009 Proposing Release, supra note 66, at section
II.C.3.
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2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and
2013
Several significant market events since our 2010 reforms have
permitted us to evaluate the efficacy of those reforms. Specifically,
in the summer of 2011, the Eurozone sovereign debt crisis and an
impasse over the U.S. Government's debt ceiling unfolded, and during
the fall of 2013 another U.S. Government debt ceiling impasse occurred.
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 needed to re-price below its stable
$1.00 share price. As discussed in greater detail in the Proposing
Release, as a result of concerns about exposure to European financial
institutions, in the summer of 2011, prime money market funds began
experiencing substantial redemptions.\90\ But unlike September 2008,
money market funds did not experience meaningful capital losses in the
summer of 2011 (or as discussed below, in the fall of 2013), and the
funds' shadow prices did not deviate significantly from the funds'
stable share prices. Also unlike in 2008, money market funds had
sufficient liquidity to satisfy investors' redemption requests, which
were submitted at a lower rate and over a longer period than in 2008,
suggesting that the 2010 amendments acted as intended to enhance the
resiliency of money market funds.\91\
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\90\ See Proposing Release supra note 25, at section II.D.2;
DERA Study, supra note 24, at 32. Assets held by prime money market
funds declined by approximately $100 billion (or 6%) during a three-
week period beginning June 14, 2011. Some prime money market funds
had redemptions of almost 20% of their assets in each of June, July,
and August 2011, and one fund had redemptions of 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. 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. See Proposing Release supra note 25, at section II.D.2.
\91\ DERA Study, supra note 24, at 33-34. We note that 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 DERA Study, which discusses a number of possible
explanations for redemptions during the financial crisis. Id. at 7-
13.
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In 2013, another debt ceiling impasse took place,\92\ although over
a longer time period and without the Eurozone crisis as a backdrop.
During the worst two-week period of the 2013 crisis, October 3rd
through October 16th, government and treasury money market funds
experienced combined outflows of $54.4 billion, which was 6.1% of total
assets, with approximately 1.5% of assets flowing out of these funds on
October 11th, the single worst day for outflows of the 2013 impasse.
Importantly, despite these outflows, fund shadow prices were largely
unaffected during this time period. Once the impasse was resolved,
assets flowed back into these funds, returning government and treasury
money market funds to a pre-crisis asset level before the end of the
year, indicating their resiliency.\93\
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\92\ See, e.g., Money-Market Funds Shine During Debt Limit
Crisis (10/25/2013), available at http://www.imoneynet.com/news/280.aspx.
\93\ These statistics are based on an analysis of information
from Crane Data. See also infra section III.C.1.
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Although money market funds' experiences differed in 2008 and in
the Eurozone crisis, the heavy redemptions money market funds
experienced in both periods appear to have negatively affected the
markets for short-term financing in similar ways. Academics researching
these issues have found, as detailed in the DERA 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.'' \94\ 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. Again, despite these similar effects, the
2010 reforms demonstrated that money market funds are potentially more
resilient today than in 2008.
---------------------------------------------------------------------------
\94\ DERA Study, supra note 24, 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. Continuing Consideration of the Need for Additional Reforms
As discussed in greater detail in the Proposing Release, when we
adopted the 2010 amendments, we acknowledged that money market funds'
experience during the financial crisis raised questions of whether more
fundamental changes to money market funds might be warranted.\95\ The
DERA Study, discussed throughout this Release, has informed our
consideration of the risks that may be posed by money market funds and
our formulation of today's final rules and rule amendments. The DERA
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 2011 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.\96\
---------------------------------------------------------------------------
\95\ See 2009 Proposing Release, supra note 66, at section III;
2010 Adopting Release, supra note 17, at section I.
\96\ See generally DERA Study, supra note 24, at section 4.
---------------------------------------------------------------------------
[[Page 47747]]
In particular, the DERA 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.\97\
For example, funds in 2011 had sufficient liquidity to withstand
investors' redemptions during the summer of 2011.\98\ 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 DERA 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%.\99\ The DERA 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.\100\ Based on the DERA Study, we believe that,
although 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 and the fall of
2013), these reforms do not sufficiently address the potential future
situations when credit losses may cause a fund's portfolio to lose
value or when the short-term financing markets more generally come
under stress.
---------------------------------------------------------------------------
\97\ Id. at 30.
\98\ Id. at 34.
\99\ 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.
\100\ To further illustrate the point, the DERA 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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After consideration of this data, as well as the comments we
received on the proposal, we believe that the reforms we are adopting
today should further help 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
A. Liquidity Fees and Redemption Gates
Today, we are adopting amendments to rule 2a-7 that will authorize
new tools for money market funds to use in times of stress to stem
heavy redemptions and avoid the type of contagion that occurred during
the financial crisis. These amendments provide money market funds with
the ability to impose liquidity fees and redemption gates (generally
referred to herein as ``fees and gates'') in certain
circumstances.\101\ Today's amendments will allow a money market fund
to impose a liquidity fee of up to 2%, or temporarily suspend
redemptions (also known as ``gate'') for up to 10 business days in a
90-day period, if the fund's weekly liquid assets fall below 30% of its
total assets and the fund's board of directors (including a majority of
its independent directors) determines that imposing a fee or gate is in
the fund's best interests.\102\ Additionally, under today's amendments,
a money market fund will be required to impose a liquidity fee of 1% on
all redemptions if its weekly liquid assets fall below 10% of its total
assets, 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 interests of the fund.\103\
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\101\ Under the amendments we are adopting today, government
funds are permitted, but not required, to impose fees and gates, as
discussed below. See infra section III.C.1 of this Release.
\102\ If, at the end of a business day, a fund has invested 30%
or more of its total assets in weekly liquid assets, the fund must
cease charging the liquidity fee or imposing the redemption gate,
effective as of the beginning of the next business day. See rule 2a-
7(c)(2)(i)(A) and (B), and (ii)(B).
\103\ The board also may determine that a lower or higher fee
would be in the best interests of the fund. See rule 2a-
7(c)(2)(ii)(A); see also infra section III.A.2.c.
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These amendments differ in some respects from the fees and gates
that we proposed, which would have required funds to impose a 2%
liquidity fee on all redemptions, and would have permitted the
imposition of redemption gates for up to 30 days in a 90-day period,
after a fund's weekly liquid assets fell below 15% of its total assets.
In addition, under our proposal, a fund's board (including a majority
of independent directors) could have determined not to impose the
liquidity fee or to impose a lower fee. A large number of commenters
supported, to varying degrees and with varying caveats, our fees and
gates proposal.\104\ Many other commenters, on the other hand,
expressed their opposition to fees and gates.\105\ Comments on the
proposal are discussed in more detail below.
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\104\ See, e.g., Form Letter Type A; Comment Letter of Fidelity
Investments (Sept. 16, 2013) (``Fidelity Comment Letter''); Comment
Letter of Federated Investors, Inc. (Re: Alternative 2) (Sept. 16,
2013) (``Federated V Comment Letter''); Comment Letter of Northern
Trust Corporation (Sept. 16, 2013) (``Northern Trust Comment
Letter'').
\105\ See, e.g., Comment Letter of Capital Advisors Group (Sept.
3, 2013) (``Capital Advisors Comment Letter''); Comment Letter of
Americans for Financial Reform (Sept. 17, 2013) (``Americans for
Fin. Reform Comment Letter''); Comment Letter of Edward D. Jones and
Co., L.P. (Sept. 20, 2013) (``Edward Jones Comment Letter'').
---------------------------------------------------------------------------
1. Analysis of Certain Effects of Fees and Gates \106\
---------------------------------------------------------------------------
\106\ See infra section III.K (discussing further the economic
effects of the fees and gates amendments).
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a. Background
As discussed previously, shareholders redeem money market fund
shares for a number of reasons.\107\ Shareholders may redeem shares
because the current rounding convention in money market fund valuation
and pricing can create incentives for shareholders to redeem shares
ahead of other investors when the market-based NAV per share of a fund
is lower than $1.00 per share.\108\ Shareholders also may flee to
quality, liquidity, or transparency (or combinations thereof) during
adverse economic events or financial market conditions.\109\
Furthermore, in times of stress, shareholders may simply need or want
to withdraw funds for unrelated reasons. In any case, money market
funds may have to absorb quickly high levels of redemptions that exceed
internal sources of liquidity. In these instances, funds will need to
sell portfolio securities, perhaps at a loss either because they incur
transitory liquidity costs or they must sell assets at ``fire sale''
prices.\110\ If fund managers deplete their funds' most liquid assets
first, this may impose future liquidity costs (that are not reflected
in a $1.00 share price based on current amortized cost valuation) on
the non-redeeming shareholders because later redemption requests must
be met by selling less liquid assets. These effects may be heightened
if many funds sell assets at the same time, lowering asset prices.
During the financial crisis, for example, securities sales to meet
heavy redemptions in money market funds and sales of assets by other
investors
[[Page 47748]]
created downward price pressure in the market.\111\
---------------------------------------------------------------------------
\107\ See Proposing Release, supra note 25, at 156-172; DERA
Study, supra note 24, at 2-4.
\108\ As discussed in section III.B, the floating NAV amendments
help mitigate this incentive for institutional prime funds by
causing redeeming shareholders to receive the market value of
redeemed shares.
\109\ See Proposing Release, supra note 25, at n.340.
\110\ See Proposing Release, supra note 25, at n.341.
\111\ See supra section II.D herein (discussing the financial
crisis); see also Proposing Release, supra note 25 at 32-33; DERA
Memorandum Regarding Liquidity Cost During Crisis Periods, dated
March 17, 2014 (``DERA Liquidity Fee Memo''), available at http://www.sec.gov/comments/s7-03-13/s70313-321.pdf.
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Liquidity fees and redemption gates have been used successfully in
the past by certain non-money market fund cash management pools to stem
redemptions during times of stress.\112\ Liquidity fees provide
investors continued access to their liquidity (albeit at a cost) while
also reducing the incentives for shareholders to redeem shares.
Liquidity fees, however, will not outright stop redemptions. In
contrast to fees, redemption gates stop redemptions altogether, but do
not offer the flexibility of fees.\113\ Because redemption gates
prevent investors from accessing their investments for a period of
time, a fund may choose to first impose a liquidity fee and then, if
needed, impose a redemption gate.
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\112\ A Florida local government investment pool experienced
heavy redemptions in 2007 due to its holdings in SIV securities. The
pool suspended redemptions and ultimately reopened but only after
the pool (and each shareholder's interest) had been split into two
separate pools: one holding the more illiquid securities previously
held by the pool (``Fund B'') and one holding the remaining
securities of the pool (``Fund A''). Fund A reopened, but limited
redemptions to up to 15% of an investor's holdings or $2 million
without penalty, and imposed a 2% redemption fee on any additional
redemptions. Fund B remained closed. When Fund A reopened, it
experienced withdrawals, but according to state officials, the
withdrawals were manageable. See Dealbook, NY Times, Florida Fund
Reopens, and $1.1 Billion is Withdrawn; 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); see also infra note 114 (discussing
the successful use by some European enhanced cash funds of fees or
gates during the financial crisis).
\113\ See Institutional Money Market Funds Association, IMMFA
Recommendations for Redemption Gates and Liquidity Fees, available
at http://www.immfa.org/publications/policy-positions.html
(``Redemption gates and/or a liquidity fee are methods by which a
fund manager, if experiencing difficulty due to extreme market
circumstances, can control redemptions in order to ensure that all
investors are treated fairly and that no `first-mover' advantage
exists.''); 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.
---------------------------------------------------------------------------
The fees and gates amendments we are adopting today are designed to
address certain issues highlighted by the financial crisis. In
particular, the amendments should allow funds to moderate redemption
requests by allocating liquidity costs to those shareholders who impose
such costs on funds through their redemptions and, in certain cases,
stop heavy redemptions in times of market stress by providing fund
boards with additional tools to manage heavy redemptions and improve
risk transparency. We understand that based on the level of redemption
activity that occurred during the financial crisis, many money market
funds would have faced liquidity pressures sufficient to cross the
liquidity thresholds we are adopting today that would allow the use of
fees and gates. Although no one can predict with certainty what would
have happened if money market funds had operated with fees and gates
during the financial crisis, we believe that money market funds would
have been better able to manage the heavy redemptions that occurred and
limit contagion, regardless of the reason for the redemptions.\114\
---------------------------------------------------------------------------
\114\ See, e.g., Comment Letter of Mutual Fund Directors Forum
(Sept. 16, 2013) (``MFDF Comment Letter'') (stating, with respect to
the proposed fee and gates amendments, ``we concur that this
approach has the potential to reduce runs during times of stress or
crisis''); UBS Comment Letter (``We agree that liquidity fees and
gates would help money funds address heavy redemptions in an
effective manner and limit the spread of contagion . . .''); Form
Letter Type D. We also note that some European enhanced cash funds
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 http:// 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 http://www.esrb.europa.eu/pub/pdf/occasional/20120622_occasional_paper_1.pdf?465916d4816580065dfafb92059615b6.
---------------------------------------------------------------------------
Fees and gates are just one aspect of the overall package of
reforms we are adopting today. We recognize that fees and gates do not
address all of the factors that may lead to heavy redemptions in money
market funds. For example, fees and gates do not fully eliminate the
incentive to redeem ahead of other investors in times of stress \115\
or fully prevent investors from redeeming shares (except during the
duration of a temporary gate) to invest in securities with higher
quality, better liquidity, or increased transparency.\116\ Fees and
gates also do not address the shareholder dilution that results when a
shareholder is able to redeem at a stable NAV that is higher than the
market value of the fund's underlying portfolio securities.\117\
Nonetheless, for the reasons discussed in this Release, fees and gates
provide funds and their boards with additional tools to stem heavy
redemptions and avoid the type of contagion that occurred during the
financial crisis by allocating liquidity costs to those shareholders
who impose such costs on funds and by stopping runs.
---------------------------------------------------------------------------
\115\ However, as discussed in section III.B herein, under
today's amendments, institutional prime funds will be required to
float their NAV. This reform is designed, in part, to address the
incentive to redeem ahead of other investors in certain money market
funds because of current money market fund valuation and pricing
methods.
\116\ Fees and gates lessen but do not fully eliminate the
incentive for investors to redeem quickly in times of stress because
redeeming shareholders will retain an economic advantage over
shareholders who remain in a fund when liquidity costs are high, but
before the fund has imposed fees or gates.
\117\ In contrast, the floating NAV requirement for
institutional prime funds will address this issue. See infra section
III.B.1.
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i. Liquidity Fees
During the financial crisis, some funds experienced heavy
redemptions. Shareholders who redeemed shares early bore none of the
economic consequences of their redemptions. Shareholders who remained
in the funds, however, faced a declining NAV and an increased
probability that their funds would ``break the buck.'' As discussed in
the Proposing Release and suggested by commenters, investors may have
re-assessed their redemption decisions during the crisis if money
market funds had imposed liquidity fees because they would have been
required to pay at least some of the costs of their redemptions.\118\
It is possible that some investors would have made the economic
decision not to redeem because the liquidity fees imposed by the fund
and incurred by an investor would have been certain, whereas potential
future losses would have been uncertain.\119\
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\118\ See, e.g., Comment Letter of U.S. Chamber of Commerce,
Center for Capital Markets Competitiveness (Sept. 17, 2013)
(``Chamber II Comment Letter'') (``[I]f shareholders were to be
charged a fee when a MMF's liquidity costs are at a premium, they
may be discouraged from redeeming their shares at that time, which
would have the effect of slowing redemptions in the MMF.''); Comment
Letter of Charles Schwab Investment Management, Inc. (Sept. 12,
2013) (``Schwab Comment Letter'') (``[W]e agree that the proposed
liquidity fee of 2% would be a strong disincentive to redeem during
a crisis . . .'').
\119\ See HSBC Comment Letter; see also infra note 152-153 and
accompanying text. We acknowledge (as we did in the Proposing
Release) that liquidity fees may not always effectively stave off
high levels of redemptions in a crisis; however, liquidity fees,
once imposed, should help reduce the incentive to redeem shares
because investors will pay a fee in connection with their
redemptions. See Proposing Release, supra note 25, at 161.
---------------------------------------------------------------------------
In addition, liquidity fees would have helped offset the costs of
the liquidity provided to redeeming shareholders and potentially
protected the funds' NAVs because the cash raised from liquidity
[[Page 47749]]
fees would create new liquidity for the funds.\120\ Additionally, to
the extent that liquidity fees imposed during the crisis could have
reduced redemption requests at the margin, they would have allowed
funds to generate liquidity internally as assets matured. By imposing
liquidity costs on redeeming shareholders, liquidity fees, as noted by
commenters, also treat holding and redeeming shareholders more
equitably.\121\
---------------------------------------------------------------------------
\120\ Fees paid by investors that redeem shares should help
prevent a fund's NAV from becoming impaired based on liquidity
costs, as long as the liquidity fee imposed reflects the liquidity
cost of redeeming shares. Fees should also generate additional
liquidity to help funds meet redemption requests.
\121\ See, e.g., Invesco Comment Letter (``Liquidity fees would
provide an appropriate and effective means to ensure that the extra
costs associated with raising liquidity to meet fund redemptions
during times of market stress are borne by those responsible for
them.''); Comment Letter of J.P. Morgan Asset Management (Sept. 17,
2013) (``J.P. Morgan Comment Letter''); UBS Comment Letter; but see,
e.g., Comment Letter of U.S. Bancorp Asset Management, Inc. (Sept.
16, 2013) (``U.S. Bancorp Comment Letter'') (suggesting that
liquidity fees harm those that redeem after the fees are imposed and
that gates harm those that remain in the fund after the gate is in
place).
---------------------------------------------------------------------------
Liquidity fees, which we believe would rarely be imposed under
normal market conditions, are designed to preserve the current benefits
of principal stability, liquidity, and a market yield, but reduce the
likelihood that, in times of market stress, costs that ought to be
attributed to a redeeming shareholder are externalized on remaining
shareholders and on the wider market.\122\ Even if a liquidity fee is
imposed, fund investors continue to have the flexibility to access
liquidity (albeit at a cost). The Commission believes, and commenters
suggested, that if funds could have imposed liquidity fees during the
crisis, they would likely have been better able to manage redemptions,
thereby ameliorating their impact and reducing contagion effects.\123\
---------------------------------------------------------------------------
\122\ See Proposing Release, supra note 25, at n.343.
\123\ See Proposing Release, supra note 25, at 155; see also,
e.g., Comment Letter of Wells Fargo Funds Management, LLC (Sept. 16,
2013) (``Wells Fargo Comment Letter'') (``Prime money market fund
investors, the short-term markets and businesses that rely on funds
for financing would each benefit from the ability of [f]ees and
[g]ates, during distressed market conditions, to reduce the
susceptibility of subject funds to runs and blunt the spread of
deleterious contagion effects.''); but see, e.g., U.S. Bancorp
Comment Letter (suggesting that liquidity fees would not deter
redemptions in times of market stress or prevent contagion because
``investors will choose to pay the [fee] now rather than wait for
the wind-down of a fund to be completed.'').
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ii. Redemption Gates
We believe that funds also could have benefitted from the ability
to impose redemption gates during the crisis.\124\ Like liquidity fees,
gates are designed to preserve the current benefits of money market
funds under most market conditions; however, if approved and monitored
by their boards, funds can use gates to respond to a run by directly
halting redemptions. If funds had been able to impose redemption gates
during the crisis, they would have had available to them a tool to stop
temporarily mounting redemptions,\125\ which if used could have
generated additional internal liquidity while gates were in place.\126\
In addition, gates may have allowed funds to invest the proceeds of
maturing assets in short-term securities for the duration of the gate,
protecting the short-term financing market, and supporting capital
formation for issuers. Gates also would have allowed funds to directly
and fully control redemptions during the crisis, providing time for
funds to better communicate the nature of any stresses to shareholders
and thereby possibly mitigating incentives to redeem shares.\127\
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\124\ See Comment Letter of Arnold & Porter LLP on behalf of
Federated Investors [Overview] (Sept. 11, 2013) (``Federated II
Comment Letter'') (noting that gates have ``been demonstrated to
address runs in a crisis. . . .''); Comment Letter of BlackRock,
Inc. (Sept. 12, 2013) (``BlackRock II Comment Letter'') (``Standby
liquidity fees and gates would ``stop the run'' in crisis
scenarios.''); see also supra note 114 (noting that European
enhanced cash funds successfully used fees or gates during the
financial crisis to stem redemptions); The Need to Focus a Light on
Shadow Banking is Nigh, Mark Carney, Financial Times (June 15,
2014), available at http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (``Money
market funds are being made less susceptible to runs. . .by
establishing an ability for funds to use, for example, temporary
suspensions of withdrawals. . . .''); The Age of Asset Management?,
Andrew Haldane (Apr. 4, 2014), available at http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf (suggesting gates may be a ``suitable'' tool to
``tackle market failures''); but see, e.g., Comment Letter of
Deutsche Investment Management Americas (Sept. 17, 2013) (``Deutsche
Comment Letter'') (suggesting that gates can exacerbate a run).
\125\ See, e.g., U.S. Bancorp Comment Letter (suggesting that
redemption gates would be the ``most effective option in addressing
run risk''); Chamber II Comment Letter (stating that ``a redemption
gate would stop a `run' in [its] tracks'').
\126\ See, e.g., Chamber II Comment Letter (``[A] redemption
gate also gives [a money market fund] time for issues in the market
to subside and for securities in the portfolio to mature, which
would increase the [money market fund's] liquidity levels.''); Form
Letter Type D (suggesting that redemption gates ``would give funds
time to stabilize''). Internal liquidity generated while a gate is
in place could prevent funds from having to immediately sell assets
at fire sale prices.
\127\ See, e.g., Invesco Comment Letter (``Redemption gates have
been proven to be an effective means of preventing runs and
providing a `cooling off' period to mitigate the effects of short-
term investor panic.'')
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b. Benefits of Fees and Gates
i. Fees and Gates Address Concerns Related to Heavy Redemptions
As noted above, a large number of commenters supported our fees and
gates proposal.\128\ The primary benefit cited by commenters in favor
of fees and/or gates is that they would address run risk and/or
systemic contagion risk.\129\ Commenters also argued that fees and
gates would protect the interests of all fund shareholders,
particularly non- or late-redeeming shareholders, treating them more
equitably.\130\ Commenters supported our view that redemption
restrictions could provide a ``cooling off'' period to temper the
effects of short-term investor panic,\131\ and that fees or gates could
[[Page 47750]]
preserve and help restore the liquidity levels of a money market fund
that has come under stress.\132\ Commenters also echoed our view that
fees and/or gates could reduce or eliminate the likelihood that funds
would be forced to sell otherwise desirable assets and engage in ``fire
sales.'' \133\ Additionally, commenters noted that gates would provide
boards and advisers with crucial additional time to find the best
solution in a crisis, instead of being forced to make decisions in
haste.\134\
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\128\ We note that many participants in the money market fund
industry have previously expressed support for imposing some form of
a liquidity fee or redemption gate when a fund comes under stress as
a way of reducing, in a targeted fashion, the fund's susceptibility
to heavy redemptions. See Proposing Release, supra note 25, at
n.358.
\129\ See, e.g., Form Letter Type A; U.S. Bancorp Comment
Letter; Comment Letter of Davenport & Company LLC (Sept. 13, 2013)
(``Davenport Comment Letter''); MFDF Comment Letter; Comment Letter
of Treasury Strategies, Inc. (Mar. 31, 2014) (``Treasury Strategies
III Comment Letter'') (``We found that [f]ees and [g]ates can stop
and prevent runs. . . . We find that highly effective run prevention
is attainable within the approaches contemplated by the [Proposing]
Release, while requiring that fund boards be given discretion to
take protective action. This is the mechanism by which [f]ees/
[g]ates cause [money market funds] to internalize the cost of
investor protection, while preserving the utility of current CNAV
vehicles.''); see also The Need to Focus a Light on Shadow Banking
is Nigh, Mark Carney, Financial Times (June 15, 2014), available at
http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (``By establishing
common policy standards and arrangements for co-operation, the
reforms [including temporary gates] will help to avoid a
fragmentation of the global financial system.''); but see, e.g.,
Boston Federal Reserve Comment Letter (suggesting fees or gates do
not address run risk); Systemic Risk Council Comment Letter; Comment
Letter of American Bankers Association (Sept. 17, 2013) (``American
Bankers Ass'n Comment Letter'').
\130\ See, e.g., Form Letter Type D (noting that gates would
``give funds time to stabilize or, in the event a fund cannot resume
redemptions without breaking the buck, ensure that the funds [sic]
shareholders are treated equally in a distribution of the funds
[sic] assets upon dissolution''); Invesco Comment Letter
(``Liquidity fees would provide an appropriate and effective means
to ensure that the extra costs associated with raising liquidity to
meet fund redemptions during times of market stress are borne by
those responsible for them.''); Comment Letter of Independent
Directors Council (Sept. 17, 2013) (``IDC Comment Letter''); J.P.
Morgan Comment Letter. We recognize, however, that our fees and
gates reform does not address other shareholder equity concerns,
including shareholder dilution, that arise as a result of the
structural features in current rule 2a-7 that promote a first-mover
advantage. Our floating NAV reform is designed to address this
concern for institutional prime money market funds. See infra
section III.B.
\131\ See, e.g., Form Letter Type D; Invesco Comment Letter;
Comment Letter of Reich & Tang Asset Management, LLC (Sept. 17,
2013) (``Reich & Tang Comment Letter'').
\132\ See, e.g., HSBC Comment Letter; Deutsche Comment Letter;
ICI Comment Letter.
\133\ See, e.g., MSCI Comment Letter; Federated V Comment
Letter; Comment Letter of Treasury Strategies, Inc. (Sept. 12, 2013)
(``Treasury Strategies Comment Letter''). We also believe that
reducing or eliminating the likelihood of fire sales would in turn
help protect other market participants that need to sell assets in
the market or perhaps mark asset values to market.
\134\ See, e.g., ICI Comment Letter; UBS Comment Letter; IDC
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------
We are adopting reforms that will give a fund the ability to impose
either a liquidity fee or a redemption gate because we believe, and
some commenters suggested, that fees and gates, while both aimed at
helping funds to better and more systematically manage high levels of
redemptions, do so in different ways and thus with somewhat different
tradeoffs.\135\ Accordingly, we believe that both fees and gates should
be available to funds and their boards to provide maximum flexibility
for funds to manage heavy redemptions.\136\ Liquidity fees are designed
to reduce shareholders' incentives to redeem shares when it is
abnormally costly for funds to provide liquidity by requiring redeeming
shareholders to bear at least some of the liquidity costs associated
with their redemption (rather than transferring all of those costs to
remaining shareholders).\137\ Liquidity fees increase the cost of
redeeming shares, which may reduce investors' incentives to sell them.
Likewise, fees help reduce investors' incentives to redeem shares ahead
of other investors, especially if fund managers deplete their funds'
most liquid assets first to meet redemptions, leaving later redemption
requests to be met by selling less liquid assets.
---------------------------------------------------------------------------
\135\ See, e.g., Invesco Comment Letter (suggesting that gates
provide ``the most direct, simple and effective method'' to prevent
runs and contagion as well as ``a `cooling off' period to mitigate
the effects of short-term investor panic,'' while fees ``mitigate
the `first-mover advantage' '' and ``provide an appropriate and
effective means to ensure that the extra costs associated with
raising liquidity to meet fund redemptions during times of market
stress are borne by those responsible for them.'')
\136\ See Treasury Strategies III Comment Letter (``Fees enable
investors to access their liquidity, but at a price . . . , but that
is the cost of being able to assure that a stable NAV product will
not cause contagion or fire sales during such periods. Gates do not
impose an extra [f]ee on shareholders, which is appealing to many
shareholders, but have the undesirable effect of restricting access
to liquidity during critical periods. Together, [f]ees and [g]ates
provide fund boards with powerful tools to prevent a run from
materializing, to stop a run in progress, and to assure that a
stress event does not cause contagion or fire sales.'').
\137\ See, e.g., Dreyfus Comment Letter (``We also agree that
liquidity fees can deter net redemption activity while also
providing an appropriate ``cost of liquidity'' for investors
choosing to exercise the option to redeem over the option to hold. .
. .); see also 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 a 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'').
---------------------------------------------------------------------------
Several commenters noted that liquidity fees could ``re-mutualize''
risk-taking among investors and provide a way to recover costs of
liquidity in times of stress.\138\ This is because liquidity fees
allocate at least some of the costs of providing liquidity to redeeming
rather than non-redeeming shareholders and protect fund liquidity by
requiring redeeming shareholders to repay funds for liquidity costs
incurred.\139\ To the extent liquidity fees 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.'' \140\ This explicit pricing of liquidity
costs in money market funds should offer significant benefits to funds
and the broader short-term financing market in times of potential
stress because it should lessen both the frequency and effect of
shareholder redemptions, which might otherwise result in the sale of
fund securities at ``fire sale'' prices.\141\
---------------------------------------------------------------------------
\138\ See, e.g., HSBC Comment Letter; Invesco Comment Letter;
IDC Comment Letter.
\139\ We note that investors owning securities directly--as
opposed to through a money market fund--naturally bear liquidity
costs. They bear these costs both because they bear any losses if
they have to sell a security at a discount 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.
\140\ See Proposing Release, supra note 25, at 160 n.352 (citing
ICI Jan. 24 FSOC Comment Letter).
\141\ See Chamber II Comment Letter (``[I]f shareholders were to
be charged a fee when an MMF's liquidity costs are at a premium,
they may be discouraged from redeeming their shares at that time,
which would have the effect of slowing redemptions in the MMF.'').
---------------------------------------------------------------------------
In contrast, redemption gates will provide fund boards with a
direct and immediate tool for stopping heavy redemptions in times of
stress.\142\ Unlike liquidity fees, gates are designed to directly stop
a run by delaying redemptions long enough to allow (1) fund managers
time to assess the condition of the fund and determine the appropriate
strategy to meet redemptions, (2) liquidity buffers to grow organically
as securities in the portfolio (many of which are very short-term)
mature and produce cash, and (3) shareholders to assess the liquidity
and value of portfolio holdings in the fund and for any shareholder or
market panic to subside.\143\ As contemplated by today's amendments,
gates definitively stop runs for funds that impose them by blocking all
redemptions for their duration.
---------------------------------------------------------------------------
\142\ See, e.g., Chamber II Comment Letter (``[A] redemption
gate would stop a `run' in [its] tracks, because shareholders would
be prohibited from redeeming their shares while the gate is in
place.'')
\143\ See Proposing Release, supra note 25, at n.348.
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We recognize that redemption gates, if they are ever imposed, will
inhibit the full, unfettered redeemability of money market fund shares,
a principle embodied in section 22(e) of the Investment Company
Act.\144\ However, as discussed in section III.A.3 below, section 22(e)
of the Investment Company Act is aimed at preventing funds and their
advisers from interfering with shareholders' redemption rights for
improper purposes, such as preservation of management fees. Consistent
with that aim, redemption gates under today's amendments are designed
to benefit the fund and its shareholders and may be imposed only when a
fund's board determines that doing so is in the best interests of the
fund.\145\ We also note that, in response to commenter concerns
regarding investor access to their investments and the proposed
duration of redemption gates, under today's amendments, gates will be
limited to up to 10 business days in any 90-day period (rather than 30
days in a 90-day period as proposed).\146\ As such, the extent to which
today's amendments inhibit the redeemability of money market fund
shares is limited.
---------------------------------------------------------------------------
\144\ See section 22(e).
\145\ See rule 2a-7(c)(2)(i).
\146\ See rule 2a-7(c)(2)(i)(B); see also, infra section
III.A.2.d (discussing the duration of redemption gates).
---------------------------------------------------------------------------
In fact, we note that money market funds are currently permitted to
delay payments on redemptions for up to
[[Page 47751]]
seven days.\147\ In addition, money market funds currently may suspend
redemptions after obtaining an exemptive order from the
Commission,\148\ or in accordance with rule 22e-3, which requires a
fund's board of directors to determine that the fund is about to
``break the buck'' (specifically, that the extent of deviation between
the fund's amortized cost price per share and its current market-based
NAV per share may result in material dilution or other unfair results
to investors).\149\ Under today's amendments, money market fund boards
will be able to temporarily suspend redemptions after a fund falls
below the same threshold that funds must cross for boards to impose
liquidity fees.\150\ Accordingly, we believe that the gating allowed by
today's amendments extends and formalizes the existing gating
framework, clarifying for investors when a money market fund
potentially may use a gate as a tool to manage heavy redemptions and
thus prevents any investor confusion on when gating may apply.
---------------------------------------------------------------------------
\147\ See section 22(e).
\148\ 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 or delay payment on redemptions for more than
seven days, 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 the Commission determines by rule or regulation) 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).
\149\ Rule 22e-3(a)(1). Unlike under today's amendments, a fund
that imposes redemptions gates pursuant to rule 22e-3 must do so
permanently and in anticipation of liquidation.
\150\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------
Fees and gates also may have different levels of effectiveness
under different stress scenarios.\151\ For example, we expect that the
imposition of liquidity fees when a fund faces heavy redemptions should
be able to reduce the harm to non-redeeming shareholders and thus the
likelihood of additional redemptions that might have been made in
response to that harm. To the extent that a fund does not need to
engage in fire sales and depress prices because of the imposition of
fees, the possibility of broader market contagion is reduced. We also
note that 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 the option that
involves only possible losses rather than the option that involves
certain losses, even when the amount of possible loss is significantly
higher than the certain loss.\152\ Unlike gates, which temporarily
prevent shareholders from redeeming shares altogether, once imposed,
liquidity fees will present investors with an economic decision as to
whether to redeem or remain in a fund. Investors fearing that a money
market fund may suffer losses may prefer to stay in the fund and avoid
paying a liquidity fee (despite the possibility that the fund might
suffer a future loss) rather than redeem and lock in payment of the
liquidity fee.\153\
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\151\ We note that under today's amendments, a fund's board may
determine that it is in the best interests of a fund to impose a fee
and then later determine to lift the fee and impose a gate, or vice
versa, subject to the limitations on the duration of fees and gates.
See rule 2a-7(c)(2)(i) and (ii).
\152\ See, e.g., Proposing Release, supra note 25, at n.355
(citing Daniel Kahneman, Thinking, Fast and Slow (2011), at 278-
288); see also HSBC Comment Letter; Schwab Comment Letter (``A
liquidity fee would force early redeemers to pay for the costs of
their redemption, without knowing whether the fund was actually
going to experience losses or not. This is a powerful
disincentive.''); but see Comment Letter of Melanie L. Fein Law
Offices (Sept. 10, 2013) (``Fein Comment Letter'') (suggesting
liquidity fees are unlikely to ``prevent institutional [money market
fund] investors from reallocating their assets in a crisis'').
\153\ See, e.g., Proposing Release, supra note 25, at n.355
(citing Daniel Kahneman, Thinking, Fast and Slow (2011), at 278-
288); see also HSBC Comment Letter; Schwab Comment Letter.
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It is possible, however, that liquidity fees might not be fully
effective during a market-wide crisis because, for example,
shareholders might redeem shares irrespective of the level of their
fund's true liquidity costs and the imposition of a liquidity fee.\154\
In those cases, gates will be able to function as circuit breakers,
creating time for funds to rebuild their own internal liquidity and
shareholders to reconsider whether redemptions are still desired or
warranted.\155\
---------------------------------------------------------------------------
\154\ See DERA Study, supra note 24, at 7-14 (discussing
different possible explanations for why shareholders may redeem from
money market funds in times of stress).
\155\ See, e.g., Comment Letter of Department of the Treasury,
Commonwealth of Virginia (Sept. 17, 2013) (``Va. Treasury Comment
Letter''); Chamber II Comment Letter; Dreyfus Comment Letter.
---------------------------------------------------------------------------
ii. Management-Related Advantages
We are also mindful that permitting fund boards to impose fees and/
or gates after a fund has fallen below a particular threshold, and
requiring funds to impose liquidity fees at a lower designated
threshold (absent a board finding that the fee is not in the best
interests of the fund), may offer certain benefits to funds with
respect to management of liquidity and redemption activity. Some
commenters suggested that, even during non-stress periods, fees and
gates could provide fund managers with an incentive to carefully
monitor shareholder concentration and shareholder flow to lessen the
chance that the fund might have to impose fees or gates (because larger
redemptions are more likely to cause the fund to breach the
threshold).\156\ The fees and gates amendments also may have the
additional effect of encouraging portfolio managers to more closely
monitor fund liquidity and hold more liquid securities to increase the
level of daily and weekly liquid assets in the fund, as it would tend
to lessen the likelihood of a fee or gate being imposed.\157\ Such an
approach could also lead to greater investor participation in money
market funds to the extent investors seek to invest in a product with
low liquidity risk, thereby increasing the supply of capital available
to invest in commercial paper. We recognize, however, that such an
approach could perhaps shrink the market for riskier or longer-term
commercial paper, or have a negative effect on yield.\158\
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\156\ See, e.g., Comment Letter of Securities Industry and
Financial Markets Association (Sept. 17, 2013) (``SIFMA Comment
Letter'') (stating that some members ``believe the existence of the
liquidity trigger for the fee and gate will motivate fund managers
to maintain fund liquidity well in excess of the trigger level, to
avoid triggering the fee or gate. That is to say, the mere existence
of the potential for the fee or gate will result in enhanced
liquidity in money market funds.''); BlackRock II Comment Letter;
Comment Letter of Hester Peirce and Robert Greene (Sept. 17, 2013)
(``Peirce & Greene Comment Letter''); see also HSBC Global Asset
Management, Liquidity Fees; a proposal to reform money market funds
(Nov. 3, 2011) (``HSBC 2011 Liquidity Fees Letter'') (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);
Comment Letter of BlackRock, Inc. (Dec. 13, 2012) (available in File
No. FSOC-2012-0003) (``BlackRock FSOC Comment Letter'') (``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.'').
\157\ See, e.g., Proposing Release, supra note 25, at n.365.
\158\ See infra section III.K.
---------------------------------------------------------------------------
We also note that funds may take alternate approaches to managing
liquidity and imposing fees and gates,
[[Page 47752]]
which may differentially affect the short-term funding markets. For
example, a fund that imposes a fee or gate may decide to immediately
build liquidity by investing all maturing securities in highly liquid
assets, particularly if the fund wants to remove the fee or gate as
soon as possible. Another fund may plan to impose a fee or gate for a
set period of time, in which case, there would be no reason to stop
investing in less liquid short-term commercial paper provided it
matured while the fee or gate was in place. The first strategy would
likely have the capital formation effect of lowering participation in
short-term funding markets, whereas the second strategy may defer the
impact until a later time, possibly after market conditions have
improved.
iii. Transparency
We recognize, and certain commenters noted,\159\ that the prospect
of fees and gates being implemented when a fund is under stress should
help make the risk of investing in money market funds more salient and
transparent to investors, which may help sensitize them to the risks of
investing in money market funds. On the other hand, we note that other
commenters argued that fees and gates would not improve transparency of
risk for investors.\160\ Having considered these comments, however, we
believe that there will be an appreciable increase in transparency as a
result of our fees and gates amendments. The disclosure amendments we
are adopting today will require funds to provide disclosure to
investors regarding the possibility of fees and gates being imposed if
a fund's liquidity is impaired. We believe such disclosure will benefit
investors by informing them further of the risks associated with money
market funds, particularly that money market funds' liquidity may, at
times, be impaired.\161\ In addition, as noted above, fees and gates
also could encourage shareholders to monitor funds' liquidity levels
and exert market discipline over the fund to reduce the likelihood that
the imposition of fees or gates will become necessary in that
fund.\162\
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\159\ See, e.g., ICI Comment Letter; Comment Letter of Myra Page
(July 19, 2013) (``Page Comment Letter'').
\160\ See, e.g., Comment Letter of Thrivent Financial for
Lutherans (Sept. 17, 2013) (``Thrivent Comment Letter) (``The
imposition of a liquidity fee or gate will always be a surprise to
the investors that do not redeem quickly enough to avoid it. The
need to impose such a fee or gate will not be transparent to the
investor unless redemption activity is disclosed in a timely manner
providing sufficient time for investors to react.''); Capital
Advisors Comment Letter. Two commenters also expressed concern that
the ability to impose fees and gates would perpetuate shareholder
reliance on sponsor support. See Capital Advisors Comment Letter;
Thrivent Comment Letter. As discussed herein, we believe fees and
gates and the disclosure associated with fees and gates will provide
investors certain benefits, including informing investors further of
the risks associated with money market funds. We further believe
that the disclosure requirements adopted today regarding sponsor
support should help ameliorate concerns regarding shareholder
reliance on sponsor support. See infra sections III.E.7, III.E.9.g
and III.F.3.
\161\ We recognize that the level of board discretion in the
fees and gates amendments may make it more difficult for investors
to predict when fees and/or gates will imposed; however, we are
adopting certain thresholds and maximums that we believe will
provide investors with notice as to the possible imposition of fees
and gates. Additionally, today we are adopting a requirement that
funds disclose their percentage of weekly liquid assets on a daily
basis on their Web sites and, thus, shareholders should be aware
when a fund is approaching these thresholds. See rule 2a-
7(h)(10)(ii)(B).
\162\ See Proposing Release, supra note 25, at n.366. The
disclosure of fees and gates also could advantage larger funds and
fund groups if the ability to provide financial support reduces or
eliminates the need to impose fees and/or gates (whose imposition
may be perceived to be a competitive detriment).
---------------------------------------------------------------------------
c. Concerns Regarding Fees and Gates
i. Pre-Emptive Runs and Broader Market Concerns
We acknowledge the possibility that, in market stress scenarios,
shareholders might pre-emptively redeem shares if they fear the
imminent imposition of fees or gates (either because of the fund's
situation or because other money market funds have imposed redemption
restrictions).\163\ A number of commenters suggested investors would do
so.\164\ Some commenters also suggested that sophisticated investors in
particular might be able to predict that fees and gates may be imposed
and may redeem shares before this occurs.\165\
---------------------------------------------------------------------------
\163\ See, e.g., Proposing Release, supra note 25, at 163-167,
n.361.
\164\ See, e.g., Comment Letter of Novelis (July, 16, 2013)
(``Novelis Comment Letter''); Comment Letter of State Investment
Commission, Commonwealth of Kentucky (Sept. 9, 2013) (``Ky. Inv.
Comm'n Comment Letter''); Boston Federal Reserve Comment Letter;
Comment Letter of Hester Peirce and Robert Greene, Working Paper:
Opening the Gate to Money Market Fund Reform (Apr. 8, 2014)
(``Peirce & Greene II Comment Letter''). Some commenters were
concerned that news of one money market fund imposing a redemption
restriction could trigger a system-wide run by investors in other
money market funds. See, e.g., Samuel Hanson, David Scharfstein, and
Adi Sunderam (Sept. 16, 2013) (``Hanson et al. Comment Letter'');
Deutsche Comment Letter; Boston Federal Reserve Comment Letter
(suggesting further that ``because of the relative homogeneity in
many [money market funds' holdings], the imposition of a liquidity
fee or redemption gate on one fund may incite runs on other funds
which are not subject to such measures'') (citation omitted). In
addition, one commenter, drawing an analogy to banks prior to the
adoption of federally insured deposits, noted that although
withdrawal suspensions were commonly used by banks in response to
fleeing depositors, the specter of suspensions themselves were often
the cause of such investor flight. See, e.g., Comment Letter of
Committee on Capital Markets Regulation (Sept. 17, 2013) (``Comm.
Cap. Mkt. Reg. Comment Letter'').
\165\ See, e.g., MFDF Comment Letter; Va. Treasury Comment
Letter; Goldman Sachs Comment Letter.
---------------------------------------------------------------------------
While we recognize that there is risk of pre-emptive redemptions,
the benefits of having effective tools in place to address runs and
contagion risk leads us to adopt the proposed fees and gates reforms,
with some modifications. We believe several of the changes we are
making in our final reforms will mitigate this risk and dampen the
effects on other money market funds and the broader markets if pre-
emptive redemptions do occur.
As discussed below, the shorter maximum time period for the
imposition of gates and the smaller size of the default liquidity fee
that we are adopting in these final amendments, as compared to what we
proposed, are expected to lessen further the risk of pre-emptive
runs.\166\ We understand that the potential for a longer gate or higher
liquidity fee before a restriction is in place may increase the
incentive for investors to redeem at the first sign of any potential
stress at a fund or in the markets.\167\ We believe that by limiting
the maximum time period that gates may be imposed to 10 business days
in any 90-day period (down from the proposed 30 days), investor
concerns regarding an extended loss of access to cash from their
investment should be mitigated. Indeed, some money market funds today
retain the right to delay payment on redemption requests for up to
seven days, as all registered investment companies are permitted to do
under the Investment Company Act, and we are not aware that this
possibility has led to any pre-emptive runs historically.\168\ In
addition, we note that under section 22(e), the Commission also has the
authority to, by order, suspend the right of redemption or allow the
postponement of payment of redemption requests for more than seven
days. The Commission used this authority, for example, with
[[Page 47753]]
respect to the Reserve Primary Fund. To our knowledge, this authority
also has not historically led to pre-emptive redemptions. We believe
that the gating allowed by today's amendments extends and formalizes
this existing gating framework, clarifying for investors when a money
market fund potentially may use a gate as a tool to manage heavy
redemptions and thus prevents any investor confusion on when gating may
apply.
---------------------------------------------------------------------------
\166\ See Comment Letter of Federated Investors, Inc. (Apr. 25.
2014) (``Federated XI Comment Letter'').
\167\ See J.P. Morgan Comment Letter (``The potential of total
loss of access to liquidity for up to thirty (30) days will be a
concern for investors, and could exacerbate a pre-emptive run.'');
Federated V Comment Letter (``Shareholders will find it increasingly
difficult to compensate for their loss of liquidity the longer the
suspension of redemptions continues. It is therefore important for
Alternative 2 to limit the suspension of redemptions to a period in
which the potential benefits to shareholders of delaying redemptions
outweigh the potential disruptions caused by the delay.'').
\168\ See section 22(e).
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We believe that the maximum 10 business day gating period we are
adopting today is a similarly short enough period of time (as compared
to the seven days a fund may delay payment on redemption requests) that
many investors may not be unduly burdened by such a temporary loss of
liquidity.\169\ Thus, these investors may have less incentive to redeem
their investments pre-emptively before the imposition of a gate. For
similar reasons, the reduction in the default liquidity fee to 1% (down
from the proposed 2%), discussed further below, may also lessen
shareholders' incentives to redeem pre-emptively as fewer investors may
consider it likely that a liquidity fee will result in an unacceptable
loss on their investment.\170\
---------------------------------------------------------------------------
\169\ See, e.g., Federated V Comment Letter (stating that 10
calendar days ``would be a significantly shorter period than
proposed by the Commission, while still allowing prime [money market
funds] more than a week to address whatever problem led to the
suspension of redemptions. This would also be consistent with the
comments of some of the investors who indicated to Federated that
they probably could not go more than two weeks without access to the
cash held in their [money market fund].''); see also infra section
III.A.2.d (discussing the maximum duration of temporary redemption
gates under today's amendments).
\170\ We note that under our final amendments, the 1% default
liquidity may be raised by a fund's board (up to 2%) if it is in the
best interests of the fund. See rule 2a-7(c)(2)(ii)(A). However,
given the empirical information regarding liquidity costs in money
market fund eligible securities in the financial crisis, as
discussed in the DERA Liquidity Fee Memo, which supported the
reduction in the size of the default liquidity fee to 1%, money
market fund shareholders may estimate that a fee as high as 2% will
be unlikely and that depending on the circumstances, a fee of less
than 1% could be appropriately determined by the board of directors.
See DERA Liquidity Fee Memo, supra note 111.
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In addition, we expect that the additional discretion we are
granting fund boards to impose a fee or gate at any time after a fund's
weekly liquid assets have fallen below the 30% required minimum, a much
higher level of remaining weekly liquid assets than proposed, should
mitigate the risk of pre-emptive redemptions. This board discretion
should reduce the incentive of shareholders from trying to pre-
emptively redeem because they will be able to less accurately predict
specifically when, and under what circumstances, fees and gates will be
imposed.\171\ Board discretion also should allow boards to act
decisively if they become concerned liquidity may become impaired and
to react to expected, as well as actual, declines in liquidity levels,
given their funds' investor base and other characteristics.
---------------------------------------------------------------------------
\171\ See Wells Fargo Comment Letter (``The ability for fund
investors to frequently and aggressively `game' and avoid the
potential imposition of Fees or Gates is undermined by the element
of uncertainty inherent in a fund board's discretion to impose a Fee
or a Gate.''); see also Proposing Release, supra note 25, at n.362.
Additionally, we believe that requiring investors in institutional
prime funds to redeem their shares at floating NAV should lower the
incentive to run pre-emptively when investors anticipate that a gate
will be imposed as a result of a credit event. See infra section
III.B for a discussion of the floating NAV requirement.
---------------------------------------------------------------------------
Likewise, increased board discretion should lessen the likelihood
that sophisticated investors can preferentially predict when a fee or
gate is going to be imposed because sophisticated investors, like any
other investor, will not know what specific circumstances a fund board
will deem appropriate for the imposition of fees or gates.\172\ We
recognize that sophisticated investors may monitor the weekly liquid
assets of funds and seek to redeem before a fund drops below the 30%
weekly liquid asset threshold. We believe, however, that a
sophisticated investor may be dissuaded from redeeming in these
circumstances because the fund still has a substantial amount of
internal liquidity. In addition, redemptions when the fund still has
this much internal liquidity would not lead to fire sales or other such
adverse effects.
---------------------------------------------------------------------------
\172\ Although funds' Web site disclosure will indicate when a
fund is approaching the weekly liquid asset thresholds for imposing
a fee or gate, investors will not know the circumstances under which
a board will deem such a restriction to be in the best interests of
the fund. See rule 2a-7(h)(10)(ii)(B).
---------------------------------------------------------------------------
We also believe that increased board flexibility will reduce the
occurrence of pre-emptive redemptions by shareholders who seek to
redeem because another money market fund has imposed a fee or gate.
Increased board flexibility will likely result in different funds
imposing different redemption restrictions at different times,
particularly considering that after crossing the 30% threshold each
fund's board will be required to make a best interests determination
with respect to the imposition of a fee or gate.\173\ As such, it will
be less likely that investors can predict whether any particular fund
will impose a fee or gate, even if another fund has done so, and thus
perhaps less likely they will redeem assuming that one fund imposing
such a restriction means other funds may soon do so.
---------------------------------------------------------------------------
\173\ Boards will also be required to make a best interests
determination if they determine to change the level of the default
liquidity fee or to not impose the default fee. See rule 2a-
7(c)(2)(ii).
---------------------------------------------------------------------------
Moreover, we believe that funds' ability to impose fees and gates
once weekly liquid assets drop below 30% will substantially mitigate
the broader effects of pre-emptive runs, should they occur. A money
market fund that imposes a fee or gate with substantial remaining
internal liquidity is in a better position to bear those redemptions
without a broader market impact because it can satisfy those redemption
requests through existing or internally generated cash and not through
asset sales (other than perhaps sales of government securities that
tend to increase in value and liquidity in times of stress). Thus, pre-
emptive runs, if they were to occur, under these circumstances are less
likely to generate adverse contagion effects on other money market
funds or the short-term financing markets.
We note some commenters suggested that concerns about pre-emptive
run risks from fees and gates are likely overstated.\174\ One commenter
noted that the ``element of uncertainty inherent in a board's
discretion to impose a fee or gate'' would diminish any possible gaming
by investors.\175\ Another commenter further noted that ``appropriate
portfolio construction and daily transparency'' would reduce the
likelihood of anticipatory redemptions.\176\ For example, as discussed
below, our amendments require that each money market fund disclose
daily on its Web site its level of weekly liquid assets. This means
that if one money market fund imposes a fee or gate, investors in other
money market funds will have the benefit of full transparency on
whether the money market fund in which they are invested is similarly
experiencing liquidity stress and thus is likely to impose a fee or
gate. Pre-emptive redemptions and contagion effects due to a lack of
transparency
[[Page 47754]]
(which may have occurred in the crisis) may therefore be reduced. Some
commenters also have previously indicated that a liquidity fee or gate
should 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.\177\
---------------------------------------------------------------------------
\174\ See, e.g., SIFMA Comment Letter; Wells Fargo Comment
Letter; Dreyfus Comment Letter; see also Chamber II Comment Letter
(stating that ``unlike with the current conditions of [r]ule 22e-3
under the [Investment Company Act], a redemption gate would allow
the MMF to remain in operation after the gate is lifted. This, in
turn, will provide MMF investors with comfort regarding the ultimate
redemption of their investment and make any large-scale redemptions
less likely.''); Comment Letter of Artie Green (Aug. 29, 2013)
(``Green Comment Letter'') (``Fund shareholders would be less likely
to panic if they know they will have access to their assets when the
fund reopens after a short suspension of redemptions.'').
\175\ See Wells Fargo Comment Letter.
\176\ See Dreyfus Comment Letter.
\177\ See, e.g., Proposing Release, supra note 25, at n.364.
---------------------------------------------------------------------------
Additionally, we note that while many European money market funds
are able to suspend redemptions and/or impose fees on redemptions, we
are not aware that their ability to do so has historically led to pre-
emptive runs. Most European money market funds are subject to
legislation governing Undertakings for Collective Investment in
Transferable Securities (``UCITS''), which also covers other collective
investments, and which permits them to suspend temporarily redemptions
of units.\178\ For example, in Ireland, UCITS are permitted to
temporarily suspend redemptions ``in exceptional cases where
circumstances so require and suspension is justified having regard to
the interest of the unit-holders.'' \179\ Similarly, many money market
funds in Europe are also permitted to impose fees on redemptions.\180\
---------------------------------------------------------------------------
\178\ 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); see also Coll. 7.2R United Kingdom
Financial Conduct Authority Handbook (allowing the temporary
suspension of redemptions ``where due to exceptional circumstances
it is in the interest of all the unitholders in the authorized
fund'').
\179\ See Regulation 104(2)(a) of S.I. No. 352 of 2011.
\180\ See, e.g., HSBC Comment Letter (``We are in the process of
rolling out the ability for the Board of Directors to impose trigger
based liquidity fees in our [money market funds] where current
regulation allows. At this time we are working on implementation in
our flagship ``Global Liquidity Fund'' range domiciled in
Dublin.'').
---------------------------------------------------------------------------
We also note that a commenter discussed a paper by the staff of the
Federal Reserve Bank of New York (``FRBNY'') entitled ``Gates, Fees,
and Preemptive Runs.'' \181\ The FRBNY staff paper constructs a
theoretical model of fees or gates used by a financial intermediary and
finds ``that rather than being part of the solution, redemption fees
and gates can be part of the problem.'' \182\ This commenter argued
that this paper fails to consider numerous restrictions in bank
products similar to fees and gates that do not appear to have triggered
pre-emptive runs on banks.\183\ In particular, the commenter noted that
all banks are required ``to retain contractual authority as to most
deposits to postpone withdrawals (gating) or impose early redemption
fees and to reserve the right to impose restrictions--either gates or
fees or both--on redemptions of all bank deposits other than demand
deposit accounts. . . .'' \184\
---------------------------------------------------------------------------
\181\ See Federated XI Comment Letter.
\182\ See Gates, Fees and Preemptive Runs, Federal Reserve Bank
of New York Staff Report No. 670 (Apr. 2014), available at http://www.newyorkfed.org/research/staff_reports/sr670.pdf.
\183\ See Federated XI Comment Letter.
\184\ See id. (citations omitted). The commenter states that,
other than with respect to demand deposit accounts, ``banks (1) are
required . . . to reserve the right to require seven days' advance
notice of a withdrawal from [money market deposit accounts], NOW
accounts and other savings accounts; (2) are not required to allow
early withdrawal from [certificates of deposit] and other time
deposits; and (3) are allowed to impose early withdrawal fees on
time deposits if they choose to permit an early withdrawal from a
time deposit.''
---------------------------------------------------------------------------
We note that the model of fees or gates in the FRBNY staff paper
has a number of features and assumptions different than the reforms we
are adopting today. For example, the paper's model assumes the fees or
gates are imposed only when liquid assets are fully depleted. In
contrast, under our reforms fees or gates may be imposed while the fund
still has substantial liquid assets and, as discussed above, we believe
investors may be dissuaded from pre-emptively redeeming from funds with
substantial internal liquidity because the fund is more likely to be
able to readily satisfy redemptions without adversely impacting the
fund's pricing.\185\ Moreover, under our reforms (unlike the model), a
fund board has discretion in the decision of when to impose fees or
gates, which as discussed above should reduce the incentive for
investors to run, because they will be able to less accurately predict
specifically when, and under what circumstances, fees or gates will be
imposed.\186\ Another significant difference is that our reforms
include a floating NAV for institutional prime money market funds,
which constitute a sizeable portion of all money market funds, but the
model assumes a stable NAV. As discussed below, we believe the floating
NAV requirement may encourage those investors who are least able to
bear risk of loss to redirect their investments to other investment
opportunities (e.g., government money market funds), and this may have
the secondary effect of removing from the funds those investors most
prone to redeem should a liquidity event occur for which fees or gates
could be imposed. Furthermore, the paper also assumes that no investor
could foresee the possibility of a shock to a money market fund that
reduces the fund's value or liquidity despite the events of 2008 that
should have informed investors that fund NAVs can change over time and
that liquidity levels may fluctuate. In addition, under our floating
NAV reforms, price levels of institutional prime money market funds
likely will fluctuate, and today's reforms will also require additional
disclosures that will convey important information to investors about
the fund's value which in turn may help prevent run behavior to the
extent it is based on uninformed decision-making.
---------------------------------------------------------------------------
\185\ See supra at text following note 172.
\186\ See supra notes 171-173 and accompanying text.
---------------------------------------------------------------------------
These differences in our reforms as compared to the model in the
FRBNY staff paper, along with the additional disclosures that we are
adopting today that will convey important information to investors
about the fund's value, should in our view significantly mitigate any
potential for substantial investor runs before fees and gates are
imposed. Accordingly, the FRBNY staff paper's findings regarding the
risks of pre-emptive redemptions, because they rely on different facts
and assumptions than are being implemented in today's reforms, are not
likely to apply to money market funds following today's reforms.
As noted above, the new daily transparency to shareholders on
funds' levels of weekly liquid assets should provide additional
benefits, including helping shareholders to understand if their fund's
liquidity is at risk and thus a fee or gate more likely and, therefore,
should lessen the chance of contagion from shareholders redeeming
indiscriminately in response to another fund imposing a fee or gate.
Investors will be able to benefit from this disclosure when assessing
each fund's circumstances, rather than having to infer information
from, or react to, the problems observed at other funds. Nevertheless,
investors might mimic other investors' redemption strategies even when
those other investors' decisions are not necessarily based on superior
information.\187\ General stress
[[Page 47755]]
in the short-term markets or fear of stress at a particular fund could
trigger redemptions as shareholders try to avoid a fee or gate. As
noted above, however, even if investors redeem, their redemptions
eventually could cause a fee or gate to come down, thereby lessening or
halting redemptions and mitigating contagion risk.\188\ In sum, we are
persuaded that fees and gates are important tools that can be used to
halt redemptions and prevent contagion during periods of market stress.
---------------------------------------------------------------------------
\187\ See Proposing Release, supra note 25, at n.363; see also
Hanson et al. Comment Letter (``news that one [money market fund]
has initiated redemption restrictions could set off a system-wide
run by investors who are anxious to redeem their shares before other
funds also initiate such fees or restrictions''); Boston Federal
Reserve Comment Letter (``[B]ecause of the relative homogeneity in
many [money market funds'] holdings, the imposition of a liquidity
fee or redemption gate on one fund may incite runs on other funds
which are not subject to such measures'' (citation omitted)).
\188\ See SIFMA Comment Letter (``[Some] members point out that
if a fund's liquidity breaches the trigger level, the gate and fee,
themselves, will stem any exodus and damper its effect.'').
---------------------------------------------------------------------------
ii. Impact on a Fund After Imposing a Fee or Gate
Commenters have suggested that once fees and gates are imposed,
they may not be easily lifted without triggering a run.\189\ Similarly,
other commenters warned that imposing a fee or gate would not help a
fund recover from a crisis but rather force it into liquidation because
investors would lose trust in the fund and seek to invest in a money
market fund that has not imposed a fee or gate.\190\ We acknowledge
that there is a risk that investors may redeem from a fund after a fee
or gate is lifted. We believe this is less likely following the
imposition of a fee, however, because investors will continue to have
the ability to redeem while a fee is in place and, therefore, may
experience less disruption and potentially less loss in trust. In any
event, we believe that it is important that money market funds have
these tools to give funds the ability to obtain additional liquidity in
an orderly fashion if a liquidity crisis occurs, notwithstanding the
risk that the imposition of a fee or gate may cause some subsequent
loss in trust in a fund or may lead to a resumption in heavy
redemptions once a fee or gate is lifted. Further, we think it is
important to observe that whenever a fee or gate is imposed, the fund
may already be under stress from heavy redemptions that are draining
liquidity, and the purpose of the fees and gates amendments is to give
the fund's board additional tools to address this external threat when
the board determines that using one or both of the tools is in the
fund's best interests.
---------------------------------------------------------------------------
\189\ See, e.g., Comment Letter of T. Rowe Price Associates,
Inc. (Sept. 17, 2013) (``T. Rowe Price Comment Letter'').
\190\ See, e.g., Schwab Comment Letter (``[W]e have a hard time
seeing how any fund that actually imposed fees and/or redemption
gates would ever be able to recover and be a viable fund again.
Investor trust in that fund would be lost.''); Goldman Sachs Comment
Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------
Further, to the extent that commenters' concerns about potential
loss in trust or risk of a run when a fee or gate is lifted is tied to
investor concerns about the sufficiency of the fund's liquidity levels,
we note that, under today's amendments, funds will be required to
disclose information regarding their liquidity (e.g., daily and weekly
liquid assets) on a daily basis. Such disclosure, assuming adequate
liquidity, may help ameliorate concerns that investors will run or
shift their investment elsewhere after a fund lifts its redemption
restrictions because investors will be able to see that a fund is
sufficiently liquid. To the extent heavy redemptions resume after a
fund lifts a fee or gate, we also note that a fund board may again
impose a fee, or gate if the fund has not yet exceeded the 10 business
day maximum gating period, if it is in the best interests of the
fund.\191\ Additionally, while we recognize that fees and gates may
cause some investors to leave a fund once it has lifted a fee or gate
(or, in the case of a fee, while the fee is in place), which may affect
efficiency, competition, and capital formation, we believe it is
possible that some investors, particularly those that were not seeking
to redeem during the imposition of the fee or gate, may choose to stay
in the fund. In this regard, we note that, as discussed above, a
liquidity fee would benefit those investors who were not seeking to
redeem while a fund's liquidity was under stress by more equitably
allocating liquidity costs among redeeming and non-redeeming
shareholders.\192\ In addition, to the extent a fund's drop in weekly
liquid assets was the result of an external event, if such event
resolves while a fee or gate is place, some investors may choose to
stay in the fund after the fee or gate is lifted.
---------------------------------------------------------------------------
\191\ See rule 2a-7(c)(2)(i)(B) (limiting the imposition of
gates to 10 business days in any 90-day period).
\192\ See supra note 121 and accompanying text.
---------------------------------------------------------------------------
In addition, we recognize that a fund board may determine to close
a fund and liquidate after the fund has imposed a fee or temporary gate
(or instead of imposing a fee or temporary gate) pursuant to amended
rule 22e-3.\193\ We note, however, that even if a fund ultimately
liquidates, its disposition is likely to be more orderly and efficient
if it previously imposed a fee or gate. In fact, imposing a fee or gate
should give a fund more time to generate greater liquidity so that it
will be able to liquidate with less harm to shareholders. Additionally,
to the extent a fund's board determines to close the fund and liquidate
after the fund has imposed a fee or temporary gate, we anticipate that
this would more commonly occur because the imposition of the fee or
gate was the result of idiosyncratic stresses on the fund.\194\ In this
regard, we note that at least one commenter who suggested that a money
market fund would likely be forced to liquidate after imposing a fee or
gate, also noted that ``in a systemic crisis'' where many funds may be
faced with heavy redemptions and thus the possibility of imposing fees
and gates, money market funds ``may have a greater likelihood of
avoiding liquidation after the systemic crisis [has] subsided.'' \195\
---------------------------------------------------------------------------
\193\ See infra section III.A.4 herein discussing amendments to
rule 22e-3 that will allow a board to close and liquidate a fund if
the fund's weekly liquid assets have dropped below 10%.
\194\ See infra note 195 and accompanying text.
\195\ See J.P. Morgan Comment Letter.
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iii. Investors' Liquidity Needs
A number of commenters expressed concern that fees or gates could
impair money market funds' use as liquid investments, in particular
because redemption restrictions (especially gates) would limit or deny
shareholders ready access to their funds.\196\ Commenters noted such a
lack of liquidity could have detrimental consequences for investors,
including, for example, corporations and institutions using liquidity
accounts for cash management,\197\ retail investors needing immediate
access to cash such as in a medical emergency or when purchasing a
home,\198\ and state and local governments that need to make payroll or
service bond payments when due.\199\
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\196\ See, e.g., Comment Letter of the Boeing Company (Sept. 9,
2013) (``Boeing Comment Letter''); Boston Federal Reserve Comment
Letter; BlackRock II Comment Letter.
\197\ See, e.g., Boeing Comment Letter; Capital Advisors Comment
Letter.
\198\ See, e.g., Comment Letter of the SPARK Institute, Inc.
(Sept. 16, 2013) (``SPARK Comment Letter''); Comment Letter of
Vanguard (Sept. 17, 2013) (``Vanguard Comment Letter'').
\199\ See, e.g., Comment Letter of Chief Financial Officer,
State of Florida (Sept. 12, 2013) (``Fla. CFO Comment Letter'');
Comment Letter of Treasurer and Comptroller, St. Louis, Missouri
(Sept. 17, 2013) (``St. Louis Treasurer Comment Letter'').
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We recognize that liquidity fees and redemption gates could affect
shareholders by potentially limiting, partially or fully (as
applicable), the redeemability of money market fund shares under
certain conditions, a principle embodied in the Investment
[[Page 47756]]
Company Act.\200\ In our view, however, these reforms should not
unreasonably impede the use of money market funds as liquid
investments. First, under normal circumstances, when a fund's liquidity
is not under stress, the fees and gates amendments will not affect
money market funds or their shareholders. Fees and gates are tools for
funds to use in times of severe market or internal stress. Second, even
when a fund experiences stress, the fees and gates amendments we are
adopting today do not require money market funds to impose fees and
gates when it is not in the best interests of the fund. Accordingly, we
believe these tools can assist funds facing liquidity shortages during
periods of unusual stress, while preserving the benefits of money
market funds for investors and the short-term funding markets by not
affecting the day-to-day operations of a fund in periods without
stress. In fact, a number of commenters observed that fees and gates
would be the most effective option of achieving the Commission's reform
goals,\201\ and would preserve as much as possible the current benefits
of money market funds and/or be less onerous day-to-day on funds and
investors.\202\
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\200\ See infra Section III.A.3 (discussing the rationale for
the exemptions from the Investment Company Act).
\201\ See, e.g., Fidelity Comment Letter; Deutsche Comment
Letter; Comment Letter of SunTrust Bank and SunTrust Investment
Services (Sept. 16, 2013) (``SunTrust Comment Letter'').
\202\ See, e.g., Comment Letter of Plan Investment Fund, Inc.
(Sept. 16, 2013) (``Plan Inv. Fund Comment Letter''); IDC Comment
Letter; HSBC Comment Letter.
---------------------------------------------------------------------------
With respect to liquidity fees, we also note that investors will
not be prohibited from redeeming their investments; rather, they may
access their investments at any time, but their redemptions will be
subject to a fee that is designed to make them bear at least some of
the costs associated with their access to liquidity rather than
externalizing those costs to the remaining fund shareholders. With
respect to gates, we recognize that they will temporarily prevent
investors from redeeming their investments when imposed. However, we
believe gates (as well as fees) will rarely be imposed in normal market
conditions. In our view, in those likely rare situations where a gate
would be imposed, investors would (in the absence of the gating
mechanism) potentially be left in worse shape if the fund were, for
example, forced to engage in the sale of assets and thus incur
permanent losses; or worse, if the fund were forced to liquidate
because of a severe liquidity crisis. Thus, we believe that allowing
fund boards to impose gates should not be viewed as detrimental to
funds, but rather should be viewed as an interim measure boards can
employ in worse case scenarios where the alternative would likely be a
result potentially more detrimental to investors' overall interests. To
the extent that some investors may be sufficiently concerned about
their ability to access their investment to meet certain obligations,
such as payroll or bills, we believe they may choose to manage their
money market fund investments so as to be able to meet these
obligations if a redemption gate should be imposed.\203\
---------------------------------------------------------------------------
\203\ We recognize that some investors may choose to move their
money out of affected money market funds due to concern that a fee
or gate may be imposed in the future. For a discussion of investor
movement out of money market funds, see infra section III.K.
---------------------------------------------------------------------------
While we recognize these commenter concerns regarding liquidity, we
believe that the overall benefits and protections that are provided by
the fees and gates amendments to all investors in these money market
funds outweigh these concerns. Furthermore, we note that the final
amendments have been modified and tailored to mitigate some potentially
disruptive consequences of fees and gates. For example, under the final
amendments, gates cannot be imposed for more than 10 business days in
any 90-day period, so, to the extent an investor's access to his/her
money is inhibited, it is for a limited period of time, which may allow
an investor to better prepare for and withstand a possible gate. We
also note, as discussed above, that funds are currently permitted to
impose permanent redemption gates in certain circumstances.\204\
Therefore, we believe that the gating allowed by today's amendments
extends and formalizes the existing gating framework, clarifying for
investors when a money market fund potentially may use a gate as a tool
to manage heavy redemptions and thus prevents any investor confusion on
when gating may apply. While we recognize that the permanent redemption
gates allowed under rule 22e-3 have not yet been used by money market
funds, we note that investors have widely utilized money market funds
as cash management vehicles even with the possibility of these
permanent gates under an existing rule. Moreover, to the extent an
investor wants to invest in a money market fund without the possibility
of fees and/or gates, it may choose to invest in a government money
market fund, which is not subject to the fees and gates
requirements.\205\
---------------------------------------------------------------------------
\204\ See rule 22e-3.
\205\ See infra section III.C.1.
---------------------------------------------------------------------------
iv. Investor Movement Out of Money Market Funds
Some commenters expressed concern that the possibility of fees and
gates being imposed could result in diminished investor appeal and/or
utility of affected money market funds, and could cause investors to
either abandon or severely restrict use of affected money market
funds.\206\ For example, commenters suggested that fees and gates would
drive sweep account money out of money market funds.\207\ Commenters
warned that fees and gates may cause investors to shift investments
into other assets, government money market funds, FDIC-insured accounts
and other bank products, riskier and/or less regulated investments, or
other alternative stable value products.\208\ Conversely, other
commenters predicted only minor effects on investor demand and/or that
investor demand would decrease less under the proposed fees and gates
alternative than under the proposed floating NAV alternative.\209\
---------------------------------------------------------------------------
\206\ See, e.g., Ky. Inv. Comm'n Comment Letter; Boeing Comment
Letter; Schwab Comment Letter; American Bankers Ass'n, Comment
Letter.
\207\ See Fin. Info. Forum Comment Letter (``Charging a
liquidity fee and imposing gates effectively removes money market
funds as a sweep vehicle since these accounts are designed to be a
liquidity product and firms will no longer be able to guarantee
liquidity.''); Comment Letter of M&T Banking Corporation (Oct. 1,
2013) (``M&T Bank Comment Letter'') (suggesting fees and gates would
``drive most commercial banking clients from prime money market fund
sweep accounts''); SIFMA Comment Letter.
\208\ See, e.g., Northern Trust Comment Letter; M&T Bank Comment
Letter; Schwab Comment Letter; but see Invesco Comment Letter
(suggesting that investor opposition to fees and gates could be
addressed in part by greater education regarding the circumstances
in which the gates would be imposed); Peirce and Greene Comment
Letter (suggesting that to the extent gates in particular make money
market funds less attractive to certain investors, this would be ``a
positive step toward helping them find appropriate investments for
their needs.''); see also Comment Letter of Fidelity Investments
(Apr. 22, 2014) (``Fidelity DERA Comment Letter''); Comment Letter
of BlackRock, Inc. (Apr. 23, 2014) (``BlackRock DERA Comment
Letter'').
\209\ See, e.g., Comment Letter of Cathy Santoro (Sept. 17,
2013) (``Santoro Comment Letter''); Comment Letter of Arnold &
Porter LLP on behalf of Federated Investors (Costs of Implementing
the Proposals) (Sept. 17, 2013) (``Federated X Comment Letter'').
---------------------------------------------------------------------------
We recognize that, as suggested by certain commenters, our
amendments could cause some shareholders to redeem their prime money
market fund shares and move their assets to alternative products that
do not have the ability to impose fees or gates because the potential
imposition of a fee or gate could make investment in a money market
fund less attractive due to less
[[Page 47757]]
certain liquidity.\210\ As noted above, this could affect efficiency,
competition, and capital formation. We agree with one commenter that
suggested it is difficult to estimate the extent to which assets might
shift from prime funds to government funds or other alternatives.\211\
As discussed above, some investors may determine they are comfortable
investing in money market funds that may impose fees and gates, because
fees and gates will likely be imposed only during times of stress and
should not affect the daily operations of money market funds during
normal market conditions.\212\ Other investors, however, may reallocate
their assets to investment alternatives that are not subject to fees
and gates, such as government money market funds.\213\
---------------------------------------------------------------------------
\210\ See Comment Letter of SunGard Institutional Brokerage Inc.
(Sept. 13, 2013) (``SunGard Comment Letter'') (finding in a survey
of its corporate, government and pension plan customers that 76% of
respondents would decrease their use of money market funds
substantially or entirely, but that only 22% of respondents would
stop using money market funds entirely); Comment Letter of Fidelity
(Feb. 3, 2012) (available in File No. 4-619) (``Fidelity Feb. 3
Comment Letter'') (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);
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 http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf (``Federated IOSCO Comment
Letter'') (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 Invesco Comment Letter (suggesting
that investor opposition to fees and gates could be addressed in
part by greater education regarding the circumstances in which the
gates would be imposed).
\211\ See Comment Letter of Federated Investors, Inc. (Demand
and Supply of Safe Assets) (Apr. 23, 2014) (``Federated DERA I
Comment Letter'') (suggesting an ``inability to predict how many
assets might shift from prime and municipal MMFs to government MMFs
in response to adoption [of] [a]lternative 1 or 2, or a combination
thereof'' and recommending that the Commission consider a ``range of
outcomes'' when analyzing a possible shift out of prime money market
funds and into government money market funds). The commenter also
noted that it has ``not found any basis for estimating the extent to
which prime and municipal MMF shareholders would prefer bank
instruments to government MMFs.'' See id.
\212\ See, e.g., Invesco Comment Letter (``[W]e believe that
additional education about the purpose and operation of the proposed
liquidity fees and redemptions gates and the circumstances in which
they might be implemented would increase greatly MMF investors'
willingness to accept them.''); Goldman Sachs Comment Letter
(``[S]ome of our investors have told us that they could accept the
prospect of liquidity fees and gates. . . .''); Comment Letter of
Tom Garst (Aug. 30, 2013) (``Garst Comment Letter'') (suggesting
that gates would be the ``most acceptable alternative'' out of those
proposed); Capital Advisors Comment Letter (``[W]e think
shareholders may accept a cost of liquidity in a stressful
situation. . . .''). We note that, under today's amendments,
institutional prime funds will be subject to the fees and gates
requirements as well as a floating NAV requirement, and that
investor acceptance of fees and gates for these funds may be
different. See, e.g., ICI Comment Letter (suggesting a fund that is
subject to fees and gates and a floating NAV will be ``a fund which
nobody will want''); see also infra section III.B for a discussion
of the floating NAV requirement and any investor movement out of
money market funds as result of such requirement.
\213\ Government money market funds also will not be subject to
the floating NAV requirement adopted today. See infra section
III.C.1. In addition, as noted above, all money market funds today
have the option to impose a permanent redemption gate and liquidate
under rule 22e-3 under the Investment Company Act. While we
recognize that these permanent redemption gates have not yet been
used by money market funds, we note that they have not led to the
migration of investors away from money market funds.
---------------------------------------------------------------------------
One potential issue related to market efficiency that several
commenters raised was a potential shortage of eligible government
securities if investors reallocate assets from funds that are subject
to fees and gates into government funds.\214\ We anticipate that any
increase in demand for eligible government securities because of the
fees and gates requirement would likely be accompanied by an additional
increase in demand arising from investors that reallocate assets from
institutional prime funds because of the floating NAV requirement. As
such, we discuss the reforms' joint impact on the demand for eligible
government securities and possible repercussions on the economy and
capital formation in section III.K below.
---------------------------------------------------------------------------
\214\ See, e.g., Fidelity DERA Comment Letter.
---------------------------------------------------------------------------
In addition, a number of commenters noted that a possible shift out
of affected money market funds could ultimately lead to a decrease in
the funding of, or other adverse effects on, the short-term financing
markets.\215\ The Commission recognizes the expected benefits from
today's amendments may be accompanied by adverse effects on issuers
that access the short-term financing markets with consequent effects on
competition and capital formation. As discussed in greater detail in
section III.K below, the magnitude of these effects, including any
effects on competition, efficiency, and capital formation, will depend
on the extent to which investors reallocate their investments within or
outside the money market fund industry and which alternatives investors
choose.
---------------------------------------------------------------------------
\215\ See, e.g., MFDF Comment Letter; Comment Letter of Arizona
Association of County Treasurers (Sept. 16, 2013) (``Ariz. Ass'n of
County Treasurers Comment Letter''); Northern Trust Comment Letter.
---------------------------------------------------------------------------
Some commenters also suggested that fees and gates could motivate
money market funds to hold securities of even shorter-term duration,
which could encourage issuers to fund themselves with shorter-term
debt.\216\ Shortening debt maturity would increase the frequency at
which issuers would need to refinance, leaving both issuers and the
broad financial system more vulnerable to refinancing risk.\217\ One
such commenter further noted that basing the threshold for fees and
gates on weekly liquid assets will ``discourage[e] prime money market
funds from drawing down on their buffers of liquid assets [due to fear
of crossing below the fees and gates thresholds] precisely when they
should do so from a system-wide perspective, i.e., in a system-wide
liquidity and funding crisis.'' \218\ In addition, some commenters were
concerned about a loss of funding or other adverse impacts on state and
local governments as a result of the fees and gates amendments.\219\ We
discuss these concerns in section III.K below.
---------------------------------------------------------------------------
\216\ See Hanson et al. Comment Letter; Deutsche Comment Letter.
\217\ See generally Hanson et al. Comment Letter; Deutsche
Comment Letter.
\218\ See, e.g., Hanson et al. Comment Letter.
\219\ See, e.g., Comment Letter of Governor, Commonwealth of
Massachusetts (Deval L. Patrick) (Sept. 17, 2013) (``Mass. Governor
Comment Letter''); Comment Letter of Office of the Governor, State
of New Hampshire (Oct. 4, 2013) (``NH Governor Letter''); Comment
Letter of Treasurer, State of North Carolina (Sept. 19, 2013) (``NC
Treasurer Comment Letter''); Comment Letter of 42 Members of U.S.
Congress (Oct. 28, 2013) (``42 Members of U.S. Congress Comment
Letter''). Some commenters cited the role of municipal money market
funds as a funding mechanism for state and local governments,
arguing such role might be endangered by the proposed reforms. See,
e.g., Fidelity Comment Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------
2. Terms of Fees and Gates
As discussed above, we are adopting provisions that, unlike the
proposal, will allow a money market fund the flexibility to impose fees
(up to 2%) \220\ and/or gates (up to 10 business days in a 90-day
period) \221\ after the fund's weekly liquid assets have crossed below
30% of its total assets, if the fund's board of directors (including a
majority of its independent directors) determines that doing so is in
the best interests of the fund.\222\ We are also adopting amendments
that will require a money market fund, if its weekly liquid assets fall
below 10% of its total assets, to impose a 1% liquidity fee on each
shareholder's redemption, unless the fund's board of directors
(including a
[[Page 47758]]
majority of its independent directors) determines that such a fee would
not be in the best interests of the fund, or determines that a lower or
higher fee (not to exceed 2%) would be in the best interests of the
fund.\223\ The proposal would have required funds (absent a board
determination otherwise) to impose a 2% liquidity fee on all
redemptions, and would have permitted the imposition of redemption
gates for up to 30 days in a 90-day period, after a fund's weekly
liquid assets fell below 15% of its total assets. In addition, unlike
in the proposal, today's amendments will allow a fund to impose a fee
or gate at any point throughout the day after a fund's weekly liquid
assets have dropped below 30%.\224\
---------------------------------------------------------------------------
\220\ See infra notes 300-302 and accompanying text.
\221\ Rule 2a-7(c)(2)(i)(B).
\222\ Rule 2a-7(c)(2)(i). The fund must reject any redemption
requests it receives while the fund is gated. See rule 2a-
7(c)(2)(i)(B).
\223\ Rule 2a-7(c)(2)(ii). If a fund imposes a liquidity fee, a
fund's board can later vary the level of the liquidity fee (subject
to the 2% limit) if the board determines that a different fee level
is in the best interests of the fund. Rule 2a-7(c)(2)(i)(A) and
(ii)(B).
\224\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------
As in the proposal, any fee or gate imposed under today's
amendments must be lifted automatically after the money market fund's
level of weekly liquid assets rises to or above 30%, and it can be
lifted at any time by the board of directors (including a majority of
independent directors) if the board determines to impose a different
redemption restriction (or, with respect to a liquidity fee, a
different fee) or if it determines that imposing a redemption
restriction is no longer in the best interests of the fund.\225\ As
amended, rule 22e-3 also will permit the permanent suspension of
redemptions and liquidation of a money market fund if the fund's level
of weekly liquid assets falls below 10% of its total assets.\226\
---------------------------------------------------------------------------
\225\ Rule 2a-7(c)(2)(i)(A)-(B) and (ii)(B).
\226\ See rule 22e-3(a)(1). To mirror the proposed fees and
gates amendments to rule 2a-7, the proposed amendments to rule 22e-3
would have set a threshold of below 15% weekly liquid assets for a
fund to permanently close and liquidate. For a discussion of amended
rule 22e-3, see infra section III.A.4.
---------------------------------------------------------------------------
a. Thresholds for Fees and Gates
i. Discretionary Versus Mandatory Thresholds
As proposed, a fund would have been required (unless the board
determined otherwise) to impose a default liquidity fee, and would have
been permitted to impose a gate, after the fund's weekly liquid assets
dropped below 15% of its total assets. In addition, a fund would have
had to wait to impose a fee or gate until the next business day after
it crossed below the 15% threshold.
Commenters ranged widely over whether and to what extent the
trigger for fees and gates should be an objective test or left to the
discretion of fund boards. On one hand, a group of commenters expressed
concern about giving money market fund boards discretion to impose fees
and gates.\227\ For example, some commenters noted that board
discretion could create uncertainty among investors,\228\ and that
boards might be reticent, due to the possible impact of the decision,
to act in a time of crisis.\229\
---------------------------------------------------------------------------
\227\ See, e.g., BlackRock II Comment Letter; Capital Advisors
Comment Letter; Fidelity Comment Letter; HSBC Comment Letter; cf.
Comment Letter of The Independent Trustees of the Fidelity Fixed-
Income and Asset Allocation Funds (Sept. 10, 2013) (``Fidelity
Trustees Comment Letter'') (suggesting that the Commission should
have the ability to impose a fee on prime money market funds when a
fund's weekly liquid assets fall below 15%).
\228\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter.
\229\ See, e.g., Capital Advisors Comment Letter; HSBC Comment
Letter (``[S]ome commentators have suggested that a fund board may
be too commercially conflicted to decide whether to impose a
liquidity fee.'').
---------------------------------------------------------------------------
On the other hand, a large group of commenters generally argued in
favor of giving boards more discretion over whether to impose a fee or
gate.\230\ For example, a number of commenters expressly noted that
fees should be at the discretion of fund boards instead of being
automatically triggered at a particular liquidity threshold.\231\ A
number of other commenters argued more generally that, when heavy
redemptions are already underway or clearly foreseeable, boards should
be able to impose fees and gates even before a set liquidity threshold
or some other objective threshold has been crossed.\232\
---------------------------------------------------------------------------
\230\ See, e.g., Chamber II Comment Letter; Dreyfus Comment
Letter; Invesco Comment Letter.
\231\ See, e.g., Federated V Comment Letter; HSBC Comment
Letter; T. Rowe Price Comment Letter; Peirce & Green Comment Letter;
cf., BlackRock Comment Letter (advocating a mandatory gate after
assets dropped below 15% weekly liquid assets, but also allowing
money market fund boards ``the ability to impose a gate before
weekly liquid assets fell below 15% of total assets if the [b]oard
believed this was in the best interest of the [money market
fund]'').
\232\ See., e.g., BlackRock II Comment Letter; Chamber II
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------
We continue to believe that a hybrid approach that at some point
imposes a default fee that boards can opt out of or change best ensures
that fees and gates will be imposed when it is appropriate. Based on
commenter feedback, however, we believe that such a hybrid approach
could benefit from the default fee acting more as a floor for board
consideration when liquidity has been significantly depleted and from
additional board discretion to impose fees and gates in advance of that
point.\233\ Thus, our final approach--while still a hybrid approach--is
significantly more discretionary than under our proposal. As we
indicated in the Proposing Release, we believe a hybrid approach offers
the possibility of achieving many of the benefits of both a purely
discretionary trigger and a fully automatic trigger. We recognize that
a discretionary trigger allows a fund board the flexibility to
determine when a restriction is necessary, and thus allows the board to
trigger the fee or gate based on current market conditions and the
specific circumstances of the fund.
---------------------------------------------------------------------------
\233\ See supra section III.A.1.c.i (discussing the impact of
board discretion on possible pre-emptive runs); see also Wells Fargo
Comment Letter.
---------------------------------------------------------------------------
A purely discretionary trigger, however, 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. As
commenters indicated,\234\ a board may choose not to impose a fee or
gate for commercial reasons--for example, out of fear that doing so
would signal trouble for the individual fund or fund complex (and thus
may incur significant negative business and reputational effects) or
could incite redemptions in other money market funds in the fund
complex in anticipation that fees may be imposed in those funds as
well. We are also concerned that purely discretionary triggers could
cause some funds to use fees and gates when they are not under stress
and in contravention of the principles underlying the Investment
Company Act. If, for example, a fund's NAV began to fall due to losses
incurred in the portfolio, a board with full discretion to impose fees
on fund redemptions could impose a fee solely to recover those losses
and repair the fund's NAV, even if that fund's liquidity is not being
stressed.
---------------------------------------------------------------------------
\234\ See supra note 229.
---------------------------------------------------------------------------
As discussed in the Proposing Release, we recognize that although
an automatic trigger set by the Commission may mitigate some of the
potential concerns associated with a fully discretionary trigger, it
also may create the risk of imposing costs on shareholders, such as
those related to board meetings or liquidity fees themselves, when
funds are not truly distressed or when liquidity is not abnormally
costly. As indicated by a number of commenters and discussed above, an
automatic trigger also could result in shareholders pre-emptively
redeeming their shares to avoid a fee or
[[Page 47759]]
gate.\235\ In addition, commenters suggested that a fund's liquidity
could quickly evaporate once heavy redemptions begin and that a fund
board should not have to wait until the fund's weekly liquid assets
breach the default liquidity fee threshold or until the next business
day in order to act.\236\
---------------------------------------------------------------------------
\235\ See supra section III.A.1.c.i for a discussion regarding
pre-emptive run risk and increased board discretion.
\236\ See, e.g., Federated II Comment Letter; Dreyfus Comment
Letter.
---------------------------------------------------------------------------
In light of these risks and in response to the comments discussed
above, we have determined to increase the amount of board discretion
under the fees and gates amendments so that funds may impose fees or
gates before the default liquidity fee threshold is reached and so they
can better tailor the redemption restrictions to their particular
circumstances. Additionally, the amendments will allow fund boards to
impose fees and gates the same day that a fund experiences or foresees
heavy redemptions and, thus, funds will not have to wait until the next
day to act.\237\ This increased flexibility should better allow fund
boards to prevent or stem heavy redemptions before they occur, or as
soon as possible after they begin or are anticipated.\238\
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\237\ Although funds will have to wait until a fund's weekly
liquid assets drop below 30% in order to impose a fee or gate, we
believe the higher threshold of 30% for discretionary fees and gates
should assuage concerns about having to wait to impose redemption
restrictions until a fund's weekly liquid assets breach the default
liquidity fee threshold.
\238\ See, e.g., Treasury Strategies III Comment Letter (``We
found that [f]ees and [g]ates can stop and prevent runs, provided
that they are implemented effectively through policy and preemptive
action by fund boards.''). For example, if a fund board believes
that a fund's weekly liquid assets are likely to fall below the 10%
weekly liquid asset threshold for a default liquidity fee, it could
choose to impose a liquidity fee prior to the fund breaching this
threshold.
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ii. Threshold Levels
As discussed above, funds will be permitted to impose fees and
gates after a fund's weekly liquid assets have dropped below 30%, and
will be required to impose a liquidity fee after a fund's weekly liquid
assets drop below 10%, unless the fund's board determines such fee is
not in the best interests of the fund. As proposed, the threshold for
the imposition of fees and gates would have been a drop below 15%
weekly liquid assets and a fund's board could have determined that a
fee would not be in the best interests of the fund.
Various commenters proposed modifications or substitutes to the
proposed 15% weekly liquid assets threshold. For example, one
commenter, citing a survey of its members, suggested fund boards be
given discretion to impose a liquidity fee when weekly liquid assets
fall below a specified threshold, and that a default liquidity fee
could be imposed at a specified lower level of weekly liquid assets
(unless the board determines otherwise).\239\ Another commenter
proposed a blended trigger for the imposition of gates at 30% weekly
liquid assets or a drop in NAV below $0.995, whichever comes
first.\240\
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\239\ See SIFMA Comment Letter.
\240\ See Capital Advisors Comment Letter.
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As discussed in this section, we have been persuaded by commenters
that boards should be allowed some flexibility to impose a fee or gate
when heavy redemptions are underway or clearly foreseeable. As was
suggested by a commenter,\241\ we are adopting a tiered threshold for
the imposition of fees and gates, with a higher threshold for
discretionary fees and gates and a lower threshold for default
liquidity fees. We believe this tiered approach will allow boards to
determine with greater flexibility the best line of defense against
heavy redemptions and to tailor that defense to the specific
circumstances of the fund. We also believe this tiered approach will
allow boards to act quickly to stem heavy redemptions. This approach
also recognizes, however, that at a certain point (under the amended
rule, a drop below 10% weekly liquid assets), boards should be required
to consider what, if any, action should be taken to address a fund's
liquidity.
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\241\ See SIFMA Comment Letter; but see, e.g., Peirce & Greene
Comment Letter (suggesting the Commission should adopt entirely
discretionary gates).
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We are adopting a threshold of less than 30% weekly liquid assets
at which fund boards will be able to impose discretionary fees and
gates, as was suggested by a commenter.\242\ As 30% weekly liquid
assets is the minimum required under rule 2a-7, we believe it is an
appropriate threshold at which fund boards should be able to consider
fees and gates as measures to stop heavy redemption activity that may
be building in a fund.\243\ A drop in weekly liquid assets below the
regulatory minimum could indicate current or future liquidity problems
or forecast impending heavy redemptions, or it could be the result of
idiosyncratic stresses that may be resolved without intervention--in
either case, the money market fund's board, in consultation with the
fund's investment adviser, is best suited to determine whether fees and
gates can address the situation.\244\
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\242\ See Capital Advisors Comment Letter. As discussed below,
we have not included an NAV trigger along with the weekly liquid
assets trigger (as suggested by the commenter) because we do not
believe that a fund's NAV is an appropriate trigger for liquidity
fees and redemption gates. See infra note 253 and accompanying text.
\243\ As was discussed in the Proposing Release, we considered a
threshold based on the level of daily liquid assets rather than
weekly liquid assets. We noted in the Proposing Release that 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. Thus, we believe that basing the
threshold on weekly liquid assets rather than daily liquid assets
provides a better picture of the fund's overall liquidity position.
In addition, a fund's levels of daily liquid assets may be more
volatile because they are typically used first to satisfy day-to-day
shareholder redemptions, and thus more difficult to use as a gauge
of fund distress. Commenters did not specifically suggest a
threshold based on daily liquid assets.
\244\ For a discussion of the factors a board may wish to
consider in determining whether to impose fees and gates, see infra
section III.A.2.b herein. For a discussion of the factors a board
may wish to consider in determining the level of a liquidity fee,
see infra section III.A.2.c herein.
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Some commenters recommended that the default liquidity fee
threshold be lowered to 10% weekly liquid assets.\245\ These commenters
generally argued that a 10% threshold, rather than a 15% threshold,
would produce fewer ``false positives''--instances when a money market
fund is, in fact, not experiencing stress on its liquidity but is
nonetheless required (absent a board finding) to impose a liquidity
fee--which should prevent unnecessary board meetings that would not be
in the interest of shareholders or market stability.\246\ As was
discussed in the Proposing Release, the threshold for a default
liquidity fee should indicate distress in a fund and be a threshold few
funds would cross in the ordinary course of business. Commission staff
analysis shows that from March 2011 through October 2012, there was
only one month that any funds reported weekly liquid assets below 15%
and only one month that a fund reported weekly liquid assets below
10%.\247\
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\245\ See, e.g., Federated V Comment Letter; Comment Letter of
Chairman, Federated Funds Board of Directors (on behalf of
Independent Trustees of Federated Funds) (Sept. 16, 2013)
(``Federated Funds Trustees Comment Letter''); HSBC Comment Letter.
\246\ See Federated II Comment Letter; HSBC Comment Letter.
\247\ See Proposing Release supra note 25, at 177. Our staff
conducted an analysis of Form N-MFP data that showed that if the
default fee 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. The analysis further showed that during the period, there was
one month in which funds reported weekly liquid assets below 15%
(four funds in June 2011) and one month in which a fund reported
weekly liquid assets below 10% (one fund in May 2011). Based on this
data and industry comment, we proposed a default fee threshold of
15% weekly liquid assets.
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[[Page 47760]]
In light of commenters' concerns and the Commission staff analysis,
and in recognition of the increased board discretion to impose fees and
gates that we are adopting in today's amendments, we have determined
that a threshold of 10% weekly liquid assets (down from the proposed
15%) is an appropriate threshold for the imposition of a default
liquidity fee. We believe that the flexibility in today's amendments
justifies a decrease in the default liquidity fee threshold,
particularly because fund boards will be allowed to impose
discretionary fees and gates, if it is in the best interests of a fund,
at any time after a fund's weekly liquid assets drop below 30%--i.e.,
before the default liquidity fee threshold is reached.\248\ Our
proposal, which, as noted above, set a higher threshold for the default
liquidity fee or the imposition of a gate, did not include board
discretion to use these tools prior to reaching this threshold. Under
today's amendments, however, the 10% default liquidity fee threshold is
designed effectively as a floor to require fund boards to focus on a
fund's liquidity and to consider what action to take, if any, before
liquidity is further depleted. Additionally, Commission staff analysis
shows that a 10% threshold for the default liquidity fee is also a
threshold few funds would cross in the ordinary course of
business.\249\
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\248\ See rule 2a-7(c)(2)(i); cf. Treasury Strategies III
Comment Letter (suggesting that fees and gates will better prevent a
run if they are imposed intraday).
\249\ See Proposing Release supra note 25, at 177 (setting forth
a chart that show from March 2011 through October 2012, there was
only one month that any funds reported weekly liquid assets below
15% and only one month that a fund reported weekly liquid assets
below 10%). Because liquidity data reported to the Commission is as
of month end, it could be the case that more than one money market
fund's level of weekly liquid assets fell below 10% 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
default liquidity fee because funds may increase their risk
management around their level of weekly liquid assets in response to
the default liquidity fee to avoid breaching the default liquidity
fee threshold, or that many funds may impose fees and/or gates after
they cross the 30% threshold, allowing them to repair their
liquidity prior to reaching the 10% threshold.
---------------------------------------------------------------------------
Some commenters on the fees and gates threshold suggested moving
away from weekly liquid asset levels as the triggering mechanism.\250\
One commenter noted that the most appropriate rules-based threshold
would be if the shadow price fell to $0.9975 or below.\251\ Another
commenter also suggested that, to the extent the Commission moved
forward with a rules-based threshold, ``defaults, acts of insolvency,
significant downgrades or determinations that a portfolio security no
longer presents minimum credit risk'' should be added to the situations
in which a board could impose a fee or gate.\252\
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\250\ But see Fidelity Comment Letter (``We also favor using the
weekly liquid asset level as the measure because it is the best
indicator of liquidity and is less susceptible to extraneous
factors. In addition, the weekly liquidity structure reflects daily
liquidity within its calculation.''). As noted in section
III.A.2.a.i, a number of commenters argued for giving boards the
discretion to impose redemption restrictions. See supra note 230.
\251\ See HSBC Comment Letter; see also Comment Letter of HSBC
Global Asset Management Ltd (Feb. 15, 2013) (available in File No.
FSOC-2012-0003) (``HSBC FSOC Comment Letter'') (suggesting setting
the market-based NAV trigger at $0.9975). 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.
\252\ See Federated II Comment Letter.
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We do not believe a drop in a fund's NAV (or shadow price, to the
extent the money market fund is a stable value fund), or a default, act
of insolvency, significant downgrade or determination that a portfolio
security no longer presents minimum credit risk, would be the
appropriate threshold for the imposition of fees and gates. First, as
we discussed in the Proposing Release, we are concerned that a money
market fund being able to impose a fee only when the fund's NAV or
shadow price has fallen by some amount may in certain cases come too
late to mitigate the potential consequences of heavy redemptions on a
fund's liquidity and to fully protect investors.\253\ 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. Second, the
thresholds we are adopting today are just that--thresholds. If it is
not in the best interests of a fund, a board is not required to impose
a liquidity fee or redemption gate when the fund's weekly liquid assets
have fallen below 30% or 10%, respectively. Moreover, once a fund has
crossed below a weekly liquid asset threshold, a board is not prevented
from taking into account whether the fund's NAV or shadow price has
deteriorated in considering whether to impose fees or gates. Finally,
the fees and gates amendments are intended to address the liquidity of
the fund and its ability to meet redemptions, not to address every
possible circumstance that may adversely affect a money market fund and
its holdings. However, if a particular circumstance, such as a default,
act of insolvency, significant downgrade, or increased credit risk,
affects the liquidity of a fund such that its weekly liquid assets drop
below the 30% threshold for imposition of fees and gates, a fund could
then impose a fee or gate.
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\253\ As we also discussed in the Proposing Release, a threshold
based on shadow price 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.'' See
Proposing Release supra note 25, at 179-180.
---------------------------------------------------------------------------
Another commenter suggested basing the threshold for redemption
gates on the level at which a money market fund's liquidity would force
it to sell assets.\254\ This particular commenter was concerned that a
threshold based on 15% weekly liquid assets might otherwise cause funds
close to the threshold to start selling assets to avoid crossing the
threshold, which could have a larger destabilizing effect on the
markets.\255\ We appreciate the commenter's concerns and believe that
the higher weekly liquid asset threshold for the imposition of fees and
gates and the increased board flexibility included in today's
amendments should lessen such a risk. In particular, as discussed above
in section III.A.1.c.i, we believe that the 30% weekly liquid assets
threshold will allow a money market fund to impose a fee or gate while
it still has substantial remaining internal liquidity, thus putting it
in better position to bear redemptions without a broader market impact
because it can satisfy redemption requests through internally generated
cash and not through asset sales (other than perhaps sales of
government securities that tend to increase in value and liquidity in
times of stress). In addition, the board flexibility in today's
amendments could result in funds imposing gates at different times and,
thus, to the extent funds determine to dispose of their assets to raise
liquidity, it could also result in funds disposing assets at different
times, lessening any potential strain on the markets.
---------------------------------------------------------------------------
\254\ Comment Letter of James Angel (Georgetown/Wharton) (Sept.
17, 2013) (``Angel Comment Letter'').
\255\ Angel Comment Letter.
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[[Page 47761]]
b. Board Determinations
In the Proposing Release, we discussed a number of factors that a
fund's board of directors may want to consider in determining whether
to impose a liquidity fee or redemption gate.\256\ We received a
variety of comments related to these factors and, more generally, about
board determinations regarding fees and gates. Some commenters
suggested that the Commission provide additional guidance on the nature
and scope of the findings that boards can make.\257\ A commenter asked
the Commission to provide an expanded list of examples and a non-
exclusive list of factors to be considered by boards with respect to
imposing a fee or gate.\258\ The commenter added that the Commission
should clarify that boards need to consider only those factors they
reasonably believe to be relevant, not all factors or examples that the
Commission might generally suggest.\259\
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\256\ See Proposing Release, supra note 25, at 178-179.
\257\ See, e.g., ABA Business Law Section Comment Letter;
Comment Letter of New York City Bar Committee on Investment
Management Regulation (Sept. 26, 2013) (``NYC Bar Committee Comment
Letter''); Federated X Comment Letter; but see, e.g., MFDF Comment
Letter.
\258\ See NYC Bar Committee Comment Letter.
\259\ Id.
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In contrast, another commenter, an industry group representing fund
directors, supported the Commission providing only minimal guidance on
what factors boards might consider.\260\ This commenter argued that
``providing any guidance on what factors boards should consider (beyond
the very general and non-exclusive examples in the Proposing Release)
is likely to be counter-productive.'' \261\ The commenter also
suggested that the Commission clarify that a ``best interests of the
fund'' standard would not demand that boards place significant emphasis
on the broader systemic effects of their decision.\262\
---------------------------------------------------------------------------
\260\ See MFDF Comment Letter.
\261\ Id.
\262\ See id.
---------------------------------------------------------------------------
The ``best interests'' standard in today's amendments recognizes
that each fund is different and that, once a fund's weekly liquid
assets have dropped below the minimum required by rule 2a-07, a fund's
board is best suited, in consultation with the fund's adviser, to
determine when and if a fee or gate is in the best interests of the
fund.\263\ The factors we set forth in the Proposing Release were
intended only as possible factors a board may consider when making a
best interests determination. They were not meant to be a one-size-
fits-all or exhaustive list of factors. We agree with the commenter who
suggested an exclusive list of factors could be counter-productive. We
recognize that there are differences among funds and that the markets
are dynamic, particularly in a crisis situation. Accordingly, an
exhaustive list of factors may not address each fund's particular
circumstances and could quickly become outdated. Instead, we believe a
fund board should consider any factors it deems appropriate when
determining whether fees and/or gates are in the best interests of a
fund. We note that these factors may include the broader systemic
effects of a board's decision, but point out that the applicable
standard for a board's determination under the amended rule is whether
a fee or gate is in the fund's best interests.
---------------------------------------------------------------------------
\263\ For a discussion of why the Commission is adopting a
hybrid approach to the imposition of fees and gates, see supra
section III.A.2.a.i.
---------------------------------------------------------------------------
Nonetheless, we believe it is appropriate to provide certain
guideposts that boards may want to keep in mind, as applicable and
appropriate, when determining whether a fund should impose fees or
gates and are providing such guidance in this Release. As recognized in
the Proposing Release, there are a number of factors a board may want
to consider. These may include, but are not limited to: relevant
indicators of liquidity stress in the markets and why the fund's weekly
liquid assets have fallen (e.g., Have weekly liquid assets fallen
because the fund is experiencing mounting redemptions during a time of
market stress or because a few large shareholders unexpectedly redeemed
shares for idiosyncratic reasons unrelated to current market conditions
or the fund?); the liquidity profile of the fund and expectations as to
how the profile might change in the immediate future, including any
expectations as to how quickly a fund's liquidity may decline and
whether the drop in weekly liquid assets is likely to be very short-
term (e.g., Will the decline in weekly liquid assets be cured in the
next day or two when securities currently held in the fund's portfolio
qualify as weekly liquid assets?); \264\ for retail and government
money market funds, whether the fall in weekly liquid assets has been
accompanied by a decline in the fund's shadow price; \265\ the make-up
of the fund's shareholder base and previous shareholder redemption
patterns; and/or the fund's experience, if any, with the imposition of
fees and/or gates in the past.
---------------------------------------------------------------------------
\264\ As discussed in the Proposing Release, 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. See
Proposing Release, supra note 25, at 179.
\265\ Likewise, a floating NAV fund's board may wish to consider
any drops in the fund's NAV.
---------------------------------------------------------------------------
Some commenters urged the Commission to affirm that a board's
deliberations would be protected by the business judgment rule.\266\
One commenter was particularly concerned about the threat of litigation
if boards were not protected by the rule, as it could ``chill the
board's ability to act in a manner that would be highly
counterproductive in times of market stress.'' \267\ While sensitive to
this commenter's concerns, we do not believe it would be appropriate
for us to address the application of the business judgment rule because
the business judgment rule is a construct of state law and not the
federal securities laws.
---------------------------------------------------------------------------
\266\ See, e.g., Dreyfus Comment Letter; Chamber II Comment
Letter; MFDF Comment Letter; IDC Comment Letter.
\267\ See MFDF Comment Letter.
---------------------------------------------------------------------------
Other commenters proposed that boards should be permitted to
reasonably determine and commit themselves in advance to a policy to
not allow a fee or gate to ever be imposed on a fund.\268\ We disagree.
A blanket decision on the part of a fund board to not impose fees or
gates, without any knowledge or consideration of the particular
circumstances of a fund at a given time, would be flatly inconsistent
with the fees and gates amendments we are adopting today, which, at a
minimum, require a fund to impose a liquidity fee when its weekly
liquid assets have dropped below 10%, unless the fund's board
affirmatively finds that such fee is not in the best interests of the
fund. As discussed above, we believe that when a fund falls below 10%
weekly liquid assets, its liquidity is sufficiently stressed that its
board should be required to consider, based on the facts and
circumstances at that time, what, if any, action should be taken to
address a fund's liquidity. We regard fees and gates as additional
tools for boards to employ when necessary and appropriate to protect
the fund and its shareholders. We note, however, that our amendments do
not require funds to impose fees and gates when it is not in a fund's
best interests.
---------------------------------------------------------------------------
\268\ See Goldman Sachs Comment Letter; ABA Business Law Section
Comment Letter. These commenters were concerned that uncertainties
over a fee or gate could lead to pre-emptive runs. We discuss pre-
emptive runs in section III.A.1.c.i of this Release.
---------------------------------------------------------------------------
Certain commenters cited operational challenges with respect to
fees and gates and board quorum requirements, given that in a crisis a
board's independent
[[Page 47762]]
board members may not be readily available on short notice.\269\
Commenters thus proposed that the quorum requirement be relaxed to
require only the approval of a majority of independent directors
available rather than of all independent directors.\270\
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\269\ See Comment Letter of PFM Asset Management, LLC (Sept. 17,
2013) (``PFM Asset Mgmt. Comment Letter''); ABA Business Law Section
Comment Letter; Comment Letter of Ropes & Gray LLP (Sept. 17, 2013)
(``Ropes & Gray Comment Letter'').
\270\ See id.
---------------------------------------------------------------------------
We have not made the requested change. The requirement that a
majority of independent directors make a determination with respect to
a fund matter is not unique to today's amendments. This requirement is
widely used in the Investment Company Act and its rules, including a
number of other exemptive rules.\271\ As we have emphasized,
independent directors are the ``independent watchdogs'' of a fund, and
the Investment Company Act and its rules rely on them to protect
investor interests.\272\ A determination with respect to fees and gates
by less than a majority of independent directors would not provide the
level of independent oversight we are seeking in today's amendments, or
in carrying out the purposes of the Investment Company Act. The
decision to impose redemption restrictions on a fund's investors has
significant ramifications for shareholders, and it is one that we
believe should be entrusted only to a fund's board, including its
independent directors. We note, however, that today's amendments do not
require a best interests determination to be made at an in-person
meeting and, thus, fund boards, including their independent directors,
could hold meetings telephonically or through any other technological
means by which all directors could be heard.\273\
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\271\ See, e.g., rule 12b-1 and rule 15a-4.
\272\ See Role of Independent Directors of Investment Companies,
Investment Company Act Release No. 24082 (Oct. 15, 1999).
\273\ The Commission has previously recognized that fund boards
can hold meetings telephonically or through other technological
means by which all directors can be heard simultaneously. See, e.g.,
rule 15a-4 (permitting the approval of an interim advisory contract
by a fund board at a meeting in which directors may participate by
any means of communication that allows all directors participating
to hear each other simultaneously during the meeting).
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Some commenters asserted that a fund's adviser or sponsor should
have greater input regarding the imposition of a fee or gate.\274\ For
example, one commenter urged the Commission to recognize that ``the
primary role of the board is oversight'' and acknowledge ``both the
ability and practical necessity of delegating day-to-day decision-
making functions to a fund's officers and investment adviser/
administrator pursuant to procedures approved by the board.'' \275\ A
few other commenters suggested that the Commission provide guidance
that an adviser must provide the board certain information, guidance or
a recommendation on whether to impose a fee or gate.\276\
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\274\ See, e.g., NYC Bar Committee Comment Letter; Ropes & Gray
Comment Letter; PFM Asset Mgmt. Comment Letter.
\275\ See Ropes & Gray Comment Letter.
\276\ See NYC Bar Committee Comment Letter; Comment Letter of
the Independent Trustees of the Wilmington Funds (Sept. 17, 2013)
(``Wilmington Trustees Comment Letter''); ABA Business Law Section
Comment Letter.
---------------------------------------------------------------------------
We believe that a fund's board, and not its adviser, is the
appropriate entity to determine (within the constructs of the rule)
when and how a fund will impose liquidity fees and/or redemption gates.
As discussed above, given the role of independent directors, a fund's
board is in the best position to determine whether a fee or gate is in
the best interests of the fund.\277\ The Investment Company Act and its
rules require many other fund fees and important matters to be approved
by a fund's board, including a majority of independent directors, and
we do not believe that liquidity fees and redemption gates should be
treated differently.\278\
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\277\ If a fund's adviser was charged with determining when to
impose fees and gates, it could choose, irrespective of its
fiduciary duty, to act in its own interests rather than the
interests of fund shareholders by, for example, not imposing a fee
or gate for fear that it would negatively impact the adviser's
reputation. We note that the role of independent directors on a fund
board should counteract any similar concerns on the part of
interested directors.
\278\ See, e.g., section 15(a)-(c); rule 12b-1 and rule 22c-2.
---------------------------------------------------------------------------
We note that although the final rule amendments contemplate that
information from a fund's adviser will inform the board's determination
involving a fee or gate,\279\ we are not charging a fund's adviser with
specific duties under today's amendments. As the board is the entity
charged with overseeing the fund and determining whether a fee or gate
is in the fund's best interests, we believe the board should dictate
the information and analysis it needs from the adviser in order to
inform its decision. Nonetheless, as a matter of course and in light of
its fiduciary duty to the fund, an adviser should provide the board
with necessary and relevant information to enable the board to make the
determinations under the rule.
---------------------------------------------------------------------------
\279\ Because a fund's adviser is responsible for managing the
portfolio, it is the entity that will have direct access to
information on the fund's liquidity. As noted below, a fund's
adviser should provide the board with all necessary and relevant
information to make the determinations under the rule.
---------------------------------------------------------------------------
c. Size of Liquidity Fee
Today's amendments will permit a money market fund to impose a
discretionary liquidity fee of up to 2% after its weekly liquid assets
drop below 30% of its total assets. We are also adopting a default
liquidity fee of 1% that must be imposed if a fund drops below 10%
weekly liquid assets, unless a fund's board determines not to impose
such a fee, or to impose a lower or higher fee (not to exceed 2%)
because it is in the best interests of the fund.\280\ As proposed, the
amendments would have required funds to impose a default liquidity fee
of 2% after a fund's weekly liquid assets dropped below 15% of its
total assets, although (as under our final amendments) fund boards
could have determined not to impose the fee or to lower the fee.
---------------------------------------------------------------------------
\280\ See rule 2a-7(c)(2)(ii)(A).
---------------------------------------------------------------------------
We received a wide range of comments on the size and structure of
the proposed liquidity fee.\281\ A few commenters expressly supported a
default fee of 2%.\282\ One commenter expressed concern that a maximum
2% fee may be insufficient in times of crisis and urged the Commission
to permit greater flexibility in setting an even higher fee if
necessary.\283\
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\281\ We note that prior to issuing the proposal, commenters had
suggested liquidity fee levels ranging from 1% to 3% could be
effective. See, e.g., Comment Letter of Vanguard (Jan. 15, 2013)
(available in File No. FSOC-2012-0003) (``Vanguard FSOC Comment
Letter'') (recommending a fee of between 1 and 3%); BlackRock FSOC
Comment Letter (recommending a standby liquidity fee of 1%); ICI
Jan. 24 FSOC Comment Letter (recommending a 1% fee).
\282\ See J.P. Morgan Comment Letter; Ropes & Gray Comment
Letter; Schwab Comment Letter; Wells Fargo Comment Letter.
\283\ See Ropes & Gray Comment Letter.
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Other commenters explicitly argued against a default fee of
2%.\284\ One commenter noted that 2% would be excessive ``since it is
far higher than the actual cost of liquidity paid by money market funds
even at the height of the financial crisis.'' \285\ Other commenters
described a 2% fee as punitive \286\ and arbitrary.\287\ A number of
commenters favored instead a default fee of 1% while also allowing
boards discretion to set a higher or lower fee.\288\
---------------------------------------------------------------------------
\284\ See, e.g., Fidelity Trustees Comment Letter; Fidelity
Comment Letter; Invesco Comment Letter; Comment Letter of Financial
Services Roundtable (Sept. 17, 2013) (``Fin. Svcs. Roundtable
Comment Letter'').
\285\ See Invesco Comment Letter.
\286\ See, e.g., Fidelity Trustees Comment Letter; Fidelity
Comment Letter.
\287\ See, e.g., Fin. Svcs. Roundtable Comment Letter.
\288\ See Dreyfus Comment Letter; SIFMA Comment Letter; Northern
Trust Comment Letter; BlackRock II Comment Letter; Fidelity Comment
Letter.
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[[Page 47763]]
As suggested by commenters, the amendments we are adopting today
will impose a default liquidity fee of 1%, that may be raised or
lowered (or not imposed at all) by a fund's board. As discussed below,
we are persuaded by commenters that 2% may be higher than most
liquidity costs experienced when selling money market securities in a
crisis, and may thus result in a penalty for redeeming shareholders
over and above paying for the costs of their liquidity.\289\ We are
also persuaded by commenters that fund boards may be reluctant to
impose a fee that is lower than the default liquidity fee for fear of
being second-guessed--by the market, the Commission, or otherwise.\290\
Accordingly, commenters supporting the 1% default fee have persuaded us
that 1% is the correct default fee level.
---------------------------------------------------------------------------
\289\ See, e.g., SIFMA Comment Letter (``Our members' consensus
is that a redemption fee of 100 basis points will adequately
compensate a money market fund for the costs of liquidating assets
to honor redemptions in times of market stress, and avoid imposing a
punitive charge on shareholders.''); Fidelity Comment Letter (``We
have examined the liquidation costs for our money market funds that
sold securities during the period immediately following the
bankruptcy of Lehman Brothers and determined that the highest
liquidation cost was less than 50 basis points of face value.
Recognizing that liquidation costs in a future market stress
scenario may be greater, we think it is reasonable to set a
liquidation fee at 100 basis points or one percent.'').
\290\ See SIFMA Comment Letter.
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Furthermore, analysis by Commission staff of liquidity costs of
certain corporate bonds during the financial crisis further confirms
that a reduced default fee of 1% is appropriate.\291\ DERA staff
estimated increases in transaction spreads for certain corporate bonds
that occurred during the financial crisis.\292\ Relative to transaction
spreads observed during the pre-crisis period from January 2, 2008 to
September 11, 2008, average transaction spreads increased by 54.1 bps
for Tier 1 eligible securities and by 104.4 bps for Tier 2 eligible
securities during the period from September 12, 2008 to October 20,
2008. These estimates indicate that market stress increases the average
cost of obtaining liquidity by an amount closer to 1% than 2%.\293\
---------------------------------------------------------------------------
\291\ See DERA Liquidity Fee Memo, supra note 111.
\292\ See id.
\293\ DERA obtained information on trades in Tier 1 and Tier 2
eligible securities, as defined in rule 2a-7 from TRACE (Trade
Reporting and Compliance Engine) between January 2, 2008 through
December 31, 2009, and formed a Tier 1 and a Tier 2 sample. TRACE
provides transaction records for TRACE eligible securities that have
a maturity of more than a year at issuance. Money market
instruments, sovereign debt, and debt securities that have a
maturity of less than a year at issuance are not reported in TRACE
and hence DERA's sample differs from what money market funds hold.
Nevertheless, the samples constructed from TRACE provide estimates
for costs of liquidity during market stress since the selected
securities have similar time-to-maturity and credit risk
characteristics as those permitted under rule 2a-7. DERA included in
the samples only trades of bonds with fewer than 120 days to
maturity and with a trade size of at least $100,000. DERA classified
bonds with credit ratings equal to AAA, AA+, AA, or AA- as Tier 1
eligible securities. The average days to maturity for Tier 1
securities in the sample is 67 days, which roughly reflects the 60-
day weighted average maturity limit specified in rule 2a-7. Bonds
with credit ratings equal to A+, A, or A- represent Tier 2 eligible
securities. The average days to maturity for Tier 2 securities in
the sample is 28 days, which is somewhat lower than the 45-day
weighted average maturity limit required by rule 2a-7.
---------------------------------------------------------------------------
We received a number of comments on DERA's analysis of liquidity
costs.\294\ Some commenters agreed that DERA's analysis supports a
default liquidity fee of 1% and that 1% is the appropriate level for
the fee.\295\ Other commenters, however, took issue with DERA's
methodology in examining liquidity costs and, one commenter suggested a
default fee ``as low as'' 0.50% may be appropriate.\296\
---------------------------------------------------------------------------
\294\ See, e.g., Comment Letter of SIFMA (Apr. 23, 2014)
(``SIFMA II Comment Letter''); Comment Letter of Dreyfus Corporation
(Apr. 23, 2014) (``Dreyfus DERA Comment Letter''); Comment Letter of
Invesco (Apr. 23, 2014) (``Invesco DERA Comment Letter'').
\295\ See SIFMA II Comment Letter (``Data in the [DERA]
Liquidity [Fee Memo] support that a lower default level [from the
level proposed] will effectively compensate money market funds for
the cost of liquidity during market turmoil. . . . A 100 basis point
(1%) default level for the liquidity fee will more closely
approximate the fund's cost of providing liquidity during a crisis
period for a portfolio comprised largely of Tier 1 securities.'');
Dreyfus DERA Comment Letter (``We read [DERA's analysis] and
interpret the average spread calculations contained [in the DERA
Liquidity Fee Memo] to support a [default liquidity fee] of 1% and
not 2%, as proposed.''); Fidelity DERA Comment Letter (supporting a
1% liquidity fee and suggesting the empirical market data examined
by DERA in its Liquidity Fee Memo is ``critical in order for the SEC
to determine the size of a liquidity fee,'' but noting that the
methodology in DERA's analysis ``overstates the estimates of
absolute spreads.'')
\296\ See Invesco DERA Comment Letter (suggesting concerns with
the data and methodology used in DERA's analysis); BlackRock DERA
Comment Letter (suggesting the methodology used in DERA's analysis
was not ``the appropriate methodology to measure the true cost of
liquidity in MMFs,'' particularly the use of TRACE data); Comment
Letter of Federated Investors Inc. (Liquidity Fee) (Apr. 23, 2014)
(``Federated DERA II Comment Letter'') (suggesting it generally
agrees with DERA's methodology, but believes that a more appropriate
default liquidity fee may be ``as low as'' 0.50% because ``use of
[TRACE] bond data as the basis for spread analysis led DERA to find
significantly larger spreads than it would have found had it based
its analysis on the short-term instruments in which MMFs actually
invest''); see also Fidelity DERA Comment Letter (supporting a 1%
default liquidity fee, but suggesting that the spreads cited in
DERA's analysis are higher than those it has seen it its experience
and that its independent analysis reflects average spreads between
0.12% and 0.57% during the week immediately following the Lehman
Brothers bankruptcy).
---------------------------------------------------------------------------
As discussed in the Proposing Release, we have attempted to set the
default liquidity fee high enough to deter shareholder redemptions so
that funds can recoup costs of providing liquidity to redeeming
shareholders in a crisis and so that the fund's liquidity is not
depleted, but low enough to permit investors who wish to redeem despite
the cost to receive their proceeds without bearing disproportionate
costs.\297\ Based on the comments we received on the proposal, we
believe that a default fee of 1% strikes this balance. Although we have
looked to the DERA study as confirming our decision based on comments
we received supporting the 1% fee, we recognize commenters' critiques
of the methodology used in the DERA analysis. We also note, however,
that DERA acknowledged in its memorandum that its samples were not
perfectly analogous to money market fund holdings, but that the samples
nevertheless ``provide estimates for costs of liquidity during market
stress since the selected securities have similar time-to-maturity and
credit risk characteristics as those permitted under Rule 2a-7.'' \298\
Moreover, at least one commenter who took issue with DERA's samples
agreed, based on its own independent analysis, that a default liquidity
fee of 1% is appropriate.\299\ Furthermore, because we recognize that
establishing any fixed fee level may not precisely address the
circumstances of a particular fund in a crisis, we are permitting (as
in the proposal) fund boards to alter the level of the default
liquidity fee and to tailor it to the specific circumstances of a fund.
As amended, rule 2a-7 will permit fund boards to increase (up to 2%),
decrease (to, for example, 0.50% as suggested by a commenter), or not
impose the default
[[Page 47764]]
1% liquidity fee if it is in the best interests of the fund.
---------------------------------------------------------------------------
\297\ See, e.g., SIFMA Comment Letter; Fidelity Trustees Comment
Letter; Fidelity Comment Letter (suggesting a 2% fee would be
punitive); see also supra note 281.
\298\ See DERA Liquidity Fee Memo, supra note 111. Some
commenters suggested we should analyze liquidity spreads in actual
money market fund portfolios. See Federated DERA II Comment Letter;
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter.
However, as one commenter acknowledged, this information is not
publicly available, and we note that only one commenter on the DERA
Liquidity Fee Memo provided specific information in this area. See
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter
(providing specific information on spreads during the financial
crisis and stating that a 1% default liquidity fee is appropriate).
We believe one data point is not adequate for us to draw conclusions
on liquidity costs in money market funds during the crisis.
\299\ See Fidelity DERA Comment Letter.
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As proposed and supported by commenters,\300\ we are limiting the
maximum liquidity fee that may be imposed by a fund to 2%. As with the
default fee, we seek to balance the need for liquidity costs to be
allocated to redemptions with shareholders' need to redeem absent
disproportionate costs. We also believe setting a limit on the level of
a liquidity fee provides notice to investors about the extent to which
a liquidity fee could impact their investment. In addition, as
recognized by at least one commenter,\301\ the staff has noted in the
past that fees greater than 2% raise questions regarding whether a
fund's securities remain ``redeemable.'' \302\ We note that if a fund
continues to be under stress even with a 2% liquidity fee, the fund
board may consider imposing a temporary redemption gate under amended
rule 2a-7 or liquidating the fund pursuant to amended rule 22e-3.
---------------------------------------------------------------------------
\300\ See, e.g., SIFMA Comment Letter.
\301\ See NYC Bar Assoc. Comment Letter.
\302\ Section 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 rule 23c-3(b)(1), which
permits a maximum 2% repurchase fee for interval funds and rule 22c-
2(a)(1)(i),which similarly permits a maximum 2% redemption fee to
deter frequent trading in mutual funds.
---------------------------------------------------------------------------
As recognized in the Proposing Release, there are a number of
factors a board may want to consider in determining the level of a
liquidity fee. These may include, but are not limited to: changes in
spreads for portfolio securities (whether based on actual sales, dealer
quotes, pricing vendor mark-to-model or matrix pricing, or otherwise);
the maturity of the fund's portfolio securities; changes in the
liquidity profile of the fund in response to redemptions and
expectations regarding that profile in the immediate future; whether
the fund and its intermediaries are capable of rapidly putting in place
a fee of a different amount from a previously set liquidity fee or the
default liquidity fee; if the fund is a floating NAV fund, the extent
to which liquidity costs are already built into the NAV of the fund;
and the fund's experience, if any, with the imposition of fees in the
past. We note that fund boards should not consider our 1% default
liquidity fee as creating the presumption that a liquidity fee should
be 1%. If a fund board believes based on market liquidity costs at the
time or otherwise that a liquidity fee is more appropriately set at a
lower or higher (up to 2%) level, it should consider doing so. Once a
liquidity fee has been imposed, the fund's board would likely need to
monitor the imposition of such fee, including the size of the fee, and
whether it continues to be in the best interests of the fund.\303\
---------------------------------------------------------------------------
\303\ A board may change the level of a liquidity fee at any
time if it determines it is in the best interests of the fund to do
so. Similarly, once a gate is imposed, the fund's board would likely
monitor the imposition of the gate and whether it remains in the
best interests of the fund to continue imposing the gate.
---------------------------------------------------------------------------
Other commenters argued for even more flexible approaches and/or
entirely different standards for setting a fee.\304\ For example, a
commenter argued against having any default fee and instead supported
allowing the board to tailor the fee to encompass the cost of liquidity
to the fund.\305\ Different commenters similarly argued that liquidity
fees should be carefully calibrated in relation to a fund's actual cost
of liquidity.\306\ A commenter noted this calibration could be achieved
by, rather than setting a fixed fee in advance, delaying redemptions
for up to seven days to allow the fund to determine the size of the fee
based on actual transaction costs incurred on each day's
redemptions.\307\ Finally, a commenter proposed a flexible redemption
fee whereby redemptions would occur at basis point NAV (i.e., NAV to
the fourth decimal place) plus 1%.\308\
---------------------------------------------------------------------------
\304\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab
Comment Letter; Santoro Comment Letter; Invesco Comment Letter.
\305\ See Fin. Svcs. Roundtable Comment Letter.
\306\ See Invesco Comment Letter; Ropes & Gray Comment Letter.
\307\ See Ropes & Gray Comment Letter.
\308\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------
As discussed above, the amendments we are adopting today
incorporate substantial flexibility for a fund board to determine when
and how it imposes liquidity fees. We believe that including in the
amended rule a 1% default fee that may be modified by the board is the
best means of directing fund boards to a liquidity fee that may be
appropriate in stressed market conditions, while at the same time
providing flexibility to boards to lower or raise the liquidity fee if
a board determines that a different fee would better and more fairly
allocate liquidity costs to redeeming shareholders. We would encourage
a fund board, if practicable given any timing concerns, to consider the
actual cost of providing liquidity when determining if the default
liquidity fee is in the fund's best interests. In addition, we note
that under today's amendments, a fund board also could, as suggested by
a commenter, determine that the default fee is not in the best
interests of the fund and instead gate the fund for a period of time,
possibly later imposing a liquidity fee.
Furthermore, we have determined not to explicitly tie the default
liquidity fee to market indicators. As discussed in the Proposing
Release, we believe there are certain drawbacks to such a ``market-
sized'' liquidity fee.\309\ First, it may be difficult for money market
funds to rapidly determine precise liquidity costs in times of stress
when the short-term financing markets may generally be illiquid.\310\
Similarly, the additional burdens associated with computing a market-
sized liquidity fee could make it more difficult for funds and their
boards to act quickly and proactively to stem heavy redemptions.
Second, a market-sized liquidity fee does not signal in advance the
size of the liquidity fee shareholders may have to pay if the fund's
liquidity is significantly stressed.\311\ This lack of transparency may
hinder shareholders' ability to make well-informed investment decisions
because investors may invest funds without realizing the extent of the
costs they could incur on their redemptions.
---------------------------------------------------------------------------
\309\ See Proposing Release, supra note 25, at 183; see also
HSBC FSOC Comment Letter (suggesting 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).
\310\ Our staff gave no-action assurances to money market funds
relating to valuation during the financial crisis because
determining pricing in the then-illiquid markets was so difficult.
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.'').
\311\ A liquidity fee based on market indicators would not
provide notice to shareholders of the potential level of a liquidity
fee like our maximum 2% fee and default fee level of 1% provide.
---------------------------------------------------------------------------
Finally, commenters proposed various potential exemptions from the
default
[[Page 47765]]
liquidity fee. For example, a commenter suggested an exemption for all
shareholders to redeem up to $1 million for incidental expenditures
without a fee.\312\ Other commenters argued that a fee should not be
imposed on newly purchased shares.\313\ For several independent
reasons, we do not currently believe that there should be exemptions to
the default liquidity fee. First, because the circumstances under which
liquidity becomes expensive historically have been infrequent, we
believe the imposition of fees and gates will also be infrequent. As
long as funds' weekly liquid assets are above the regulatory threshold
(i.e. 30%), fund shareholders should continue to enjoy unfettered
liquidity for money market fund shares.\314\ The likely limited and
infrequent use of liquidity fees leads us to believe exemptions are
generally unnecessary. Second, liquidity fees are meant to impose at
least some of the cost of liquidity on those investors who are seeking
liquidity by redeeming their shares. Allowing exemptions to the default
liquidity fee would run counter to this purpose and permit some
investors to avoid bearing at least some of their own costs of
obtaining liquidity and could serve to further harm the liquidity of
the fund, potentially requiring the imposition of a liquidity fee for
longer than would otherwise be necessary. Third, as suggested by
commenters and discussed in section III.C.7.a below, exemptions to the
default liquidity fee would increase the cost and complexity of the
amendments for funds and intermediaries because funds would have to
develop the systems and policies to track, for example, the amount of
each shareholder's redemption, and could facilitate gaming on the part
of investors because investors could attempt to fit their redemptions
within the scope of an exemption.\315\
---------------------------------------------------------------------------
\312\ See Capital Advisors Comment Letter.
\313\ See ABA Business Law Section Comment Letter; Wilmington
Trustees Comment Letter; Federated V Comment Letter.
\314\ See Proposing Release, supra note 25, at n.342.
\315\ See, e.g., Federated V Comment Letter (``Any attempt to
create exceptions, such as allowing redemptions free of any
liquidity fee up to a set dollar amount or percentage of the
shareholder's account balance, would add significant operational
hurdles to the proposed reform. In order to be applied equitably,
prime [money market funds] would have to take steps to assure that
intermediaries were implementing the exceptions on a consistent
basis.''); Fidelity Comment Letter (urging the Commission not to
adopt partial gates, which like an exception to a liquidity fee,
would, for example, except a certain amount of redemptions (e.g., up
to $250,000 per shareholder) from a gate that has been imposed). The
commenter stated ``that the challenges and costs associated with
[partial gates] outweigh the benefits. The systems enhancements
necessary to track holdings for purposes of determining each
shareholder's redemption limit would be more complicated,
cumbersome, and costly than the changes required to implement the
full gate, [and] that this complicated structure lends itself to
arbitrary or inconsistent application across the industry and
potential inequitable treatment among shareholders.'' Id.
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d. Duration of Fees and Gates
We are adopting, as proposed, a requirement that any fee or gate be
lifted automatically once the fund's weekly liquid assets have risen to
or above 30% of the fund's total assets. We are also adopting, with
certain modifications from the proposal as discussed below, a
requirement that a money market fund must lift any gate it imposes
within 10 business days and that a fund cannot impose a gate for more
than 10 business days in any 90-day period. As proposed, the amendments
would have allowed funds to impose a gate for up to 30 days in any 90-
day period.
Several commenters noted positive aspects of the Commission's
proposed duration for fees and gates.\316\ Some commenters, however,
suggested that the duration of liquidity fees, like the duration of
redemption gates, should be limited to a number of days.\317\ We
continue to believe that the appropriate duration limit on a liquidity
fee is the point at which a fund's assets rise to or above 30% weekly
liquid assets. Thirty percent weekly liquid assets is the minimum
required under rule 2a-7 and thus a fee (or gate) would appear to no
longer be justified once a fund's level of weekly liquid assets has
risen to this level. If we were to limit the imposition of liquidity
fees to a number of days, a fund might have to remove a liquidity fee
while it is still under stress and thus it would not gain the full
benefits of imposing the fee.\318\ Additionally, if a fund was required
to remove the fee while it was still under stress, it may have to re-
impose the fee shortly thereafter, which could cause investor
confusion.\319\ We note that a fund's board can always determine that
it is in the best interests of the fund to lift a fee before the fund's
level of weekly liquid assets is restored to 30% of its total assets.
---------------------------------------------------------------------------
\316\ See, e.g., HSBC Comment Letter; Dreyfus Comment Letter;
SIFMA Comment Letter; UBS Comment Letter.
\317\ See BlackRock II Comment Letter (``We would also recommend
that a MMF not be open with a liquidity fee for more than 30
days.''); Federated V Comment Letter (suggesting that liquidity fees
should be subject to the same duration limits as redemption gates
and proposing a limit of 10 calendar days); J.P. Morgan Comment
Letter; see also UBS Comment Letter (noting that ``there should be a
maximum time period during which the liquidity fee . . . could be
imposed'').
\318\ We note that, unlike a redemption gate, a liquidity fee
does not prohibit a shareholder from accessing its investment; this
distinction, in our view, justifies imposing a limited duration on
the imposition of a gate while not doing so for the imposition of
fees. We also note that, once a fund's weekly liquid assets drop
below the regulatory minimum (30%), it is limited to purchasing only
weekly liquid assets, which should increase the fund's liquidity and
potentially bring it back above the weekly liquid asset threshold.
See rule 2a-7(d)(4)(iii).
\319\ As discussed in the Proposing Release, we considered
whether a fee or gate should be lifted automatically before a fund's
weekly liquid assets were completely restored to their required
minimum--for example, after they had risen to 25%. However, we
believe that such a requirement would be inappropriate for the same
reasons we are not limiting the length of time the fee is imposed.
---------------------------------------------------------------------------
We also received a number of comments on the duration of redemption
gates.\320\ For example, some commenters described the maximum 30-day
term for gating as reasonable,\321\ including a commenter that noted it
would not be in favor of a shorter time period.\322\ Another commenter
stated its support for the Commission's proposed 30-day time limit for
redemption gates.\323\ In addition, an industry group commented that
although its members had varying views, some stressed the importance of
the maximum 30-day period to allow the fund adequate time to replenish
its liquidity as securities mature.\324\
---------------------------------------------------------------------------
\320\ See, e.g., UBS Comment Letter (supporting a maximum time
period that would require a gated fund to reopen or liquidate
thereafter).
\321\ See, e.g., Dreyfus Comment Letter; Page Comment Letter.
\322\ See Dreyfus Comment Letter (noting that shortening the
maximum gating period might not be enough time for a fund's
liquidity levels to adequately recover).
\323\ See HSBC Comment Letter.
\324\ See SIFMA Comment Letter.
---------------------------------------------------------------------------
On the other hand, in response to our request for comment on the
appropriate duration of redemption gates, including our request for
comment on a 10-day maximum gating period, some commenters raised
concerns with the proposed 30-day maximum gating period.\325\ For
example, one commenter noted that ``denying investors access to their
cash for more than a brief period'' would ``create serious hardships.''
\326\ This commenter expressed doubt that it would take boards ``much
more than a week to resolve what course of action would best serve the
interest of their shareholders'' and suggested an alternate maximum
gating period of up to 10 calendar days.\327\ A second
[[Page 47766]]
commenter added that the potential total loss of liquidity for up to 30
days could further exacerbate pre-emptive runs and even be
destabilizing to the short-term liquidity markets, and suggested an
alternative maximum gating period of up to 10 calendar days.\328\
Additionally, some members of an industry group suggested that gating
for a shorter period of time would be more consistent with investors'
liquidity needs and the requirements of the Investment Company
Act.\329\
---------------------------------------------------------------------------
\325\ See, e.g., SIFMA Comment Letter; J.P. Morgan Comment
Letter; Fla. CFO Comment Letter; Federated V Comment Letter.
\326\ See Federated II Comment Letter; Federated V Comment
Letter.
\327\ See Federated II Comment Letter (``Federated had
previously proposed limiting any suspension of redemptions to five
or ten business days. Alternative 2, on the other hand, would set
the limit in terms of calendar days. Federated therefore recommends
limiting a temporary suspension of redemptions to not more than ten
calendar days.''); Federated V Comment Letter; Federated X Comment
Letter; see also Federated Funds Trustees Comment Letter; J.P.
Morgan Comment Letter (suggesting a 10-day gating period).
\328\ See J.P. Morgan Comment Letter.
\329\ See SIFMA Comment Letter.
---------------------------------------------------------------------------
We have carefully considered the comments we received, both on the
duration of gates and on the possibility of pre-emptive runs as a
result of potential gates, and have been persuaded that gates should be
limited to a shorter time period of up to 10 business days.\330\ As
discussed in the Proposing Release and reiterated by commenters,\331\
we recognize the strong preference embodied in the Investment Company
Act for the redeemability of open-end investment company shares.\332\
Additionally, as was echoed by a number of commenters,\333\ we
understand that investors use money market funds for cash management
and a lack of access to their investment for a long period of time can
impose substantial costs and hardships. Indeed, many shareholders in
the Reserve Primary Fund informed us about these costs and hardships
during that fund's lengthy liquidation.\334\ As discussed above, it
remains one of our goals to preserve the benefits of money market funds
for investors. Accordingly, upon consideration of the comments
received, we have modified the final rules to limit the redeemability
of money market fund shares for a shorter period of time.\335\
---------------------------------------------------------------------------
\330\ In a change from the proposal, the maximum gating period
in the final amendments uses business days rather than calendar days
to better reflect typical fund operations and to mitigate potential
gaming of the application of gates during weekends or periods during
which a fund might not already typically accept redemption requests.
If a fund imposes a gate, it is not required to impose the gate for
10 business days. Rather, a fund can lift a gate before 10 business
days have passed and we would expect a board would promptly do so if
it determines that it is in the best interests of the fund. We note
that a money market fund board would likely meet regularly during
any period in which a redemption gate is in place. See supra note
303. Additionally, a fund's board may also consider permanently
suspending redemptions in preparation for fund liquidation under
rule 22e-3 if the fund approaches the 10 business day gating limit.
\331\ See, e.g., SIFMA Comment Letter.
\332\ 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); see also
section 22(e) (limiting delays in payments on redemptions to up to
seven days).
\333\ See, e.g., Federated II Comment Letter; Federated V
Comment Letter; SIFMA Comment Letter.
\334\ See Kevin McCoy, Primary Fund Shareholders Put in a Bind,
USA Today, Nov. 11, 2008, available at http://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 purchases 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.'').
\335\ We recognize that rule 22e-3 does not limit gates to a
short period of time, but under that rule, a gate is permanent and a
fund must liquidate thereafter. See rule 22e-3.
---------------------------------------------------------------------------
Some commenters suggested that the longer a potential redemption
gate may be imposed, the greater the possibility that investors may try
to pre-emptively redeem from a fund before the gate is in place.\336\
We recognize this concern and believe that if gates are limited to 10
business days, investors may be less inclined to try to redeem before a
gate is imposed because 10 business days is a relatively short period
of time and after that time investors will have access to their
investment.\337\
---------------------------------------------------------------------------
\336\ See, e.g., J.P. Morgan Comment Letter; Federated XI
Comment Letter.
\337\ See, e.g., Federated V Comment Letter (``[A 10-day maximum
gating period] would also be consistent with the comments of some of
the investors who indicated to Federated that they probably could
not go more than two weeks without access to the cash held in their
[money market fund].'') In addition, we note that 10 business days
is not significantly longer than funds are statutorily permitted to
delay payment on redemptions. See section 22(e).
---------------------------------------------------------------------------
We also believe that by limiting gates to 10 business days,
investors may be better able to account for the possibility of
redemption gates when determining their investment allocations and cash
management policies. For example, an employer may determine that money
market funds continue to be a viable cash management tool because even
if a fund imposes a gate, the employer could potentially still meet its
payroll obligations, depending on its payroll cycle. Similarly, a
retail investor may determine to invest in a money market fund for cash
management purposes because a money market fund's potential for yield
as compared to the interest on a savings or checking account outweighs
the possibility of a money market fund imposing a gate and delaying
payment of the investor's bills for up to 10 business days.
While we believe temporary gates should be limited to a short
period of time, we also recognize that gates may be the most effective,
and probably only, way for a fund to stop a run for the duration of the
gating period. As one commenter stated, ``[s]uspending redemptions
would allow a [b]oard to deal with large-scale redemptions directly, by
effectively calling a `time out' until the [b]oard can decide how to
deal with the circumstances prompting the redemptions.'' \338\
Accordingly, we believe gates, even those that are limited to up to 10
business days, will be a valuable tool for funds to limit heavy
redemptions in times of stressed liquidity.\339\
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\338\ See Federated V Comment Letter.
\339\ As discussed in supra note 148, as necessary, the
Commission also has previously granted orders allowing funds to
suspend redemptions to address exigent circumstances. See, e.g., In
the Matter of: Centurion Growth Fund, Inc., Investment Company Act
Release Nos. 20204 (Apr. 7, 1994) (notice) and 20210 (Apr. 11, 1994)
(order); In the Matter of Suspension of Redemption of Open-End
Investment Company Shares Because of the Current Weather Emergency,
Investment Company Act Release No. 10113 (Feb. 7, 1978).
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We also recognize, as suggested by some commenters,\340\ that
temporary gates should provide a period of time for funds to gain
internal liquidity. In this regard, we note that weekly liquid assets
generally consist of government securities, cash, and assets that will
mature in five business days,\341\ and that once a fund has dropped
below 30% weekly liquid assets (the required regulatory minimum, and
the threshold for the imposition of gates), the fund can purchase only
weekly liquid assets.\342\ Accordingly, because the securities a fund
may purchase once it has imposed a gate will mature, in large part, in
five business days, we believe a limit of 10 business days for the
imposition of a gate should provide a fund with an adequate period of
time in which to generate internal liquidity.\343\
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\340\ See, e.g., SIFMA Comment Letter; Dreyfus Comment Letter.
\341\ See rule 2a-7(a)(34).
\342\ See rule 2a-7(d)(4)(iii).
\343\ See J.P. Morgan Comment Letter (``Ten (10) calendar days
should provide [money market funds] an opportunity to rebuild
significant amounts of liquidity since the 2010 amendments to Rule
2a-7 require [money market funds] to invest at least 30% of their
portfolios in assets that can provide weekly liquidity.'').
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[[Page 47767]]
We further recognize that 10 business days is not significantly
longer than the seven days funds are already permitted to delay payment
of redemption proceeds under section 22(e) of the Investment Company
Act. We note, however, that while section 22(e) allows funds to delay
payment on redemption requests, it does not prevent shareholders from
redeeming shares. Even if a fund delays payment on redemptions pursuant
to section 22(e), redemptions can continue to mount at the fund.\344\
Unlike payment delays under section 22(e), the temporary gates we are
adopting today will allow a fund a cooling off period during which
redemption pressures do not continue to mount while the fund builds
additional liquidity, and the fund's board can continue to evaluate the
best path forward. Additionally, temporary gates may also provide a
cooling off period for shareholders during which they may gather more
information about a fund, allowing them to make more well-informed
investment decisions after a gate is lifted.
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\344\ For example, if on day one, fifty shareholders place
redemptions requests with a fund, there is nothing to stop another
fifty shareholders from placing redemption requests on day two. The
fund's liquidity may continue to be strained because it is required
to pay out redemption proceeds to all fifty shareholders from day
one within seven days (and the next day, to all fifty shareholders
from day two) and it must do so at day one's NAV (and the next day,
at day two's NAV).
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Finally, one commenter asked the Commission to clarify that the
time limit for redemption gates may ``occur in multiple separate
periods within any ninety-day period (as well as consecutively), and if
so, whether the ninety-day period is a rolling period which is
recalculated on a daily basis.'' \345\ As indicated in the Proposing
Release, the intent of the 90-day limit on redemption gates is to
ensure that funds do not circumvent the time limit on redemption gates
\346\--for example, by reopening on the 9th business day for one
business day before re-imposing a gate for potentially another 10
business day period. Accordingly, when determining whether a fund has
been gated for more than 10 business days in a 90-day period, the fund
should account for any multiple separate gating periods and assess
compliance with the 90-day limit on rolling basis, calculated daily.
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\345\ See Comment Letter of Stradley Ronon Stevens & Young, LLP
(Sept. 17, 2013) (``Stradley Ronon Comment Letter'').
\346\ See Proposing Release, supra note 25, at 189.
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3. Exemptions to Permit Fees and Gates
The Commission is adopting, as proposed, exemptions from various
provisions of the Investment Company Act to permit a fund to institute
liquidity fees and redemption gates.\347\ 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 exercising 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 redemption gates notwithstanding these
restrictions.\348\ As discussed in the Proposing Release and 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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\347\ See rule 2a-7(c)(2).
\348\ Section 6(c). To clarify the application of liquidity fees
and redemption gates to variable contracts, we are also amending
rule 2a-7 to provide that, notwithstanding section 27(i) of the Act,
a variable insurance contract issued by a registered separate
account funding variable insurance contracts or the sponsoring
insurance company of such separate account may apply a liquidity fee
or redemption 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 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 the temporary gates we are allowing in
today's amendments will 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.\349\ Rather, under today's amendments, the board of a money
market fund can impose gates to benefit the fund and its shareholders
by making the fund better able to protect against redemption activity
that would harm remaining shareholders, and to allow time for any
market distress to subside and liquidity to build organically.
---------------------------------------------------------------------------
\349\ See 2009 Proposing Release, supra note 66, at n.281 and
accompanying text.
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In addition, gates will be limited in that they can be imposed only
for limited periods of time and only when a fund's weekly liquid assets
are stressed. 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 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.\350\
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\350\ See 2010 Adopting Release, supra note 17, at text
following n.379.
---------------------------------------------------------------------------
We are also providing exemptions from rule 22c-1 to permit a money
market fund to impose liquidity fees because such fees can benefit the
fund and its shareholders by providing a more systematic and equitable
allocation of liquidity costs.\351\ In addition, based on the level of
the liquidity fee imposed, a fee may secondarily benefit a fund by
helping to repair its market-based NAV.
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\351\ See rule 2a-7(c)(2) (providing that, notwithstanding rule
22c-1, among other provisions, a money market fund may impose a
liquidity fee under the circumstances specified in the rule).
---------------------------------------------------------------------------
We are permitting money market funds to impose fees and gates in
limited situations because they may provide substantial benefits to
money market funds, the short-term financing markets for issuers, and
the financial system, as discussed above. However, we are adopting
limitations on when and for how long money market funds can impose
these restrictions 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).\352\ We did not
receive comments suggesting changes to the proposed exemptions and,
thus, we are adopting them as proposed.\353\
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\352\ See rule 2a-7(c)(2)(i) and (ii); cf. 2010 Adopting
Release, supra note 17, 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.'')
\353\ But see NYC Bar Committee Comment Letter (discussing
section 22(e) and the Commission's authority to allow gates under
that section). As discussed above, we are adopting the proposed
amendments to rule 22e-3 pursuant to section 6(c).
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4. Amendments to Rule 22e-3
Currently, rule 22e-3 allows a money market fund to permanently
suspend redemptions and liquidate if the fund's board determines that
the deviation between the fund's amortized cost price per share and its
market-based NAV per
[[Page 47768]]
share may result in material dilution or unfair results to investors or
existing shareholders.\354\ Today, we are amending rule 22e-3 to also
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 10% of its total assets.\355\ As proposed, the
amendments would have allowed for permanent suspension of redemptions
and liquidation after a money market fund's level of weekly liquid
assets fell below 15%.\356\
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\354\ See rule 22e-3(a)(1).
\355\ See id.
\356\ The proposed weekly liquid asset threshold corresponded
with the proposed threshold for the imposition of a default fee and/
or redemption gates.
---------------------------------------------------------------------------
Commenters generally supported our proposed retention of rule 22e-3
\357\ and did not suggest changes to our proposed amendments. We are
making a conforming change in the proposed weekly liquid asset
threshold below which a fund may permanently gate and liquidate,
however, in order to correspond to other changes in the proposal
related to weekly liquid asset thresholds for fees and gates. For the
reasons discussed above, we have determined to raise the initial
threshold below which a fund board may impose fees and gates, but lower
the threshold for imposition of a default liquidity fee. Due to the
absolute and significant nature of a permanent suspension of
redemptions and liquidation, we believe the lower default fee threshold
would also be the appropriate threshold for board action under rule
22e-3.\358\ 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. Therefore, we do not believe that the 30% weekly liquid
asset threshold for discretionary fees and gates, which is designed to
provide boards with significant flexibility to restore a fund's
liquidity in times of stress, would be an appropriate threshold under
which fund boards could permanently close a fund.
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\357\ See, e.g., ICI Comment Letter (supporting the retention of
rule 22e-3); Stradley Ronon Comment Letter, (discussing rule 22e-3
and master/feeder funds); Dreyfus Comment Letter; but see Peirce &
Green Comment Letter (suggesting that the requirement in rule 22e-3
that ``a fund's board have made an irrevocable decision to liquidate
the fund . . . unnecessarily dissuades boards from using redemption
suspensions'').
\358\ Cf. Proposing Release supra note 25, at 195-196.
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Amended rule 22e-3 will allow all money market funds, not just
those that maintain a stable NAV as currently contemplated by rule 22e-
3, to rely on the rule when the fund's liquidity is significantly
stressed. A money market fund whose weekly liquid assets have fallen
below 10% of its total assets (whether that fund has previously imposed
a fee or gate, or not) may rely on the rule to permanently suspend
redemptions and liquidate.\359\ Under amended rule 22e-3, stable value
funds also will continue to be able to suspend redemptions and
liquidate if the board determines that the deviation between its
amortized cost price per share and its market-based NAV per share may
result in material dilution or other unfair results to investors or
existing shareholders.\360\ Thus, a stable value money market fund that
suffers a default will still be able to suspend redemptions and
liquidate before a credit loss leads to redemptions and a fall in its
weekly liquid assets.
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\359\ We note that a money market fund would not have to impose
a fee or a gate before relying on rule 22e-3. For example, if the
fund drops below the 10% weekly liquid asset threshold, its board
may determine that a liquidity fee is not in the best interests of
the fund and instead decide to suspend redemptions and liquidate.
\360\ See rule 22e-3(a)(1).
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5. Operational Considerations Relating to Fees and Gates
a. Operational Costs
As discussed in the Proposing Release, we recognize that money
market funds and others in the distribution chain (depending on the
structure) will incur some operational costs in establishing or
modifying systems to administer a liquidity fee or temporary gate.\361\
These costs may relate to the development of procedures and controls
for the imposition of liquidity fees or updating systems for
confirmations and account statements to reflect the deduction of a
liquidity fee from redemption proceeds.\362\ Additionally, these costs
may relate to the establishment of new or modified systems or
procedures that will allow funds to administer temporary gates.\363\ We
also recognize that money market funds may incur costs in connection
with board meetings held to determine if fees and/or gates are in the
best interests of a fund.
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\361\ Some commenters also suggested that affected money market
funds may have to examine whether shareholder approval is required
to amend organizational documents, investment objectives or
policies. See, e.g., Ropes & Gray Comment Letter; Fidelity Comment
Letter.
\362\ See, e.g., ICI Comment Letter (``[T]he nature of the
liquidity fee would entail changes to support a separate fee type,
appropriate tax treatment, and investor reporting, including
transaction confirmation statements that reference fees charged and
applicable tax information for customers.'').
\363\ See ICI Comment Letter (``Temporary gating also would
require fund transfer agent and intermediary system providers to
ensure that their systems can suppress redemption activity while
supporting all other transaction types.'').
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In addition, operational costs may be incurred by, or spread among,
a fund's transfer agents, sub-transfer agents, recordkeepers,
accountants, portfolio accounting departments, and custodian.\364\
Funds also may seek to modify contracts with financial intermediaries
or seek certifications from intermediaries that they will apply a
liquidity fee on underlying investors' redemptions. Money market fund
shareholders also may be required to modify their own systems to
prepare for possible future liquidity fees, or to manage gates,
although we expect that only some shareholders will be required to make
these changes.\365\
---------------------------------------------------------------------------
\364\ See ICI Comment Letter; see also Comment Letter of State
Street Corporation (Sept. 17, 2013) (``State Street Comment
Letter'') (suggesting that transfer agents and intermediaries will
need to modify their systems to accommodate fees and gates).
\365\ Many shareholders use common third party-created systems
and thus would not each need to modify their systems.
---------------------------------------------------------------------------
A number of commenters suggested that the operational costs and
burdens of implementing and administrating fees and gates would be
manageable.\366\ Some commenters noted that liquidity fees and
redemption gates would be more practicable, and less costly and
burdensome to implement and maintain than the other proposed reform
alternative (floating NAV).\367\ Another commenter added that the
systems modifications for fees and gates, especially absent a
requirement to net each shareholder's redemptions each day, would be
``far less costly and onerous'' than the operational challenges posed
by the floating NAV reform alternative.\368\ One commenter estimated
that implementing fees and gates would require only ``minimal
enhancements'' to its core custody/fund accounting systems at ``minimal
costs.'' \369\ This commenter further noted that most systems
enhancements would likely be required with respect to the systems of
transfer agents and
[[Page 47769]]
intermediaries, although their systems would likely already include
``basic functionality to accommodate liquidity fees and gates.'' \370\
Similarly, another commenter noted that the operational issues of fees
and gates could be solved if the industry and all its stakeholders were
given sufficient implementation time.\371\ This commenter cited its
ongoing efforts to implement liquidity fees at its Dublin-domiciled
money market fund complex as an example that the operational challenges
and costs would not be prohibitive.\372\
---------------------------------------------------------------------------
\366\ See, e.g., ICI Comment Letter; HSBC Comment Letter,
Federated X Comment Letter; Invesco Comment Letter.
\367\ See, e.g., SunTrust Comment Letter; Federated X Comment
Letter; Angel Comment Letter. One commenter argued that for
investors, intermediaries and fund complexes alike, the estimated
costs of fees and gates ``are dramatically lower'' than under the
proposed floating NAV alternative. See Federated X Comment Letter.
\368\ See, e.g., ICI Comment Letter (``System modifications for
liquidity fees and gates, especially absent the net redemption
requirement, are far less onerous and costly, however, than the
extensive programming and other system changes necessary to
implement a floating NAV as contemplated by the SEC's proposal.'')
\369\ See State Street Comment Letter.
\370\ See id.
\371\ See HSBC Comment Letter. The commenter also noted that a
variable liquidity fee, if available in a timely manner, should not
create any operational impediments.
\372\ See id.
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Conversely, a number of commenters expressed concern over the
operational burdens and related administrative costs with the fees and
gates requirements.\373\ Some commenters argued that the implementation
and administration of fees and gates would present significant
operational challenges, in particular with respect to omnibus accounts,
sweep accounts, intermediaries and the investors that use them.\374\
One commenter argued that, to reduce operational burdens, a liquidity
fee should be applied to each redemption separately--rather than net
redemptions--in an affected money market fund.\375\ This commenter also
expressed concern that intermediaries would not know whether their
sweeps would be subject to a liquidity fee or temporary gate until
after the daily investment is made.\376\ For example, the possibility
of a liquidity fee would require intermediaries to develop trading
systems to ensure that for each transaction ``the investor has
sufficient funds to cover the trade itself plus the possibility of a
liquidity fee.'' \377\ Commenters also suggested that a fee or gate
could not be uniformly applied within omnibus accounts,\378\ and
certain commenters expressed concern over transparency with respect to
fees and gates for shareholders investing through omnibus
accounts.\379\
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\373\ See, e.g., Comment Letter of TIAA-CREF (Sept. 17, 2013)
(``TIAA-CREF Comment Letter''); J.P. Morgan Comment Letter; Fin.
Svcs. Roundtable Comment Letter; Goldman Sachs Comment Letter.
\374\ See, e.g., SunTrust Comment Letter; Comment Letter of
Coalition of Mutual Fund Investors (Sept. 17, 2013) (``Coal. of
Mutual Fund Invs. Comment Letter''); Schwab Comment Letter.
\375\ See ICI Comment Letter (expressing concern that funds,
record keepers and intermediaries would have to develop complex
operational systems that could apply a fee with respect to a
shareholder's net redemptions for a particular day and tracking the
``shareholder of record'' to whom such a fee would apply).
\376\ See id.
\377\ See Fin. Svcs. Roundtable Comment Letter; see also Fin.
Info. Forum Comment Letter (suggesting liquidity fees could cause
investors [to] over-trade their account by settling an amount
greater than their balance due to a liquidity fee not known at the
time of order entry).
\378\ See Coal. of Mutual Fund Invs. Comment Letter; SunTrust
Comment Letter.
\379\ See Coal. of Mutual Fund Invs. Comment Letter; Goldman
Sachs Comment Letter.
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We understand that the implementation of fees and gates (as with
any new regulatory requirement) is not without its operational
challenges; however, we have sought to minimize those challenges in the
amendments we are adopting today. Based on the comments discussed
above, we now recognize that a liquidity fee could either be applied to
each redemption separately or on a net basis. As indicated by the
relevant commenter, our proposal contemplated net redemptions as an
investor-friendly manner of applying a liquidity fee.\380\ However, in
light of the comments, we are persuaded that such an approach may be
too operationally difficult and costly for funds to apply and, thus, we
are not requiring funds to apply a liquidity fee on a net basis.\381\
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\380\ See Proposing Release, supra note 25, at n.373 (discussing
the application of a liquidity fee and stating that ``[i]f 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 redemption for the day.''); see also ICI
Comment Letter (``Currently, systems used to process money market
fund transactions do not have the ability to assess a fee by netting
one or more purchases against one or more redemptions. This process
would be highly complex and require a significant and costly
redesign of the processing functionality used by funds and
intermediaries today.'' (footnote omitted)).
\381\ See ICI Comment Letter (noting that ``[a]bsent further
definition, it would be challenging for funds (and intermediaries
assessing the fee) to determine how a shareholder of record
requirement applies to multiple accounts of a given beneficial
owner. . . .'').
---------------------------------------------------------------------------
We also recognize commenters' concerns regarding the application of
fees and gates in the context of sweep accounts. We note that during
normal market conditions, fees and gates should not impact sweep
accounts' (or any other investor's) investment in a money market
fund.\382\ We also note that, unlike our proposal, the amendments we
are adopting today will allow fund boards to institute a fee or gate at
any time during the day.\383\ To the extent a sweep account's daily
investment is made at the end of the day, we believe this change should
reduce concerns that the sweep account holder will find out about a
redemption restriction only after it has made its daily investment and
may lessen the difficulty and costs related to developing a trading
system that can ensure an account has sufficient funds to cover the
trade itself plus the possibility of a liquidity fee.
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\382\ As discussed herein, however, we recognize that sweep
accounts may be unwilling to invest in a money market fund that
could impose a gate. See supra section III.A.1.c.iv and infra note
641.
\383\ See rule 2a-7(c)(2)(i).
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With respect to omnibus accounts, we continue to believe that
liquidity fees should be handled in a manner similar to redemption
fees, which currently may be imposed to deter market timing of mutual
fund shares.\384\ As discussed in the Proposing Release, we understand
that financial intermediaries themselves generally impose redemption
fees to record or beneficial owners holding through that
intermediary.\385\ We recognize commenters' concerns regarding the
uniform application of liquidity fees through omnibus accounts. We
believe, however, that the benefits and protections afforded to funds
and their investors by the fees and gates amendments justify the
application of these amendments in the context of omnibus accounts. In
this regard, we note, as we did in the Proposing Release, that funds or
their transfer agents may contract with intermediaries to have them
impose liquidity fees. As we also noted in the Proposing Release, we
understand that some money market fund sponsors may want to review
their contractual arrangements with their funds' financial
intermediaries and service providers to determine whether any
contractual modifications are necessary or advisable to ensure that
liquidity fees are appropriately applied to beneficial owners of money
market fund shares. We further 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
may need to engage in certain communications regarding a liquidity fee.
---------------------------------------------------------------------------
\384\ 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.
\385\ See Proposing Release, supra note 25, at 191.
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With respect to those commenters who expressed concern over the
transparency of fees and gates for omnibus investors, we note that fees
and gates will be equally transparent for all investors. Investors,
both those that invest directly and those that invest through omnibus
accounts, should have access to information about a fund's weekly
liquid assets, which will be
[[Page 47770]]
posted on the fund's Web site. All money market fund investors also
should receive copies of a fund's prospectus, which will include
disclosure on fees and gates.
We note that some commenters expressed concern about the costs and
burdens associated with the combination of fees and gates and a
floating NAV requirement for institutional prime funds.\386\ As we
stated in the Proposing Release, we do not expect that there will be
any significant additional costs from combining the two approaches that
are not otherwise discussed separately with respect to each of the fees
and gates and floating NAV reforms.\387\ As we discussed in the
Proposing Release, it is likely that implementing a combined approach
will 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 will create any new costs as a result of the
combination itself.\388\ Accordingly, we estimate, as we did in the
proposal, 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.
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\386\ See, e.g., Dreyfus Comment Letter (suggesting the
combination of both proposed reform options would be ``excessive and
unduly harmful to the utility of [money market funds] without
offering any additional benefit''); Northern Trust Comment Letter
(suggesting the combination of both proposed reform options would
``be very costly to implement''). For a discussion of the possible
movement out of money market funds as result of today's reforms, see
infra section III.K. But see State Street Comment Letter (``State
Street does not believe there would be any new costs other than
those listed by the staff from a fund accounting, custody or fund
administrator point of view by combining the two alternatives.'').
\387\ See Proposing Release, supra note 25, at 249; see also
infra section III.B.8 for a discussion of the costs associated with
the floating NAV requirement.
\388\ See State Street Comment Letter.
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b. Cost Estimates
As we indicated in the Proposing Release, the costs associated with
the fees and gates amendments will vary depending on how a fee or gate
is structured, including its triggering event and the level of a fee,
as well as on the capabilities, functions and sophistication of the
systems and operations of the funds and others involved in the
distribution chain, including transfer agents, accountants, custodians
and intermediaries. These costs relate to the development of procedures
and controls, systems' modifications, training programs and shareholder
communications and may vary among funds, shareholders and their service
providers.
In the Proposing Release, we estimated a range of hours and costs
that may be required to perform activities typically involved in making
systems modifications, such as those described above. We estimated that
a money market fund (or others in the distribution chain) would incur
one-time systems modification costs that range from $1,100,000 to
$2,200,000.\389\ We further estimated that the one-time costs for
entities to communicate with shareholders about the liquidity fee or
gate would range from $200,500 to $340,000.\390\ In addition, we
estimated that the costs for a shareholder mailing would range between
$1.00 and $3.00 per shareholder.\391\
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\389\ We estimated 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
Proposing Release, supra note 25, at n.245 (discussing the bases of
our estimates of operational and related costs in Proposing
Release).
\390\ We estimated 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 Proposing Release, supra note 25, at n.245
(discussing the bases of our estimates of operational and related
costs in Proposing Release).
\391\ Total costs of the mailing for individual funds would vary
significantly depending on the number of shareholders who receive
information from the fund by mail (as opposed to electronically).
---------------------------------------------------------------------------
We also recognized in our proposal that depending on how a
liquidity fee or gate is structured, mutual fund groups and other
affected entities already may have systems that can be adapted to
administer a fee or gate at minimal cost, in which case the costs may
be less than the range we estimated above. For example, some money
market funds may be part of mutual fund groups in which one or more
funds impose deferred sales loads under rule 6c-10 or redemption fees
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. We estimated that a money market fund
shareholder whose systems required modifications to account for a
liquidity fee or gate would incur one-time costs ranging from $220,000
to $450,000.\392\
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\392\ We estimated 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 Proposing Release, supra note 25, at n.245 (discussing the
bases of our estimates of operational and related costs in Proposing
Release).
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Some of the comments we received regarding the costs of fees and
gates included alternate estimates of implementation costs.\393\ For
example, one commenter indicated that its costs for implementing fees
and gates would likely be in the range of $400,000 to $500,000.\394\
This commenter further explained that cost of the fees and gates
alternative ``reflects the ability of the affected entity to custom-
design its own approach to implementation, as well as the fact that the
necessary changes would not be for use in day-to-day operations, but
only for rare occasions.'' \395\
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\393\ We note that some commenters provided industry-wide
estimates of approximately $800 million to $1.75 billion for initial
implementation of fees and gates, and estimates of approximately $80
to $350 million for annual ongoing costs. See ICI Comment Letter;
Invesco Comment Letter. As discussed herein, we have analyzed a
variety of commenter estimates and provided cost estimates on a per-
fund basis (including a fund's distribution chain). We are unable,
however, to verify the accuracy or make a relevant comparison
between our per-fund cost estimates and the broad range of costs
provided by these commenters that apply to all U.S. prime money
market fund investors and/or the entire industry because we are
unable to estimate how many intermediaries will be affected by the
fees and gates amendments.
\394\ See Federated X Comment Letter.
\395\ See id. As discussed above, another commenter indicated
that implementing fees and gates would only require ``minimal
enhancements'' to its core custody/fund accounting systems at
``minimal costs,'' and that most transfer agency and intermediary
systems would likely already include ``basic functionality to
accommodate liquidity fees and gates.'' See State Street Comment
Letter. Also as discussed above, an additional commenter noted that,
with respect to its Dublin-domiciled money market fund complex that
is currently implementing the ability to impose liquidity fees, the
implementation process has created costs but that these costs have
not been prohibitive. See HSBC Comment Letter.
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A number of other commenters, however, expressed concern that the
fees and gates amendments would impose significant costs and burdens,
higher than those estimated in the Proposing Release.\396\ For example,
one commenter estimated that it would cost it a total of approximately
$11 million in largely one-time costs, reflecting costs of $9 million
to implement fees and gates as well as $2 million for the related
modifications in disclosure.\397\ Another commenter indicated that the
implementation costs of fees and gates would be an estimated
$1,697,000.\398\ Similarly, an industry group conducting a survey of
its members found that the
[[Page 47771]]
implementation costs relating to liquidity fees would likely be $2
million or more, according to 36% of survey respondents.\399\ The group
also noted that initial costs would be particularly significant for
distributors and intermediaries, with 60% of respondents estimating
initial costs at $2 million or more.\400\ In addition, the survey found
initial costs associated with gates to range from $1 million to $10
million.\401\
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\396\ See, e.g., IDC Comment Letter; Comment Letter of Dechert
LLP (Sept. 17, 2013) (``Dechert Comment Letter''); SPARK Comment
Letter.
\397\ See Fidelity Comment Letter.
\398\ See Comment Letter of Financial Information Forum (Sept.
17, 2013) (``Fin. Info. Forum Comment Letter'') (``Based on the
available information, one back office processing service provider
estimates the implementation cost of . . . Alternative 2 at
$1,697,000.'')
\399\ SIFMA Comment Letter. The survey also included the
following results for implementation costs: 24% in the $2 million to
$5 million range, 8% in the $5 million to $10 million range, and 4%
in the $10 million to $15 million range.
\400\ Id. The commenter's survey indicated that 40% of asset
managers would incur $2 to $5 million in initial costs.
\401\ Id. The survey indicated costs of $1 million to $2 million
according to 17% of respondents, $2 million to $5 million according
to another 17% of respondents, and $5 million to $10 million
according to 8% of respondents.
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Based on the information provided by commenters, as well as the
operational changes in the final rule, we are increasing our estimates
for implementation costs for fees and gates. Three of the four
commenters who provided estimates suggested that the implementation
costs would be around $2,000,000 or more.\402\ In addition, we estimate
that a fund's ability to impose a fee or gate intra-day (as opposed to
the end of the day, as contemplated by the proposal) may result in
increased operational costs related to the implementation of fees and
gates. Accordingly, we have increased our original estimate of
$1,100,000 to $2,200,000 \403\ for one-time systems modification costs
to a higher estimate of $1,750,000 to $3,000,000.\404\ We continue to
estimate that the one-time costs for entities to communicate with
shareholders (including systems costs related to communications) about
fees and gates would range from $200,500 to $340,000. In addition, we
are increasing the estimated cost for a shareholder mailing from
between $1.00 and $3.00 per shareholder to between $2.00 and $3.00 per
shareholder, recognizing that it is unlikely such a mailing would cost
$1.00. We continue to estimate one-time costs of $220,000 to $450,000
for a money market fund shareholder whose systems (including related
procedures and controls) required modifications to account for a
liquidity fee or redemption gate.
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\402\ See supra notes 394-401 and accompanying text.
\403\ We note that, in the Proposing Release, our estimate was
based on a money market fund that determined it would only impose a
flat liquidity fee of a fixed percentage known in advance and have
the ability to impose a gate. This estimate was based on our
proposal, which included less flexibility than today's amendments.
Accordingly, our revised estimates account for a money market fund
that has the ability to vary the level of a fee at imposition or
thereafter, or impose a gate.
\404\ As with our estimate in the Proposing Release, these
amounts reflect the costs of one-time systems modifications for a
money market fund and/or others in its distribution chain.
---------------------------------------------------------------------------
We recognized in our proposal that adding new capabilities or
capacity to a system will entail ongoing annual maintenance costs and
understand these costs generally are estimated as a percentage of
initial costs of building or expanding a system. We also recognized
that ongoing costs related to fees and gates may include training
costs. In the proposal, we estimated that the costs to maintain and
modify the systems required to administer a fee or gate (to accommodate
future programming changes), to provide ongoing training, and to
administer the fee or gate on an ongoing basis would range from 5% to
15% of the one-time costs. We understand that funds may impose varying
liquidity fees and that the cost of varying liquidity fees could exceed
this range, but because such costs depend on to what extent the fees
might vary, we do not have the information necessary to provide a
reasonable estimate of how much more (if any) varying fees might cost
to implement.
One commenter indicated a lower estimate of approximately $164,000
for annual ongoing costs.\405\ Another commenter, an industry group
that surveyed its members, indicated that ongoing annual costs of
implementing a liquidity fee are likely to range from 10% to 20% of
initial costs.\406\ The same commenter indicated that ongoing annual
costs related to redemption gates were estimated as 10% to 20% of
initial cost by 33% of survey respondents.\407\ Based on these
estimates, which are largely similar to our estimates of 5-15% in the
Proposing Release, we continue to believe our estimates in the
Proposing Release are appropriate.
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\405\ See Federated X Comment Letter.
\406\ See SIFMA Comment Letter. The survey indicated 10% to 15%
of initial costs for 17% of respondents, 15% to 20% of initial costs
for 12% of respondents, and 20+% of initial costs for 8% of
respondents. With respect to distributor/intermediary respondents,
the commenter indicated that ongoing annual costs for a liquidity
fee are estimated as 10% to 20% of initial costs by 29% of
distributor/intermediary respondents (evenly split between those who
estimate 10% to 15% of initial cost and those who estimate 15% to
20%). For asset managers, the commenter indicated that ongoing
annual costs for a liquidity fee are estimated to be 10% to 15% of
initial costs by 20% of respondents, 15% to 20% of initial costs by
10% of respondents and 20+% of initial costs by 20% of respondents.
\407\ See SIFMA Comment Letter. The commenter note that the 33%
of survey respondents were evenly split between those who estimated
10% to 15% of initial cost and those who estimated 15% to 20% of
initial cost.
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We also recognize that funds may incur costs in connection with
board meetings held to determine if fees and/or gates are in the best
interests of the fund. In the Proposing Release, we estimated an
average annual time cost of approximately $9,895 per fund in connection
with each such board meeting.\408\ We did not receive comments on this
estimate. As discussed in section IV.A.3 herein, we are revising our
estimate from $9,895 per fund to $10,700 as result of updated industry
data.\409\
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\408\ See Proposing Release, supra note 25, at 549.
\409\ See infra section IV.A.3 (discussing the PRA estimates for
board determinations under the fees and gates amendments and noting
that certain estimates have increased from those in the proposal as
a result of the increased number of funds that may cross the higher
weekly liquid assets threshold of 30% (as compared to 15%) for the
imposition of fees and gates).
---------------------------------------------------------------------------
Although we have 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.
6. Tax Implications of Liquidity Fees
As discussed in the Proposing Release, we understand that liquidity
fees may have certain tax implications for money market funds and their
shareholders.\410\ We understand that for federal income tax purposes,
shareholders of mutual funds that impose a redemption fee pursuant to
rule 22c-2 under the Investment Company Act 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).\411\
[[Page 47772]]
Consistent with this characterization, funds generally treat the
redemption fee as having no associated tax effect for the fund.\412\ We
understand that a liquidity fee will be treated for federal income tax
purposes consistently with the way that funds and shareholders treat
redemption fees under rule 22c-2.
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\410\ As discussed above, the liquidity fee we are adopting
today is analogous to a redemption fee under rule 22c-2, which
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.
\411\ 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 http://www.irs.gov/pub/irs-pdf/p550.pdf.
\412\ See ICI Comment Letter (``Pursuant to section 311(a)(2) of
the Internal Revenue Code, corporations (including investment
companies) do not recognize gain or loss upon a redemption of their
shares.'').
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If, as described above, a liquidity fee has no direct federal
income tax consequences for the money market fund, that tax treatment
will allow the fund to use 100% of the fee to help repair a market-
based NAV per share that was below $1.00. If redemptions involving
liquidity fees cause a stable value 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 on the upside (i.e., by rounding up to $1.01 in
pricing its shares).\413\ 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.
---------------------------------------------------------------------------
\413\ See rule 2a-7(g)(2).
---------------------------------------------------------------------------
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). Thus, in the event of any return of
capital distributions, as we noted in the Proposing Release, there is a
possibility that the fund, other intermediaries, and the shareholders
might become subject to tax-reporting or tax-payment obligations that
do not affect stable value money market funds currently operating under
rule 2a-7.\414\
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\414\ See Proposing Release, supra note 25, at 207. Funds that
strive to maintain a stable NAV per share currently are not subject
to these transaction reporting requirements. We have been informed
that, today, the Department of the Treasury and the IRS are
proposing new regulations to exempt all money market funds from
transaction reporting obligations. As we describe below, funds and
brokers may rely on this exemption immediately. We note that at
least one commenter indicated that funds and intermediaries may want
to provide certain tax information to their investors even if it is
not required. See ICI Comment Letter.
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Commenters were concerned with this possibility--that investors may
have to recognize capital gains or reduced losses if a fund makes a
distribution to shareholders in order to avoid ``breaking the buck'' on
the upside as a result of excessive fees.\415\ Commenters noted that
such distributions and the resulting capital gains or losses upon
disposition of investors' shares would require funds and intermediaries
to start tracking investors' basis in shares of a fund.\416\ In order
to avoid such basis tracking, commenters suggested that the Treasury
Department and the Internal Revenue Service (``IRS'') issue guidance
stating that when a money market fund is required to make a payment of
excess fees in order to avoid breaking the buck, the fund should be
deemed to have sufficient earnings and profits to treat the
distribution as a taxable dividend.\417\
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\415\ See, e.g., Fidelity Comment Letter; BlackRock II Comment
Letter; Wells Fargo Comment Letter.
\416\ See, e.g., ICI Comment Letter; Fidelity Comment Letter;
BlackRock II Comment Letter; SIFMA Comment Letter; but see, e.g.,
State Street [Appendix 4] (suggesting that a liquidity fee causing
the shadow price to exceed $1.0049 would not result in special
distribution to shareholders but most likely be recorded as income
to the fund and paid out to shareholders as an ordinary income
distribution).
\417\ See, e.g., BlackRock II Comment Letter; ICI Comment
Letter; Wells Fargo Comment Letter.
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Although these events are hypothetically possible, the scenario
that would lead to a payment of excess fees to fund shareholders
without sufficient earnings and profits is subject to many
contingencies that make it unlikely to occur. First, as we discussed
above, under normal market conditions, we believe funds will rarely
impose liquidity fees. Second, we believe it is highly unlikely that
shareholders would redeem with such speed and in such volume that the
redemptions would create a danger of breaking the buck on the upside
before a fund could remove a fee. Third, the distributions to avoid
breaking the buck might not exceed the fund's earnings and profits. For
this purpose, we understand that the fund's earnings and profits take
into account the fund's income through the end of the taxable year.
Thus, unless the additional distribution occurs very close to the end
of the taxable year, some of the money market fund's subsequent income
during the year will operate to qualify these distributions as
dividends.\418\
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\418\ A portion of this subsequent income may also have to be
distributed to avoid breaking the buck on the upside. However, if
the fund attracts new shareholders, we understand that some of the
subsequent income can be retained, with its associated earnings and
profits qualifying the earlier distributions as dividends.
---------------------------------------------------------------------------
Finally, as discussed in the Proposing Release, 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. However, we have been informed that the Treasury
Department and the IRS today will propose new regulations exempting all
money market funds from certain transaction reporting
requirements.\419\ This exemption is to be formally applicable for
calendar years beginning on or after the date of publication in the
Federal Register of a Treasury Decision adopting those proposed
regulations as final regulations. The Treasury Department and the IRS
have informed us, however, that the text of the proposed regulations
will state that persons subject to transaction reporting may rely on
the proposed exemption for all calendar years prior to the final
regulations' formal date of applicability. Therefore, the Treasury
Department and IRS relief described above is available immediately.
---------------------------------------------------------------------------
\419\ See infra section III.B.6.a.
---------------------------------------------------------------------------
Thus, even in the unlikely event that some shareholders' bases in
their shares change due to non-dividend distributions, neither fund
groups nor their intermediaries will need to track the tax bases of
money market fund shares. On the other hand, if there are any non-
dividend distributions by money market funds, the affected shareholders
will need to report in their annual tax filings any resulting gains
\420\ or reduced losses upon the sale of affected money market fund
shares. We are unable to quantify with any specificity 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
[[Page 47773]]
subject to liquidity fees would cause the funds to make returns of
capital distributions to the remaining shareholders (although, as noted
above, we believe such returns of capital distributions are unlikely).
Commenters did not provide any such estimates.
---------------------------------------------------------------------------
\420\ Redemptions subject to a liquidity fee would almost always
result in losses, but gains are possible in the unlikely event that
a shareholder received a return of capital distribution with respect
to some shares. Because a later redemption of the shares by the
shareholder would be for $1.00 each, there would be small gains with
respect to those redemptions. If the money market fund making such a
non-dividend distribution is a floating NAV money market fund and if
a shareholder uses the simplified aggregate method discussed below
in section III.B.6.a, then the shareholder would be able to report
the gain or loss without having to track the basis of individual
shares.
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7. Accounting Implications
A number of commenters questioned whether an investment in a money
market fund subject to a possible fee or gate, or in a money market
fund that in fact imposes a fee or gate, would continue to qualify as a
``cash equivalent'' for purposes of U.S. Generally Accepted Accounting
Principles (``U.S. GAAP'').\421\ 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.\422\ To remove any uncertainty,
several commenters requested that the Commission, the Financial
Accounting Standards Board (``FASB'') and/or Government Accounting
Standards Board (``GASB'') issue guidance to clarify whether
investments in money market funds will continue to qualify as cash
equivalents under U.S. GAAP.\423\ Various commenters on our proposal,
including the American Institute of Certified Public Accountants
(``AICPA'') and each of the ``Big Four'' accounting firms, stated that
a money market fund's ability to impose fees and gates should not
preclude an investment in the fund from being classified as a ``cash
equivalent'' under U.S. GAAP.\424\
---------------------------------------------------------------------------
\421\ See, e.g., Invesco Comment Letter; BlackRock II Comment
Letter; Wells Fargo Comment Letter; see also Proposing Release,
supra note 25, at 246 (stated that ``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.''); ICI Comment Letter (suggesting that any such Commission
guidance should also ``discuss whether a money market fund that
imposes a liquidity fee and/or gate would continue to be considered
a cash equivalent investment and whether the amount of the fee or
the length of the gate would affect the analysis.'')
\422\ In addition, some corporate investors may perceive cash
and cash equivalents on a company's balance sheet as a measure of
financial strength.
\423\ See, e.g., ICI Comment Letter; Fidelity Comment Letter;
Fin. Svcs. Roundtable Comment Letter; see also Proposing Release,
supra note 25, at 246 (suggesting that funds with the ability to
impose fees and gates should still be considered cash equivalents).
As discussed in section III.C.4 herein, we do not have authority
over the actions that GASB may or may not take with respect to
LGIPs.
\424\ See Comment Letter of American Institute of Certified
Public Accountants, Financial Reporting Executive Committee (Sept.
16, 2013) (``AICPA Comment Letter); Comment Letter of Ernst & Young
LLP (Sept. 12, 2013) (``Ernst & Young Comment Letter''); Comment
Letter of Deloitte & Touche LLP (Sept. 17, 2013) (``Deloitte Comment
Letter''); Comment Letter of KPMG LLP (Sept. 17, 2013) (``KPMG
Comment Letter''); Comment Letter of PricewaterhouseCoopers LLP
(Sept. 16, 2013) (``PWC Comment Letter'').
---------------------------------------------------------------------------
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.'' \425\ U.S. GAAP includes an investment in a money market fund
as an example of a cash equivalent.\426\ The Commission's position
continues to be that, under normal circumstances, an investment in a
money market fund that has the ability to impose a fee or gate under
rule 2a-7(c)(2) qualifies as a ``cash equivalent'' for purposes of U.S.
GAAP.\427\ However, as is currently the case, events may occur that
give rise to credit and liquidity issues for money market funds. If
such events occur, including the imposition of a fee or gate by a money
market fund under rule 2a-7(c)(2), shareholders would need to reassess
if their investments in that money market fund continue to meet the
definition of a cash equivalent. A more formal pronouncement (as
requested by some commenters) to confirm this position is not required
because the federal securities laws provide the Commission with plenary
authority to set accounting standards, and we are doing so here.\428\
---------------------------------------------------------------------------
\425\ See FASB Accounting Standards Codification (``FASB ASC'')
paragraph 305-10-20.
\426\ Id.
\427\ We are also amending the Codification of Financial
Reporting Policies to reflect our interpretation under U.S. GAAP, as
discussed below. See infra section VI.
\428\ The federal securities laws provide the Commission with
authority to set accounting and reporting standards for public
companies and other entities that file financial statements with the
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 30(e), section
31, and section 38(a) of the Investment Company Act.
---------------------------------------------------------------------------
If events occur that cause shareholders to determine that their
money market fund 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.\429\ For example, during the financial crisis, 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.
---------------------------------------------------------------------------
\429\ See FASB ASC paragraph 320-10-25-1. This accounting
treatment would not apply to entities to which the guidance in FASB
ASC Topic 320 does not apply. See FASB ASC paragraph 320-10-15-3.
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B. Floating Net Asset Value
1. Introduction
As discussed earlier in this Release, absent an exemption
specifically provided by the Commission from various provisions of the
Investment Company Act, all registered mutual funds must price and
transact in their shares at the current NAV, calculated by valuing
portfolio instruments at market value, in the case of securities for
which market quotations are readily available, or, at fair value, as
determined in good faith by the fund's board of directors, in the case
of other securities and assets (i.e., use a floating NAV).\430\ Under
rule 2a-7, the Commission has exempted money market funds from this
floating NAV requirement, allowing them to price and transact at a
stable NAV per share (using the amortized cost and penny rounding
methods), provided that they follow certain risk-limiting
conditions.\431\ In doing so, the Commission was statutorily required
to find that such an exemption was 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.\432\ Accordingly, when providing this exemption in 1983, the
Commission considered the benefits of a stable value product as a cash
management vehicle for investors, but also imposed a number of
conditions designed to minimize the risk inherent in a stable value
fund that some shareholders may redeem and receive more than their
shares are actually worth, thus diluting the holdings of remaining
shareholders.\433\ At the time, the Commission was persuaded that
deviations in value that could cause material dilution to investors
generally would not occur, given the risk-limiting
[[Page 47774]]
conditions of the rule.\434\ Experience, however, has shown that
deviations in value do occur, and at times, can be significant.
---------------------------------------------------------------------------
\430\ See supra section I.
\431\ Id.
\432\ Section 6(c) of the Investment Company Act provides the
Commission with broad authority to exempt persons, securities or
transactions from any provision of the Investment Company Act, or
the regulations thereunder, if and to the extent that such exemption
is 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. See Commission Policy and
Guidelines for Filing of Applications for Exemption, SEC Release No.
IC-14492 (Apr. 30, 1985).
\433\ See Proposing Release, supra note 25, at n.9. The
Commission was similarly concerned with the risk that redeeming
shareholders may receive less than their shares were worth and that
purchasing shareholders may pay too little for their shares,
diluting remaining shareholders.
\434\ Id.
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As discussed above, money market funds' sponsors on a number of
occasions have voluntarily chosen to provide financial support for
their money market funds for various reasons, including to keep a fund
from re-pricing below its stable value, suggesting that material
deviations in the value in money market funds have not been a rare
occurrence.\435\ This historical experience, combined with the events
of the financial crisis, has caused us to reconsider the exemption from
the statutory floating NAV requirement for money market funds in light
of our responsibilities under the Act in providing this exemption. In
doing so, we again took into account the benefits of money market funds
as a stable value cash management product for investors, but also
considered all of the historical and empirical information discussed in
section I above, the Investment Company Act's general obligation for
funds to price and transact in their shares at the current NAV, and
developments since 1983.
---------------------------------------------------------------------------
\435\ See supra section II.B.4
---------------------------------------------------------------------------
We considered the many reasons shareholders may engage in heavy
redemptions from money market funds--potentially resulting in the
dilution of share value that the Investment Company Act's provisions
are designed to avoid--and have tailored today's final rules
accordingly. In particular, while many investors may redeem because of
concerns about liquidity, quality, or lack of transparency--and our
fees and gates, disclosure, and reporting reforms are primarily
intended to address those incentives--an incremental incentive to
redeem is created by money market funds' current valuation and pricing
methods. As discussed below, this incremental incentive to redeem
exacerbates shareholder dilution in a stable NAV product because non-
redeeming shareholders are forced to absorb losses equal to the
difference between the market-based value of the fund's shares and the
price at which redeeming shareholders transact. For the reasons
discussed below, we believe that this incentive exists largely in prime
money market funds because these funds exhibit higher credit risk that
make declines in value more likely (compared to government money market
funds).\436\ We further believe history shows that, to date,
institutional investors have been significantly more likely than retail
investors to act on this incentive.\437\ Thus, given the tradeoffs
involved in requiring that any money market fund transact at a floating
NAV, we are limiting this reform (and thus the repeal of the special
exemptive relief allowing these funds to price other than as required
under the Investment Company Act) to institutional prime funds.
---------------------------------------------------------------------------
\436\ See infra section III.C.1; see also, e.g., Fidelity
Comment Letter; ICI Comment Letter; Comm. Cap. Mkt. Reg. Comment
Letter.
\437\ See infra section III.C.2 and DERA Study, supra note 24;
see also, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable Comment
Letter; Vanguard Comment Letter.
---------------------------------------------------------------------------
As discussed previously, the first investors to redeem from a
stable value money market fund that is experiencing a decline in its
NAV benefit from a ``first mover advantage'' as a result of rule 2a-7's
current valuation and pricing methods, which allows them to receive the
full stable value of their shares even if the fund's portfolio value is
less.\438\ One possible reason that institutional prime funds may be
more susceptible to rapid heavy redemptions than retail funds is that
their investors are often more sophisticated, have more significant
money at stake, and may have a lower risk tolerance due to legal or
other restrictions on their investment practices.\439\ Institutional
investors may also have more resources to carefully monitor their
investments in money market funds. Accordingly, when they become aware
of potential problems with a fund, institutional investors may quickly
redeem their shares among other reasons, to benefit from the first
mover advantage.\440\ When many investors try to redeem quickly,
whether to benefit from the first mover advantage or otherwise, money
market funds may experience significant stress. As discussed above,
even a few high-dollar redemptions by institutional investors (because
of their greater capital at stake) may have a significant adverse
effect on a fund as compared with retail investors whose investments
are typically smaller and would therefore require a greater number of
redemptions to have a similar effect.\441\ This can lead to the very
dilution of fund shares that we were concerned about when we first
provided the exemptions in rule 2a-7 permitting funds to use different
valuation and pricing methods than other mutual funds to facilitate
maintaining a stable value.\442\
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\438\ See supra section II.B.3. This first mover advantage does
not have the same degree of value in other mutual funds that do not
have a stable value because investors receive the market value of
their shares when redeeming from a floating NAV fund.
\439\ See, e.g., Systemic Risk Council Comment Letter.
\440\ Id.; see, e.g. TIAA-CREF Comment Letter; Systemic Risk
Council Comment Letter.
\441\ See supra text following note 66.
\442\ See infra section III.B.3.b; see, e.g., Schwab Comment
Letter.
---------------------------------------------------------------------------
As discussed in the previous section, our fee and gate reform is
designed to address some of the risks associated with money market
funds that we have identified in this Release, but does not address
them all. In particular, fees and gates are intended to enhance money
market funds' ability to manage and mitigate potential contagion from
high levels of redemptions and make redeeming investors pay their share
of the costs of the liquidity that they receive. But those reforms do
not address the incremental incentive to redeem from a fund with a
shadow price below $1.00 that is at risk of breaking the buck. As a
result of their sophistication, risk tolerance, and large investments,
institutional investors are more likely to redeem at least in part due
to this first mover advantage.\443\
---------------------------------------------------------------------------
\443\ See, e.g. Comment Letter of United Services Automobile
Association (Feb. 15, 2013) (available in File No. FSOC-2012 0003)
(``USAA FSOC Comment Letter''); see, e.g., Systemic Risk Council
Comment Letter; but see, e.g., HSBC Comment Letter (arguing that
first mover advantage that results from the valuation and pricing
methods in rule 2a-7 is overstated in light of the real world issues
with information and time to act, and that other motivations are the
primary driver of redemptions); Dreyfus Comment Letter.
---------------------------------------------------------------------------
This has led to us re-evaluate our decision to provide an exemption
allowing amortized cost valuation and penny rounding pricing for money
market funds with these specific kinds of investors.\444\ As discussed
above, this exemption was originally premised on our expectation that
funds that followed the requirements of rule 2a-7 would be unlikely to
experience material deviations from their stable value. With respect to
prime funds in particular, this expectation has proven inaccurate with
enough regularity to cause concern, especially given the potentially
serious consequences to investors and the markets that can and has
resulted at times. Accordingly, for the reasons discussed above and in
other sections of this Release,\445\ we no longer believe that
exempting institutional prime
[[Page 47775]]
money market funds under section 6(c) of the Act is appropriate--i.e.,
we find that such an exemption is no longer 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.\446\ As discussed in detail in the sections that follow, we are
now rescinding the exemption that allows institutional prime funds to
maintain a stable NAV and are requiring them to price and transact in
their shares at market-based value, like all other mutual funds.\447\
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\444\ A number of commenters agreed with our proposed approach
of only targeting the funds most susceptible to runs (institutional
prime) with the floating NAV requirement. See, e.g., Fin. Svcs.
Roundtable Comment Letter (``. . . a floating NAV confined to
institutional prime funds represents a reasonable targeting of
reform efforts at the segment of the market that has shown the most
proclivity to runs.''); Vanguard Comment Letter.
\445\ See supra section II; infra sections III.B.3.a and
III.B.3.b.
\446\ See supra note 432.
\447\ See, e.g., Systemic Risk Council Comment Letter (``A
floating NAV (for all funds) is the same simple regulatory framework
that applies to all other mutual funds . . .'').
---------------------------------------------------------------------------
This reform is intended to work in concert with the liquidity fees
and gates reforms discussed above (as well as other reforms discussed
in section III.K.3). The floating NAV requirement, applicable only to
institutional prime funds, balances concerns about the risks of heavy
redemptions from these funds in times of stress and the resulting
negative impacts on short-term funding markets and potential dilution
of investor shares, with the desire to preserve, as much as possible,
the benefits of money market funds for investors.\448\ Consistent with
a core objective of the Investment Company Act, the floating NAV reform
may also lessen the risk of unfairness and potential wealth transfers
between holding and redeeming shareholders by mutualizing any potential
losses among all investors, including redeeming shareholders. We do not
intend, and the floating NAV reform does not seek, to deter redemptions
that constitute rational risk management by shareholders or that
reflect a general incentive to avoid loss.\449\ Instead, as discussed
below, the requirement is designed to achieve two independent
objectives: (1) To reduce the first mover advantage inherent in a
stable NAV fund due to rule 2a-7's current valuation and pricing
methods by dis-incentivizing redemption activity that can result from
investors attempting to exploit the possibility of redeeming shares at
the stable share price even if the portfolio has suffered a loss; and
(2) to reduce the chance of unfair investor dilution, which would be
inconsistent with a core principle of the Investment Company Act. An
additional motivation for this reform is that the floating NAV may make
it more transparent to certain of the impacted investors that they, not
the fund sponsors or the federal government, bear the risk of loss.
Many commenters suggested that, among the reform alternatives proposed,
the floating NAV reform is the most meaningful.\450\
---------------------------------------------------------------------------
\448\ See infra section III.B.3 (discussing the benefits of a
floating NAV requirement).
\449\ A number of commenters agreed with this goal. See, e.g.,
Schwab Comment Letter; Systemic Risk Council Comment Letter.
\450\ See, e.g., Boston Federal Reserve Comment Letter; Systemic
Risk Council Comment Letter; Thrivent Comment Letter.
---------------------------------------------------------------------------
2. Summary of the Floating NAV Reform
The liquidity fees and gates amendments apply to all money market
funds (with the exception of government money market funds). Today we
are also adopting a targeted reform designed to address the specific
risks associated with institutional prime money market funds.\451\ We
are doing so by amending rule 2a-7 to rescind certain exemptions that
have permitted these funds to maintain a stable price by use of
amortized cost valuation and/or penny-rounding pricing--as a result,
institutional prime money market funds will transact at a floating
NAV.\452\
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\451\ The floating NAV reform will not apply to government and
retail money market funds. See rule 2a-7(a)(16) (defining
``government money market fund''); rule 2a-7(a)(25) (defining
``retail money market fund''). Government and retail money market
funds are discussed infra in sections III.C.1 and III.C.2.
\452\ Rule 2a-7(c)(1) (Share price calculation). As discussed
below, an institutional prime money market fund may continue to call
itself a ``money market fund'' provided that it follows the other
conditions in rule 2a-7. But it may not use the amortized cost and
penny rounding methods to maintain a stable NAV. See rule 2a-7(b);
infra note 629 and accompanying text (discussing rule 35d-1, the
``names rule'').
---------------------------------------------------------------------------
Under our reform, institutional prime money market funds will value
their portfolio securities using market-based factors and will sell and
redeem shares based on a floating NAV.\453\ Under the final rules, and
as we proposed, institutional prime funds will round prices and
transact in fund shares to four decimal places in the case of a fund
with a $1.00 target share price (i.e., $1.0000) or an equivalent or
more precise level of accuracy for money market funds with a different
share price (e.g., a money market fund with a $10 target share price
could price its shares at $10.000). Institutional prime money market
funds will still be subject to the risk-limiting conditions of rule 2a-
7.\454\ Accordingly, they will continue to be limited to investing in
short-term, high-quality, dollar-denominated instruments, but will not
be able to use the amortized cost or penny rounding methods to maintain
a stable value. Finally, funds subject to the floating NAV reform will
be subject to the other reforms discussed in this Release.
---------------------------------------------------------------------------
\453\ See rule 2a-7(c)(1). We discuss floating NAV money market
fund share pricing in section III.B.4. A money market fund that
currently chooses to use amortized cost valuation typically also
uses a penny-rounding convention to price fund shares. See 1983
Adopting Release, supra note 3. Although not generally used, a money
market fund may also currently choose to maintain a stable NAV
solely by using penny-rounding pricing. As discussed below, these
money market funds would be able to use amortized cost valuation
only to the same 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. See ASR 219, supra note 5; we discuss the use of
amortized cost below. See infra section III.B.5.
\454\ See rule 2a-7(d) (risk-limiting conditions).
---------------------------------------------------------------------------
As discussed in section III.B.9 below, institutional prime money
market funds will have two years to comply with the floating NAV
reform. Although some commenters, including some sponsors of money
market funds, expressed general support for the floating NAV reform as
it was proposed,\455\ the majority of commenters generally opposed
requiring institutional prime money market funds to implement a
floating NAV.\456\ Below, we address the principal considerations and
requirements of the floating NAV reform, discuss comments received, and
how if applicable, the amendments have been revised to address
commenter concerns.
---------------------------------------------------------------------------
\455\ See, e.g., Goldman Sachs Comment Letter; Schwab Comment
Letter; T. Rowe Price Comment Letter; Vanguard Comment Letter;
Comment Letter of CFA Institute (Sept. 19, 2013) (``CFA Institute
Comment Letter'').
\456\ See, e.g., Federated II Comment Letter; Comment Letter of
Arnold & Porter LLP on behalf of Federated Investors (Floating NAV)
(Sept. 13, 2013) (``Federated IV Comment Letter''); Federated X
Comment Letter; J.P. Morgan Comment Letter; Comment Letter of U.S.
Chamber of Commerce, Center for Capital Markets Competitiveness
(Aug. 1, 2013) (``Chamber I Comment Letter''); Chamber II Comment
Letter.
---------------------------------------------------------------------------
3. Certain Considerations Relating to the Floating NAV Reform
a. A Reduction in the Incentive To Redeem Shares
When a money market fund's shadow price is less than the fund's
$1.00 share price, shareholders have an economic incentive to redeem
shares ahead of other investors. In the Proposing Release, we noted
that the size of institutional investors' holdings and their resources
for monitoring funds provide the motivation and means to act on this
incentive, and observed that institutional investors redeemed shares at
a much higher rate than retail investors from prime money market funds
in both September 2008 and June 2011.\457\ We also noted, as some
market
[[Page 47776]]
observers had suggested, that the valuation and pricing techniques
currently permitted by rule 2a-7 may underlie this incentive to redeem
ahead of other shareholders and to obtain $1.00 per share when
investors become aware (or expect) that the actual value of the fund's
shares is below (or will fall below) $1.00.\458\ As discussed below, to
address this incentive, the floating NAV reform mandates that
institutional prime funds transact at share prices that reflect current
market-based factors (not amortized cost or penny rounding, as
currently permitted) and therefore remove investors' incentives to
redeem early to take advantage of transacting at a stable value.
---------------------------------------------------------------------------
\457\ But see supra note 68.
\458\ See Proposing Release, supra note 25, at n.139.
---------------------------------------------------------------------------
Some commenters agreed that a floating NAV mitigates the first
mover incentive to redeem ahead of other shareholders that results from
current rule 2a-7's valuation and pricing methods.\459\ Two commenters
also noted that requiring institutional prime funds to adopt a floating
NAV would force investors who cannot tolerate any share price movement
into other products that better match their risk tolerances.\460\
According to these commenters, investors who remain in floating NAV
funds may have a greater tolerance for loss and may be less likely to
redeem quickly in times of market stress.\461\
---------------------------------------------------------------------------
\459\ See, e.g., Thrivent Comment Letter; TIAA-CREF Comment
Letter; Fin. Svcs. Roundtable Comment Letter; SIFMA Comment Letter;
Systemic Risk Council Comment Letter.
\460\ See Thrivent Comment Letter; Vanguard Comment Letter; see
infra section III.B.3.c.
\461\ See Vanguard Comment Letter.
---------------------------------------------------------------------------
Several commenters generally objected to our reasoning that our
floating NAV reform (by addressing the economic incentive inherent in
rule 2a-7) would reduce the incentive for shareholders to redeem ahead
of other investors in times of market stress, observing that a floating
NAV may not eliminate investors' incentive to redeem to the extent that
it results from the desire to move to investments of higher quality or
greater liquidity.\462\ Both the DERA Study and Proposing Release
discussed this concern.\463\ As the DERA Study noted, the incentive for
investors to redeem ahead of other investors may be heightened by
liquidity concerns--when cash levels are insufficient to meet
redemption requests, funds may be forced to sell portfolio securities
into illiquid secondary markets at discounted or even fire-sale
prices.\464\ The floating NAV reform may not fully address the
incentive to redeem because market-based pricing may 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.\465\
---------------------------------------------------------------------------
\462\ See, e.g., Dreyfus Comment Letter; Federated IV Comment
Letter; Chamber II Comment Letter; Comment Letter of The Squam Lake
Group (Sept. 17, 2013) (``Squam Lake Comment Letter''); Ropes & Gray
Comment Letter.
\463\ See Proposing Release, supra note 25, at section
III.A.1.c.
\464\ See DERA Study, supra note 24, at 4 (noting that most
money market fund portfolio securities are held to maturity, and
secondary markets in these securities are not deeply liquid).
\465\ Id.
---------------------------------------------------------------------------
We acknowledge that a floating NAV does not eliminate the incentive
to redeem in pursuit of higher quality or greater liquidity--indeed, we
intend to address the risks associated with these incentives primarily
through our fees and gates reform. However, we continue to believe that
a floating NAV should mitigate the incentive to redeem due to the
mismatch between the stable NAV price and the actual value of fund
shares because shareholders will receive a market value for their
shares rather than a fixed price when they redeem. Importantly, the
complementary liquidity fees and gates aspect of our money market
reforms would also apply to institutional prime funds that are subject
to a floating NAV. As discussed previously, while not intended to stem
investors' desire to move to more liquid or higher quality investments,
liquidity fees are specifically designed to ensure that redeeming
investors pay the costs of the liquidity they receive, and redemption
gates are designed as a tool to allow funds to manage heavy redemptions
in times of stress and thus reduce the chance of harm to the fund and
investors. In this way, we believe that the totality of our money
market fund reforms addresses comprehensively many features of money
market funds, including the characteristics of their investor base that
can make them susceptible to heavy redemptions, and gives fund boards
new tools for addressing a loss of liquidity that may develop in
funds.\466\
---------------------------------------------------------------------------
\466\ Some commenters agreed that a floating NAV alone is not
enough to address these incentives. See, e.g., Americans for Fin.
Reform Comment Letter (``[w]hile the floating NAV has clear benefits
in making clear that investor assets are at risk of loss, we are
concerned that a floating NAV alone will not create a sufficient
disincentive for investors to engage in `runs' on MMFs.'').
---------------------------------------------------------------------------
One commenter submitted a white paper concluding that (i) liquidity
fees and gates, if implemented effectively, could stop and prevent
runs; and (ii) although a variable NAV would not stop a run, it could
mitigate the first mover advantage associated with the motivation to
run that results from small shadow price departures from $1.00.\467\
The authors of the paper concluded further that the ability of a
variable NAV to mitigate this first mover advantage is overstated when
viewed in light of the real-world costs of moving between investments
that investors will face and, in a significant stress event, such
effect is a minor determinant of behavior.\468\ We acknowledge this
view and agree, as discussed above, that a floating NAV cannot stop
redemptions when (as assumed in the paper) investors are redeeming in a
flight to quality due to a continuing deterioration of the credit risk
in a fund's portfolio. However, the floating NAV reform reduces the
benefit from redeeming ahead of others to at most one half of a
hundredth of a cent per share \469\--100 times less than it is
currently--which investors would weigh against the cost of switching to
an alternative investment.\470\ As we discuss above, the floating NAV
reform is designed to supplement the fees and gates reform only for
those funds that are more vulnerable to credit events (compared to
government funds) and that have an investor base more likely to engage
in heavy redemptions (compared to retail investors) because of, among
other reasons, the first mover advantage created by the funds' current
valuation and pricing practices. Specifically, compared to the current
stable NAV environment, a variable NAV will significantly limit the
value of the first mover advantage. Although this first mover advantage
may not be the main driver of investor decisions to redeem, it
strengthens the incentive to redeem for those investors with the most
at stake from a decline in a fund's value, which increases the chance
of unfair investor dilution in contravention of a core principle of the
Investment Company Act. We continue to believe that a floating NAV
will, for institutional prime funds, reduce the impact of the first
mover advantage associated with money market funds' current valuation
and pricing practices and thus is consistent with our
[[Page 47777]]
obligation to seek to prevent investor dilution of fund shares (as
discussed in more detail in the section below).
---------------------------------------------------------------------------
\467\ See Treasury Strategies III Comment Letter (submitting a
white paper: Carfang, et al., Proposed Money Market Mutual Fund
Regulations: A Game Theory Assessment (using ``game theory''
analysis to evaluate whether a variable NAV and/or a constant NAV,
with or without the ability to impose a liquidity fee or gate, can
prevent or stop a run on money market fund assets).
\468\ Id.
\469\ For example, the floating NAV at 4 decimals will adjust
from $1.0000 to $0.9999 as soon as the value reaches $0.99995.
Hence, the most an investor can benefit from redeeming ahead of
others and switching to an alternative investment is $1.0000-
$0.99995 = $0.00005.
\470\ We discuss the costs associated with institutional
investors transferring between investment alternatives in section
III.K.3.
---------------------------------------------------------------------------
A few commenters also suggested that shareholders in a floating NAV
fund would have the same incentive to redeem if a floating NAV fund
deviates far enough from the typical historical range for market-based
pricing, particularly if they believe the fund may continue to drop in
value.\471\ We note, however, that the floating NAV reform, one part of
our broader reforms to money market funds, is designed to address a
particular structural incentive that exists as a result of existing
valuation and pricing methodologies under rule 2a-7. As we stated in
our proposal and in this Release, the floating NAV reform is not
intended to deter redemptions that constitute rational risk management
by shareholders or that reflect a general incentive to avoid loss.
---------------------------------------------------------------------------
\471\ See, e.g., Federated IV Comment Letter (arguing that,
unlike a stable NAV fund, shareholders may have a greater incentive
to redeem from a declining floating NAV fund because shareholders
would ``realize'' the small declines in value); Chamber II Comment
Letter.
---------------------------------------------------------------------------
Several commenters argued that shareholders may choose not to
redeem from a stable NAV money market fund during times of stress to
avoid contributing to the likelihood that their fund breaks the
buck.\472\ Although this may be the case for some shareholders, as
shown during the financial crisis, other shareholders do redeem from
stable value money market funds, regardless of the impact on the
fund.\473\ It is the actions of those shareholders that have led to our
re-evaluation of the appropriateness of exempting all money market
funds from the valuation and pricing provisions that apply to all other
mutual funds.
---------------------------------------------------------------------------
\472\ See, e.g., Wells Fargo Comment Letter; Ropes & Gray
Comment Letter; ICI Comment Letter.
\473\ See supra section II.
---------------------------------------------------------------------------
One commenter also argued that rule 2a-7 already places a number of
detailed remedial obligations on the board of a money market fund, in
the event a credit event occurs, that are designed to prevent any first
mover advantage related to money market funds' current valuation and
pricing methods.\474\ This commenter discussed, for example, the
existing requirement that fund boards periodically calculate the fund's
shadow price and take action in the event it deviates from the market-
based NAV per share by more than 50 basis points. We note, however,
that the floating NAV reform is designed to proactively address a
structural feature of money market funds that may incentivize heavy
redemptions in times of market stress (and the resulting shareholder
inequities) before a significant credit event occurs or the fund re-
prices its shares using market-based values (i.e., breaks the buck).
Under current rule 2a-7, there remains a first mover advantage until
the fund breaks the buck and re-prices its shares using market-based
valuations. One commenter also noted that any reduction in the
incentive to redeem early from the fund's stable pricing would be
marginal and contingent upon the type of stress experienced.\475\ We
note that the floating NAV reform is targeted towards the funds that
have been most susceptible to heavy redemptions in the past. We believe
that the risks associated with these funds have shown that the first
mover advantage that results from current rule 2a-7's valuation and
pricing methods needs to be addressed. This is particularly true in
light of the Investment Company Act mandate to ensure that investors
are treated fairly and the impact that the first mover advantage has on
investor dilution.
---------------------------------------------------------------------------
\474\ See Federated IV Comment Letter.
\475\ See ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------
Finally, a number of commenters suggested that the evidence of
heavy redemptions in European floating NAV money market funds and U.S.
ultra-short bond funds during 2008, taken together, may be the best
means available to predict whether a floating NAV will reduce
shareholder incentives to redeem shares in times of stress.\476\ These
commenters suggest, therefore, that a floating NAV alone likely would
not stop investors from redeeming shares.\477\ We recognize that many
European floating NAV money market funds and U.S. ultra short bond
funds experienced heavy redemptions during the financial crisis.\478\
We note that, as discussed above, the floating NAV reform is not
intended to wholly prevent heightened redemptions or deter redemptions
that constitute rational risk management by shareholders or that
reflect a general incentive to avoid loss. Instead, our floating NAV
reform is intended to address the incremental incentive to redeem
created by money market funds' current valuation and pricing methods
(and not incentives to redeem that relate to flights to quality and
liquidity) and that exacerbates shareholder dilution.
---------------------------------------------------------------------------
\476\ See, e.g., Federated IV Comment Letter; HSBC Comment
Letter.
\477\ See supra note 475 and accompanying text.
\478\ As we discussed in the Proposing Release, we understand
that many European floating NAV money market funds are priced and
managed differently than floating NAV funds (as we proposed, and as
adopted today). We also noted that Europe 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. Finally, we noted in the Proposing Release that empirical
analysis yields different opinions on whether floating NAV funds, as
compared with stable NAV funds, are less susceptible to run-like
behavior. See Proposing Release, supra note 25, at section
III.A.1.d. Accordingly, we note that the fact that some ultra-short
bond funds and European floating NAV funds experienced heavy
redemptions during the financial crisis does not necessarily suggest
that investors in floating NAV money market funds (as adopted today)
also would redeem heavily in a financial crisis.
---------------------------------------------------------------------------
b. Risks of Investor Dilution
As discussed earlier, one of the Commission's most significant
concerns when originally providing the exemption permitting the use of
amortized cost valuation and penny rounding pricing for money market
funds was to minimize the risks of investor dilution.\479\ A primary
principle underlying the Investment Company Act is that sales and
redemptions of redeemable securities should be effected at prices that
are fair and do not result in dilution of shareholder interests or
other harm to shareholders.\480\ Absent an exemption, a mutual fund
must sell and redeem its redeemable securities only at a price based on
its current net asset value, which equals the value of the fund's total
assets minus the amount of the fund's total liabilities.\481\ A mutual
fund generally must value its assets at their market value, in the case
of securities for which market quotations are readily available, or at
fair value, as determined in good faith by the fund's board of
[[Page 47778]]
directors, in the case of other securities and assets.\482\
---------------------------------------------------------------------------
\479\ See Proposing Release, supra note 25.
\480\ See Investment Trusts and Investment Companies: Hearings
on S. 3580 before a Subcommittee of the Senate Committee on Banking
and Currency, 76th Cong., 3d Sess. 136-38 (1940) (hearings that
preceded the enactment of the Company Act). In addition, all funds
must accurately calculate their net asset values to ensure the
accuracy of their payment of asset-based fees, such as investment
advisory fees, as well as the accuracy of their reported
performance. Statement Regarding ``Restricted Securities,''
Investment Company Act Release No. 5847 (Oct. 21, 1969).
\481\ Rule 22c-1. When calculating its net asset value for
purposes of rule 22c-1: (i) An open-end fund adds up the current
values of all of its assets (using their market values or fair
values, as appropriate), which reflect any unrealized gains; and
(ii) subtracts all of its liabilities, which include any federal
income tax liability on any unrealized gains. If the open-end fund
understates a liability, among other consequences, the price at
which the fund's redeemable securities are redeemed will be higher,
so that redeeming shareholders will receive too much for their
shares while the net asset value of shares held by the remaining
shareholders may be reduced correspondingly when the full amount of
the liability must be paid.
\482\ Rule 2a-4; see also section 2(a)(41) defining the term
``value.''
---------------------------------------------------------------------------
A fund that prices and transacts in fund shares valued at amortized
cost value and rounded to the nearest penny poses a risk of dilution of
investor shares because investors may redeem for the stable value of
their shares even where the underlying market value of the fund's
portfolio may be less. If such a redemption occurs, the value of the
remaining shareholders' shares can be diluted, as remaining
shareholders effectively end up paying redeeming shareholders the
difference between the stable value and the underlying market value of
the fund's assets.\483\ This result is illustrated in the example
provided in the Proposing Release, where we discussed how redeeming
shareholders can concentrate losses in a money market fund.\484\
---------------------------------------------------------------------------
\483\ See TIAA-CREF Comment Letter (``Allowing investors to
transact at daily using amortized pricing in times of stress could
lead to dilution of the remaining investors' shares as the first
redeemers in a run on a money market fund would get a higher
valuation for their shares based on amortized cost than would
subsequent redeemers.'').
\484\ See Proposing Release, supra note 25, at section II.B.1.
---------------------------------------------------------------------------
This risk of dilution is magnified by the ``cliff effect'' that can
occur if a stable value fund is required to re-price its shares. If,
due to heavy redemptions, losses embedded in a fund's portfolio cause
it to re-price its shares from its stable value, remaining money market
fund investors will receive at most 99 cents for every share remaining,
while redeeming investors received the full $1.00, even if the market
value of the fund's portfolio had not changed. In a mutual fund that
transacts using a floating NAV, this cliff effect is minimized because
(assuming pricing to four decimal places) the ``cliff'' is a 1/100th
the size compared to when a money market fund is priced using penny
rounding. In other words, in a floating NAV fund the risk of investor
dilution is far less, in part, because the cliff occurs earlier and is
significantly smaller (at $0.9999 cents, or one hundred times sooner
and smaller than a stable value fund that drops from $1.00 to 99
cents). Thus, the ``cliff effect'' is significantly mitigated in a
floating NAV fund that prices and rounds share prices to four decimal
places.
As we discuss in more detail below, applying a floating NAV only to
institutional investors investing in prime funds and allowing retail
investors to continue to invest in a stable value product recognizes
the historical differences between these types of investors, and
cordons off some of the risks, reducing the chance that heavy
redemptions by institutions will result in disruption or material
dilution of retail investors' shares.\485\ We also recognize that
institutional investors are not always similarly situated, with some
institutions having more or less investment at risk, resources to
monitor their investments, tolerance for losses, or proclivity to
redeem, which makes certain institutional investors less likely to be
among the first movers.\486\ A floating NAV should also help reduce the
risks of material dilution to this subset of institutional investors,
as it will reduce the first mover advantage associated with current
rule 2a-7's valuation and pricing methods, which can prompt heavy
redemptions and can have the effect of diluting the shares of slower-
to-redeem institutional investors.\487\
---------------------------------------------------------------------------
\485\ See infra section III.C.2; see also Schwab Comment Letter
(agreeing that segregating institutional investors from retail
investors would ``reduce the chance that retail investors, who tend
to be slower to react to market events, will absorb a
disproportionate share of the losses if a fund breaks the buck.'').
\486\ See, e.g., ABA Business Law Comment Letter (``It is more
likely, however, that larger institutions have greater analytical
resources than other institutional investors, such as small pension
plans and companies.'').
\487\ Several commenters supported our belief that a floating
NAV treats shareholders more equitably than under current rule 2a-7.
See, e.g., Deutsche Comment Letter; TIAA-CREF Comment Letter;
Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------
A floating NAV might also prompt investors who are the least
tolerant of losses, and thus the most likely to redeem early to avoid a
decline in a fund's NAV per share, to shift into other investment
products, such as government money market funds or other stable value
products that may more appropriately match their risk profile. Such a
shift would further reduce the risks of dilution for the remaining
investors, mitigating the chances that rapid heavy redemptions will
result in negative outcomes for these funds and their investors.
We recognize that our liquidity fees and gates reforms also address
the risks of dilution to some extent. However, fees and gates may not
address the incentives that cause rapid heavy redemptions to occur in
certain money market funds in the first place (although they should
help manage the results). They also are not primarily designed to
address the risks associated with deviations in a fund's NAV caused by
portfolio losses or other credit events; rather, they are designed to
ensure that investors pay the costs of their liquidity and allow funds
time to manage heavy redemptions. A floating NAV requires redeeming
investors to receive only their fair share of the fund when there are
embedded losses in the portfolio (avoiding dilution of remaining
shareholders), even in cases where the fund has sufficient liquidity
such that fees or gates would not be permitted. We believe that the
risks associated with institutional prime money market funds--including
the incentives associated with the first mover advantage that results
from current rule 2a-7's valuation and pricing methods, and associated
heavy redemptions that can worsen a decline in a fund's stable NAV--are
significant enough that they need to be addressed through the targeted
reform of a floating NAV.
c. Enhanced Allocation of Principal Volatility Risk
Today, the risks associated with the principal volatility of a
money market fund's portfolio securities can be obscured by the pricing
and valuation methods that allow these funds to maintain a stable NAV.
In non-money market funds, investors may look to historical principal
volatility as an indicator of fund risk because changes in the
principal may be the dominant source of the total return.\488\
Historical principal volatility in money market funds may not have been
as fully appreciated by investors, because they do not experience any
principal volatility unless the fund breaks the buck (even if such
volatility has in fact occurred).\489\
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\488\ Mutual funds earn money through dividend payments, capital
gains distributions (increases in the price of the fund's portfolio
securities), and increased NAV. See SEC Office of Investor Education
and Advocacy, Mutual Funds, A Guide for Investors (Aug. 2007),
available at http://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf. Money market fund investors may be more likely to focus
on the other components of total return in a fund, such as interest
or dividends.
\489\ Such principal volatility may be even less apparent if the
fund's sponsor provides support for the fund. See supra section
II.B.4.
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Some commenters suggested, and we agree, that transacting at prices
based on current market values means that institutional investors who
invest in floating NAV funds will be more aware of, and willing to
tolerate, occasional fluctuations in fund share prices (largely
resulting from volatility in principal that had been previously
obscured).\490\ This may result in more efficient allocation of risk
through a ``sorting effect'' whereby institutional investors in prime
funds either remain in a floating NAV money market fund and accept the
risks of regular principal
[[Page 47779]]
volatility \491\ or move their assets into alternative investment
products better suited to their actual risk tolerance.\492\
Accordingly, the shareholders who remain in institutional prime money
market funds must be prepared to experience gains and losses in
principal on a regular basis, which may result in those remaining
investors being less likely to redeem at the first sign that a money
market fund may experience such principal volatility.
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\490\ See, e.g. Vanguard Comment Letter.
\491\ We acknowledge, however, that although we expect money
market fund shares priced to four decimal places likely will
fluctuate on a somewhat regular basis, they are not likely to
fluctuate daily primarily due to the high quality and short duration
of the fund's underlying portfolio securities. A few commenters
argued that a floating NAV will not necessarily inform investors
because NAVs may not fluctuate much. See, e.g., Federated IV Comment
Letter; HSBC Comment Letter; ICI Comment Letter. Our staff
estimates, based on a historical analysis of money market fund
shadow prices, that money market funds would have floated just over
50% of the time if priced to four decimal places. See infra note 502
and accompanying text.
\492\ See, e.g. Vanguard Comment Letter (``The reason the
floating NAV would mitigate the risk of disruptive shareholder
redemptions in institutional prime MMFs is that the process of
moving from a stable NAV to a floating NAV will force the
shareholders of those funds, which tend to be concentrated with
professional investors who cannot withstand any share price
movement, into different investment vehicles. The shareholders who
remain will have a greater tolerance for loss, making them less
likely to flee at the first sign of stress.'').
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Some commenters recognized that making principal gains and losses
more apparent to investors could recalibrate investors' perceptions of
the risks inherent in money market funds.\493\ A number of commenters
argued, however, that institutional investors who invest in money
market funds that will be subject to a floating NAV are well aware of
the risks of money market funds and that money market fund shares may
fluctuate in value.\494\ But contrary to institutional investors'
purported existing knowledge of those risks, when the reality of
potential principal losses became more apparent during the financial
crisis, many of them redeemed heavily from money market funds.\495\ Our
floating NAV reform, by requiring that investors experience any gains
or losses in principal when they transact in money market fund shares,
will more fully reveal the risk from changes in the fund's principal
value to shareholders.
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\493\ See, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable
Comment Letter; Boston Federal Reserve Comment Letter.
\494\ See, e.g., Federated IV Comment Letter (citing to comments
submitted on the FSOC Proposed Recommendations); Hanson et al.
Comment Letter. Commenters also noted that investors already
understand that money market funds can ``break the buck.'' See,
e.g., Comment Letter of OFI Global Asset Management, Inc. (Sept. 17,
2013) (``Oppenheimer Comment Letter''); Dreyfus Comment Letter; UBS
Comment Letter; Wells Fargo Comment Letter; Comment Letter of Key
Bank, NA (Sept. 16, 2013) (``Key Bank Comment Letter'').
\495\ Some commenters agreed with this view. See, e.g., American
Bankers Ass'n Comment Letter; Angel Comment Letter.
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Finally, some commenters also suggested that enhanced disclosure
(including daily Web site reporting of shadow NAVs), rather than a
floating NAV, would be a more efficient and less costly way to achieve
the same goal.\496\ We agree that daily disclosure of funds' shadow
NAVs does improve visibility of risk to some degree, by making the
information about NAV fluctuations available to investors should they
choose to seek it out. But the mere availability of this information
cannot provide the same effect that is provided by institutions
experiencing actual fluctuations in the value of their investments (or
acknowledging, through their investment in a fully disclosed floating
NAV investment product, their willingness to accept daily fluctuations
in share price value), which will be provided by a floating NAV.
---------------------------------------------------------------------------
\496\ See, e.g., Federated IV Comment Letter; ICI Comment
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II
Comment Letter. A few commenters suggested that money market funds
be required to transact in fund shares to the same level of
precision as disclosed on fund Web sites, which is the approach that
we are adopting today. See, e.g., Fidelity Comment Letter (stating
that money market funds should disclose (on fund Web sites) the NAV
to the same precision as it prices its shares for transactions in
order to avoid arbitrage opportunities based on asymmetry of
information).
---------------------------------------------------------------------------
4. Money Market Fund Pricing
Having determined to adopt the floating NAV reform for
institutional prime funds, there is a separate (albeit related) issue
of how to price the shares for transactions. Today, for the reasons
discussed previously in this section, we are amending rule 2a-7 to
eliminate the exemption that currently permits institutional prime
funds to maintain a stable NAV through amortized cost valuation and/or
penny rounding pricing.\497\ We are also adopting, as proposed, an
additional requirement that these money market funds value their
portfolio assets and price fund shares by rounding the fund's current
NAV to four decimal places in the case of a fund with a $1.0000 share
price or an equivalent or more precise level of accuracy for money
market funds with a different share price (e.g., a money market fund
with a $10 target share price could price its shares at $10.000).\498\
Accordingly, the final amendments change the rounding convention for
money market funds that are required to adopt a floating NAV--from
penny rounding (i.e., to the nearest one percent) to ``basis point''
rounding (i.e., to the nearest 1/100th of one percent), which is a more
precise standard than other mutual funds use today.
---------------------------------------------------------------------------
\497\ As discussed further below, under our final rule
amendments, government and retail money market funds will be
permitted to use the amortized cost method and/or penny-rounding
method to maintain a stable price per share as they do today.
\498\ See rule 2a-7(c)(1)(ii). Mutual funds that are not relying
on the exemptions provided by rule 2a-7 today are required to price
and transact in fund shares rounded to a minimum of 1/10th of 1
percent, or three decimal places. See ASR 219, supra note 5.
---------------------------------------------------------------------------
We proposed to require that institutional prime funds use basis
point rounding and we noted that basis point rounding appeared to be
the level of sensitivity that would be required if gains and losses
were to be regularly reflected in the share price of money market funds
in all market environments, including relatively stable market
conditions. We also noted that this level of precision may help more
effectively inform investor expectations regarding the floating nature
of their shares.\499\ In money market funds today, there is no
principal volatility unless the fund breaks the buck, and thus this
indicator of risk may not have always been readily apparent.\500\
---------------------------------------------------------------------------
\499\ See Proposing Release, supra note 25, at section III.A.2.
\500\ Some commenters recognized that making gains and losses
more apparent to investors could help recalibrate investors'
perceptions of the risks inherent in money market funds. See, e.g.,
Schwab Comment Letter; Fin Svcs. Roundtable Comment Letter; Boston
Federal Reserve Comment Letter.
---------------------------------------------------------------------------
As discussed in the Proposing Release, we considered, as an
alternative to the basis point rounding requirement that we are
adopting today (which is a condition for relying on rule 2a-7 for
institutional prime money market funds), requiring institutional prime
funds to price and transact in fund shares at a precision of 1/10th of
one percent (which is typically the equivalent of three decimal places
at $10.00 share price) (``10 basis point rounding''), like other mutual
funds. But in the Proposing Release, we noted our concern that 10 basis
point rounding may not be sufficient to ensure that investors can
regularly observe the investment risks that are present in money market
funds, particularly if funds manage themselves in such a way that their
NAVs remain constant or nearly constant.\501\
---------------------------------------------------------------------------
\501\ See supra note 491.
---------------------------------------------------------------------------
In considering whether to require basis point rounding or, instead,
to allow 10 basis point rounding, we have looked to the potential for
price
[[Page 47780]]
fluctuations under the two approaches. Based on our staff analysis of
Form N-MFP data between November 2010 and November 2013, 53% of money
market funds have fluctuated in price over a twelve-month period with a
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.\502\ We recognize that, either way, this limited
fluctuation in prices is the result of the nature of money market fund
portfolios, whose short duration and/or high quality generally results
in fluctuations in value primarily when there is a credit deterioration
or other significant market event.\503\ Because of the nature of money
market fund portfolios, pricing with the accuracy of basis point
rounding should better reflect the nature of money market funds as an
investment product by regularly showing market gains and losses in an
institutional prime money market fund's portfolio.\504\
---------------------------------------------------------------------------
\502\ Our staff has updated its analysis from the discussion in
the Proposing Release. See Proposing Release, supra note 25, at
section III.A.2 and n.164.
\503\ See, e.g., Comment Letter of Arnold & Porter LLP on behalf
of Federated Investors (Elimination of the Use of Amortized Cost
Method of Valuation by Stable Value Money Market Funds) (Sept. 16,
2013) (``Federated VI Comment Letter'').
\504\ See HSBC Comment Letter.
---------------------------------------------------------------------------
After considering the results of the staff's analysis, we are
persuaded to require basis point rounding. We believe that some of the
institutional investors in these funds may not appreciate the risk
associated with money market funds.\505\ As for this subset of
institutional investors, we believe that the basis point rounding
requirement may accentuate the visibility of the risks in money market
funds by causing these shareholders to experience gains and losses when
the funds' value fluctuates by 1 basis point or more.\506\ We further
believe this may, in turn, have two potential effects that are
consistent with our overall goal of addressing features in money market
funds that can make them susceptible to heavy redemption. First, to the
extent that some of these investors become more aware of the risks,
they may develop an increased risk tolerance that could help make them
less prone to run.\507\ Second, by helping make the risk more apparent
through periodic price fluctuations, basis point rounding may help
signal to those investors who cannot tolerate the risk associated with
the fluctuating NAV that they should migrate to other investment
options, such as government funds.\508\ Because basis point rounding
is, as the staff's study demonstrated, more likely to produce price
fluctuations than 10 basis point rounding, we believe it is more likely
to have these desired effects.\509\
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\505\ To be sure, this may not generally include the more
sophisticated institutional investors who have professional
financial experts advising them and carefully monitoring their
investments. See, e.g., Federated IV Comment Letter (citing to
comments submitted on the FSOC Proposed Recommendations; Hanson et
al. Comment Letters). But within the class of institutional
investors, we understand that there are many less sophisticated
investors--e.g., smaller, closely held corporations--who rely on
money market funds to manage their cash flow but who are not fully
aware of the risks and the potential for loss.
\506\ See, e.g., Report of the President's Working Group on
Financial Markets, Money Market Fund Reform Options (Oct. 2010)
(``PWG Report''), available at http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf, 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) (``Federated May
2011 Comment Letter'') (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''). As discussed above, we
believe that our floating NAV reform improves the allocation of risk
and should result in better-informed investors that, by choosing to
invest in a floating NAV, appreciate and are willing to tolerate the
risks of principal volatility, even if those fluctuations do not
occur on a daily basis. See supra section III.B.3.c.
\507\ Several commenters agreed with this position. See, e.g.,
Comment Letter of Eric S. Rosengren, President, Federal Reserve Bank
of Boston, et al. (Sept. 12, 2013) (``Fed Bank President Comment
Letter'') (``We agree with the SEC's position that a floating NAV
requirement, if properly implemented, could recalibrate investors'
perception of the risks inherent in a fund by `making gains and
losses a more regularly observable occurrence'.''); HSBC Comment
Letter.
\508\ See, e.g., Fed Bank President Comment Letter (``Because a
constant NAV MMMF generally draws risk-averse investors, it is
likely that given an appropriate transition period, the investor
base would either change or become more tolerant of NAV
fluctuations, lowering the chance of destabilizing runs.'').
\509\ We are concerned that, were we to adopt 10 basis point
rounding, institutional prime money market funds would not regularly
float during normal market times, in which case certain
institutional investors may not fully appreciate that the investment
has risks and they might thus invest in the product despite their
lower risk tolerance. See, e.g., PWG Report, supra note 506, 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.'').
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a. Other Considerations
We recognize that 10 basis point rounding would provide certain
benefits. For example, it could provide consistency in pricing among
all floating NAV mutual funds and this could reduce investors'
incentives to reallocate assets into other potentially riskier floating
NAV mutual funds (e.g., ultra-short bond funds) that some commenters
suggested may appear to present less volatility. A number of commenters
argued for this alternative, suggesting that money market funds should
not be required to use a more precise rounding convention than what is
required of other mutual funds.\510\
---------------------------------------------------------------------------
\510\ See, e.g., BlackRock II Comment Letter; Legg Mason &
Western Asset Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------
Notwithstanding these potential benefits, as discussed above we
believe there are sufficient countervailing considerations that make it
appropriate to require basis point rounding for institutional prime
money market funds. Further, we are requiring this additional level of
precision because institutional prime money market funds are distinct
from other mutual funds in their regulatory structure, purpose, and
investor risk tolerance, as well as the risks they pose of investor
dilution and to well-functioning markets. Accordingly, we believe on
balance that it is appropriate to require these money market funds to
use a more precise pricing and rounding convention than used by other
mutual funds.
Some commenters also argued that enhanced disclosure (including
daily Web site reporting of shadow NAVs), would be a more efficient and
less costly way to achieve the same goal.\511\ We agree that daily
disclosure of funds' shadow NAVs does improve visibility of risk to
some degree, by making the information about NAV fluctuations available
to investors should they choose to seek it out. But we are skeptical
that, as to the subset of institutional investors who are less aware of
the risks, the mere availability of this information can provide the
same level of impact than is provided by actually experiencing
fluctuations in the investment value (or acknowledging, through these
investors' investment in a fully disclosed floating NAV investment
product, their willingness to accept daily fluctuations in share price
value), which will be provided by a floating NAV priced using basis
rounding. In a similar vein, one commenter suggested that, as an
alternative to a floating NAV, we consider a modified penny-rounding
pricing method whereby a money market fund would be permitted to
calculate an unrounded NAV once each
[[Page 47781]]
day and therefore, absent a significant market event, use the previous
day's portfolio valuation for any intraday NAV calculations.\512\ Under
this approach, money market funds would disclose their basis-point
rounded price, but only transact at the penny-rounded price.\513\
Although we recognize that such an approach would likely retain the
efficiencies associated with amortized cost valuation, this alternative
is not without other risks, including the use of potentially stale
valuation data. More significantly, unlike our floating NAV reform,
this alternative does not address the first-mover advantage or risks of
investor dilution discussed above.\514\
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\511\ See, e.g., Federated IV Comment Letter; ICI Comment
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II
Comment Letter.
\512\ See Comment Letter of Federated Investors, Inc. (Nov. 6,
2013); see also Comment Letter of Arnold & Porter LLP on behalf of
Federated Investors (July 16, 2014). We note that this alternative,
if combined with fees and gates, is very similar to the fees and
gates alternative we proposed (which included a requirement for
penny-rounded pricing). We discuss why we have chosen not to adopt
that alternative in section III.L.1.
\513\ Id.
\514\ See supra section III.B.3.
---------------------------------------------------------------------------
Several commenters argued that basis point rounding is an
artificial means to increase the volatility of floating NAV funds and
would mislead investors by exaggerating the risks of investing in money
market funds compared to ultra-short bond funds, and suggested that
instead we should adopt 10 basis point rounding.\515\ For example, one
commenter noted that basis point rounding is so sensitive that it might
produce price distinctions among funds that result merely from the
valuation model used by a pricing service, rather than from a
difference in the intrinsic value of the securities (``model
noise'').\516\ We do not believe that basis point rounding will mislead
investors, nor do we believe that price changes at the fourth decimal
place will generally be a result of ``model noise'' rather than
reflecting changes in the market value of the fund's portfolio.\517\ We
note that today many money market funds are voluntarily disclosing
their shadow price with basis point rounding, and they are prohibited
from doing so if the shadow price was misleading to investors. Funds
have also been required to report their shadow NAVs to us on Form N-MFP
priced to the fourth decimal place since the inception of the form, and
we have found the shadow NAVs priced at this level useful and relevant
in our risk monitoring efforts. For example, reporting of shadow prices
to four decimal places provides a level of precision (as compared with
three decimal place rounding) needed for our staff to fully evaluate
and monitor the impact of credit events on money market fund share
prices.\518\
---------------------------------------------------------------------------
\515\ See, e.g., Schwab Comment Letter; Stradley Ronon Comment
Letter; SIFMA Comment Letter; Legg Mason & Western Asset Comment
Letter; Fidelity Comment Letter.
\516\ See Goldman Sachs Comment Letter.
\517\ See, e.g., HSBC Comment Letter (noting that basis point
rounding would ``better reflect gains and losses'' than 3 decimal
place rounding).
\518\ Basis point precision will also enable our staff to
monitor the effect of shifts in interest rates on money market fund
share prices (particularly in more regular market conditions).
---------------------------------------------------------------------------
Some commenters also stated that ultra-short bond funds priced
using 10 basis point rounding might appear less volatile than money
market funds priced using basis point rounding.\519\ As a result, these
commenters noted what they viewed as the undesirable effect that
investors might be incentivized to move their assets into ultra-short
bond funds that have similar investment parameters to money market
funds but are not required to adhere to the risk-limiting conditions of
rule 2a-7.\520\ Based on our staff analysis of Morningstar data between
November 2010 and November 2013, 100% of ultra-short bond funds have
fluctuated in price over a twelve-month period with a NAV priced using
10 basis point rounding, compared with 53% of money market funds that
would have fluctuated in price using basis point rounding.\521\
Accordingly, we do not believe that it is likely investors will view
ultra-short bond funds as less volatile than money market funds priced
using basis point rounding. We also note, however, that because
floating NAV money market funds and ultra-short bond funds invest in
different securities and are subject to different regulatory
requirements (including risk-limiting conditions), investors may
consider these factors when evaluating the risk profile of these
different investment products.\522\ Existing disclosure requirements,
along with the amendments to money market fund disclosure requirements
we are adopting today, are designed to help investors understand these
differences and the associated risks.
---------------------------------------------------------------------------
\519\ See, e.g., BlackRock II Comment Letter; Stradley Ronon
Comment Letter; SIFMA Comment Letter; Fidelity Comment Letter.
\520\ We note that other features of ultra-short bond funds may
counter this incentive, including that they are generally not a cash
equivalent for accounting purposes and their less favorable tax
treatment than what the Treasury Department and IRS have proposed
and issued today. See infra section III.B.6.
\521\ Using Morningstar data, our staff analyzed the monthly NAV
fluctuations of 54 active ultra-short bond fund share classes during
November 2010 and November 2013. The money market fund data was
obtained using Form N-MFP data. See supra note 502 and accompanying
text.
\522\ As discussed in infra section III.B.6, the Treasury
Department and the IRS will issue today a revenue procedure that
exempts from the wash sale rule dispositions of shares in any
floating NAV money market fund. This exemption does not apply to
ultra-short bond funds.
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b. Implementation of Basis Point Rounding
One commenter noted that basis point rounding ``should be
relatively straightforward for the industry to accommodate.'' \523\ A
number of commenters, however, objected to our proposed amendment to
require that floating NAV money market funds price and transact their
shares at the fourth decimal place. Commenters stated that pricing and
transacting at four decimal places (as opposed to reporting only their
shadow price at four decimal places) would be operationally expensive
and overly burdensome because money market fund systems are typically
designed for processing all mutual funds,\524\ which generally process
and record transactions rounded to the nearest penny (which is
typically the equivalent of three decimal places at a $10.00 share
price).\525\ We acknowledge that money market funds, intermediaries,
and shareholders will likely incur significant costs in order to modify
their systems to accommodate pricing and transacting in fund shares
rounded to four decimals. We discuss these costs in section III.B.8.a
below. We understand, however, that because virtually all mutual funds
(including money market funds), regardless of price, round their NAV to
the nearest penny, these system change costs will be incurred if we
require money market funds to float their NAV, regardless of whether we
require the use of basis point rounding (unless funds were to re-price
to $10.00 per share).\526\
---------------------------------------------------------------------------
\523\ Comment Letter of Interactive Data Corporation (Sept. 17,
2013) (``Interactive Data Comment Letter'').
\524\ See supra note 500.
\525\ See, e.g., BlackRock II Comment Letter; Invesco Comment
Letter; Schwab Comment Letter; Legg Mason & Western Asset Comment
Letter; ICI Comment Letter.
\526\ We understand that virtually all systems round to the
nearest penny when processing fund share transactions. See ICI
Comment Letter. Accordingly, if a money market fund continued to be
priced at a dollar, even if rounded to the third decimal place, we
understand that similar significant systems changes would be
necessary to transact and report in fund shares priced at $1.000. We
note that money market funds would be able to avoid these costs and
move floating NAV money market funds to existing mutual fund systems
by re-pricing fund shares to $100.00 per share, under a basis point
rounding requirement. See id. We recognize that such a transition
might create other costs, such as proxy solicitation if the fund's
charter prohibits such a re-pricing and potential investor
resistance to using a cash management product that prices based on a
$100.00 initial share price. See id. (noting that basis point
rounding would be workable (without significant costs) if money
market funds moved to a $100.00 price per share, but suggesting that
investors would be unlikely to use a cash management product priced
at this level). We agree with this commenter that it is unlikely
that investors would invest in a money market fund that implements
an initial $100.00 share price in a floating NAV money market fund.
If a money market fund chose to do so, we estimate that each fund
would incur one-time proxy solicitation costs of $100,000. See infra
note 735 and accompanying text.
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[[Page 47782]]
A few commenters also noted that although basis point rounding may
convey the risk of a floating NAV to investors more clearly by
reflecting very small fluctuations in value, it does so at a
significant cost--increasing the tax and accounting burdens associated
with the realized gains and losses that would result from more frequent
changes in a money market fund's NAV per share.\527\ As discussed in
section III.B.6.a below, however, the Treasury Department and IRS are
today proposing a new regulation that would permit investors to elect
to use a ``simplified aggregate mark-to-market method'' to determine
annual realized gains or losses and therefore eliminate the need to
track purchase and sale transactions. Therefore, it is unlikely that
there will be increased operational burdens that result from tax or
accounting costs associated with more frequent realized gains or
losses.\528\
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\527\ See, e.g., BlackRock II Comment Letter; UBS Comment
Letter.
\528\ As discussed in section III.B.6.a.i, however, investors
are likely to incur additional, although small, realized gains and/
or losses as a result of more frequent fluctuations in the share
price under a floating NAV priced to four decimal places.
---------------------------------------------------------------------------
c. Economic Analysis
Under our final amendments, and as we proposed, institutional prime
funds will round prices and transact in fund shares to four decimal
places in the case of a fund with a $1.00 target share price (i.e.,
$1.0000) or an equivalent or more precise level of accuracy for money
market funds with a different share price. During normal market
conditions, rounding prices and transacting in fund shares at four
decimal places will provide investors an opportunity to better
understand the risks of institutional prime funds as an investment
option and will provide investors with improved transparency in
pricing. This should positively affect competition. During times of
stress, it will reduce much of the economic incentive for shareholders
to redeem shares ahead of other investors at a stable net asset value
when the market value of portfolio holdings fall and will reduce
shareholder dilution. As such, the risk of heavy share redemptions
should decrease, and shareholders will be treated more equitably as
they absorb their proportionate share of gains, losses, and costs. In
addition, rounding prices and transacting in fund shares at four
decimal places may help to further reduce the incentive for
shareholders to redeem shares ahead of other investors by helping less
informed investors better understand the inherent risks in money market
funds. As such, the risk of heavy share redemptions may decrease as
investors experience greater information efficiency and allocative
efficiency by better understanding the risks more closely and directing
their investments accordingly. Reducing the risk of heavy share
redemptions by removing the first-mover advantage should promote
capital formation by making money market funds a more stable source of
financing for issuers of short-term credit instruments. We recognize,
however, that as discussed below in section II.K, to the extent that
money flows out of institutional prime floating NAV funds and into
alternative investment vehicles, capital formation may be adversely
affected.
5. Amortized Cost and Penny Rounding for Stable NAV Funds
As discussed above, all money market funds that are not subject to
our targeted floating NAV reform may continue to price fund shares as
they do today and use the amortized cost method to value portfolio
securities.\529\ This approach differs from our 2013 proposal, in which
we proposed to eliminate the use of the amortized cost method of
valuation for all money market funds. At that time, we stated that
amortized cost valuation or penny rounding pricing 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, and in light of the fact that, under our proposal, all
money market funds (including stable NAV funds) would be required to
disclose on a daily basis their fund share prices with their portfolios
valued using market-based factors (rather than amortized cost), we
proposed to eliminate the use of amortized cost for stable NAV funds
(but to continue to permit penny rounding pricing).\530\
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\529\ Stable NAV money market funds may also choose to use the
penny rounding method of pricing fund shares. Under our amendments,
government and retail money market funds will be permitted to
maintain a stable NAV. See infra sections III.C.1 and III.C.2.
\530\ See Proposing Release, supra note 25, at section III.A.3.
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A number of commenters objected to eliminating amortized cost
valuation for stable NAV funds.\531\ Most significantly, commenters
argued that prohibiting the use of amortized cost valuation would
hinder money market funds' ability to provide for intraday purchases
and redemptions and same-day settlement because of the increased time
required to strike a market-based price.\532\ One commenter noted, for
example, that if a money market fund prices at the close of the New
York Stock Exchange, the fund may not be able to complete the penny
rounding process, wire redemption proceeds, and settle fund trades
before the close of the Fedwire.\533\ Commenters also argued that
substituting penny rounding pricing for amortized cost valuation would
increase costs and operational complexity without providing
corresponding benefits.\534\ A few commenters also suggested that, in
assessing whether to eliminate amortized cost valuation for securities
that mature in more than 60 days, we should consider the broader
systemic implications of a potential shift in money market fund
portfolio holdings towards securities that mature within 60
[[Page 47783]]
days (in order to avoid the need to use market-based values).\535\
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\531\ See generally BlackRock II Comment Letter; Dreyfus Comment
Letter; Federated VI Comment Letter; Wells Fargo Comment Letter;
SIFMA Comment Letter. A number of commenters suggested that
amortized cost is an appropriate valuation method for money market
funds because the characteristics of typical portfolio holdings
(i.e., high quality, short duration, and typically held-to-maturity)
result in minimal differences between a money market fund's NAV
calculated using amortized cost and a fund's market-based NAV. See,
e.g., Legg Mason & Western Asset Comment Letter; UBS Comment Letter;
Chamber II Comment Letter. Commenters also suggested that amortized
cost valuation may increase objectivity and consistency across the
fund industry because money market instruments do not often trade in
the secondary markets and therefore the market-based prices may be
less reliable. See, e.g., Federated VI Comment Letter; Goldman Sachs
Comment Letter; Legg Mason & Western Asset Comment Letter.
\532\ See, e.g., Federated VI Comment Letter (suggesting that it
would take a minimum of three to four hours to strike a market-based
NAV (assuming there are no technology problems), compared with as
little as one hour for a fund using penny-rounded pricing and
amortized cost valuation). See also, e.g., Legg Mason & Western
Asset Comment Letter; SunGard Comment Letter; UBS Comment Letter;
ICI Comment Letter; BlackRock II Comment Letter.
\533\ See Federated VI Comment Letter.
\534\ See, e.g., Federated VI Comment Letter (noting that June
2012 survey data from Form N-MFP filings shows that approximately
72% of prime money market fund assets had maturities of less than 60
days). As a result, this commenter suggests that substituting penny
rounding for amortized cost imposes disproportionately high costs
without incremental benefits because a large portion of fund
portfolios will continue to use amortized cost under current
Commission guidance. See also, e.g., Legg Mason & Western Asset
Comment Letter; SunGard Comment Letter; UBS Comment Letter; ICI
Comment Letter.
\535\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment
Letter. As discussed in this section, we are not eliminating, as
proposed, the use of amortized cost valuation for stable NAV money
market funds under our final amendments.
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We no longer believe that, as we stated in the Proposing Release,
there would be little additional cost to funds if we eliminated
amortized cost valuation (and permitted only penny rounding) for all
money market funds (including stable NAV money market funds). Our
belief was, in part, based on the fact that, as proposed (and as we are
adopting today), all money market funds would be required to post on
their Web sites daily shadow prices (determined using market-based
values) rounded to four decimal places. Because, under our proposal
money market funds would be required to obtain daily market-based
valuations in order to post daily shadow prices to fund Web sites, we
believed that funds would have this information readily available (and
therefore not require the use of amortized cost). Notwithstanding this,
commenters noted, however, the ability to use amortized cost valuation
provides a significant benefit to money market funds when compared to
penny rounding pricing--the ability to provide intraday liquidity to
shareholders in a cost-effective and efficient manner. We agree with
commenters that eliminating amortized cost valuation would likely
hinder the ability of funds to provide frequent intraday liquidity to
shareholders and may impose unnecessary costs and operational burdens
on stable NAV money market funds. This is particularly true in light of
the fact that under existing regulatory restrictions and guidance, a
material intraday fluctuation would still have to be recognized in fair
valuing the security. We therefore believe that eliminating amortized
cost valuation in the context of stable NAV funds would be contrary to
a primary goal of our rulemaking--to preserve to the extent feasible,
while protecting investors and the markets, the benefits of money
market funds for investors and the short-term funding markets by
retaining a stable NAV alternative.
Accordingly, we are not adopting the proposed amendments that would
prohibit stable NAV money market funds from using amortized cost to
value portfolio securities. Rather, under the final amendments, stable
NAV funds may continue to price fund shares as they do today, using the
amortized cost method to value portfolio securities and/or the penny
rounding method of pricing. Given the continued importance of amortized
cost valuation under our final rules, we are providing expanded
valuation guidance related to the use of amortized cost and other
related valuation matters in section III.D.
6. Tax and Accounting Implications of Floating NAV Money Market Funds
a. Tax Implications
In the Proposing Release, we discussed two principal tax
consequences of requiring certain money market funds to implement a
floating NAV, potentially causing shareholders to experience taxable
gains or losses. First, under tax rules applicable at the time of the
Proposing Release, floating NAV money market funds (or their
shareholders) would be required to track the timing and price of
purchase and sale transactions in order to determine and report capital
gains or losses. Second, floating NAV funds would be subject to the
``wash sale'' rule, which postpones the tax benefit of losses when
shareholders sell securities at a loss and, within 30 days before or
after the sale, buy substantially identical securities. These tax
consequences generally do not exist today, because purchases and sales
of money market fund shares at a stable $1.00 share price do not
generate gains or losses. Because we are today adopting the floating
NAV requirement for certain money market funds as part of our reforms,
we have continued to analyze the related tax effects. As discussed
below, the Treasury Department and IRS will address these tax concerns
to remove almost all tax-related burdens associated with our floating
NAV requirement.
i. Accounting for Net Gains and Losses
As we discussed in the Proposing Release, we expected taxable
investors in floating NAV money market funds, like taxable investors in
other types of mutual funds, to experience gains and losses.
Accordingly, we expected shareholders in floating NAV money market
funds to owe tax on any realized gains, to receive tax benefits from
any realized losses, and to be required to determine those amounts.
However, because it is not possible to predict the timing of
shareholders' future transactions and the amount of NAV fluctuations,
we were not able to estimate with any specificity the amount of any
increase or decrease in shareholders' tax burdens. Because we expect
that investors in floating NAV money market funds will experience
relatively small fluctuations in value, and because many money market
funds may qualify as retail and government money market funds, any
changes in tax burdens likely would be minimal.
In the Proposing Release, we also noted that tax rules generally
require mutual funds or intermediaries to report to the IRS and
shareholders certain information about sales of shares, including sale
dates and gross proceeds. If the shares sold were acquired after
January 1, 2012, the fund or intermediary would also have to report
basis and whether any gain or loss is long or short term.\536\ At the
time of the Proposing Release, Treasury regulations excluded sales of
stable value money market funds from this transaction reporting
obligation.\537\ We noted that mutual funds and intermediaries (and, we
anticipated, floating NAV money market funds) are not required to make
reports to certain shareholders, including most institutional
investors. The regulations call these shareholders ``exempt
recipients.'' \538\
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\536\ 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) (26 U.S.C. 6045(g), 6045A, and 6045B); see also 26 CFR 1.6045-
1; Internal Revenue Service Form 1099-B. These new basis reporting
requirements and the pre-2012 reporting requirements are
collectively referred to as ``transaction reporting.''
\537\ See 26 CFR 1.6045-1(c)(3)(vi).
\538\ See 26 CFR 1.6045-1(c)(3)(i).
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We have been informed that the Treasury Department and the IRS
today will propose new regulations to make all money market funds
exempt from this transaction reporting requirement, and the exemption
is to be formally applicable for calendar years beginning on or after
the date of publication in the Federal Register of a Treasury Decision
adopting those proposed regulations as final regulations. Importantly,
the Treasury Department and the IRS have informed us that the text of
the proposed regulations will state that persons subject to transaction
reporting may rely on the proposed exemption for all calendar years
prior to the final regulations' formal date of applicability.
Therefore, the Treasury and IRS relief described above is available
immediately.
We noted in the Proposing Release our understanding that the
Treasury Department and the IRS were considering alternatives for
modifying forms and guidance: (1) To include net transaction 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.
Many commenters argued that this potential relief does not go far
enough and noted that, because institutions are exempt recipients,
these
[[Page 47784]]
investors would still incur costs to build systems to track and report
their own basis information and calculate gains and losses.\539\ We
recognized in the Proposing Release the limitations of this potential
tax relief.
---------------------------------------------------------------------------
\539\ See, e.g., BlackRock II Comment Letter; Schwab Comment
Letter; ICI Comment Letter.
---------------------------------------------------------------------------
We have been informed that the Treasury Department and the IRS
today will propose new regulations that will provide more comprehensive
and effective relief than the approaches described in the Proposing
Release. These regulations will, as suggested by one commenter,\540\
make a simplified aggregate method of accounting available to investors
in floating NAV money market funds and are proposed to be formally
applicable for taxable years ending after the publication in the
Federal Register of a Treasury Decision adopting the proposed
regulations as final regulations. Importantly, the Treasury Department
and the IRS have informed us that the text of the proposed regulations
will state that taxpayers may rely on the proposed rules for taxable
years ending on or after the date that the proposed regulations are
published in the Federal Register. That is, because investors may use
this method of accounting before final regulations are published, the
Treasury Department and IRS relief is available as needed before then.
---------------------------------------------------------------------------
\540\ See Comment Letter of George C. Howell, III, Hunton &
Williams LLP, on behalf of Federated Investors (Tax Compliance
Issues Created by Floating NAV) (May 1, 2014) (``Federated XII
Comment Letter'') (suggesting that a ``mark to market'' tax
accounting method would meaningfully resolve the more significant
tax issue (as compared with ``wash sale'' provisions) resulting from
the floating NAV reform).
---------------------------------------------------------------------------
The simplified aggregate method will allow money market fund
investors to compute net capital gain or loss for a year by netting
their annual redemptions and purchases with their annual starting and
ending balances. Importantly, for shares in floating NAV money market
funds, the simplified aggregate method will enable investors to
determine their annual net taxable gains or losses using information
that is currently provided on shareholder account statements and--most
important--will eliminate any requirement to track individually each
share purchase, each redemption, and the basis of each share redeemed.
We expect that the simplified aggregate method will significantly
reduce the burdens associated with tax consequences of the floating NAV
requirement because funds will not have to build new tracking and
reporting systems and shareholders will be able to calculate their tax
liability using their existing shareholder account statements, rather
than tracking the basis for each share. We have also considered the
effect of this relief on the tax-related burdens associated with
accounting for net gains and losses in our discussion of operational
implications below.\541\
---------------------------------------------------------------------------
\541\ See infra section III.B.8.
---------------------------------------------------------------------------
The Treasury Department and IRS have informed us of their intention
to proceed as expeditiously as possible with the process of considering
comments and issuing final regulations regarding the simplified
aggregate method of accounting for floating NAV money market funds. We
note that money market funds and their shareholders may begin using the
simplified method of accounting as needed before the regulations are
finalized. Were the Treasury Department and IRS to withdraw or
materially limit the relief in the proposed regulations, the Commission
would expect to consider whether any modifications to the reforms we
are adopting today may be appropriate.
ii. Wash Sales
As discussed in the Proposing Release, the ``wash sale'' rule
applies when shareholders sell securities at a loss and, within 30 days
before or after the sale, buy substantially identical securities.\542\
Generally, if a shareholder incurs a loss from a wash sale, the loss
cannot be recognized currently and instead must be added to the basis
of the new, substantially identical securities, which postpones the
loss recognition until the shareholder recognizes gain or loss on the
new securities.\543\ 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) and subject to the wash sale
rule.
---------------------------------------------------------------------------
\542\ See 26 U.S.C. 1091.
\543\ Id.
---------------------------------------------------------------------------
Subsequent to our proposal, the Treasury Department issued for
comment a proposed revenue procedure under which redemptions of
floating NAV money market fund shares that generate losses below 0.5%
of the taxpayer's basis in those shares would not be subject to the
wash sale rule (de minimis exception).\544\ Many commenters noted,
however, that the de minimis exception to the wash sale rule does not
mitigate the tax compliance burdens and operational costs that would be
required to establish systems capable of identifying wash sale
transactions, determining if they meet the de minimis criterion, and
adjusting shareholder basis when they do not.\545\
---------------------------------------------------------------------------
\544\ See IRS Notice 2013-48, Application of Wash Sale Rules to
Money Market Fund Shares (proposed July 3, 2013), available at
http://www.irs.gov/pub/irs-drop/n-13-48.pdf.
\545\ See, e.g., ICI Comment Letter; BlackRock II Comment
Letter; Schwab Comment Letter.
---------------------------------------------------------------------------
We understand that these concerns will not be applicable to
floating NAV money market funds. First, under the simplified aggregate
method of accounting described above, taxpayers will compute aggregate
gain or loss for a period, and gain or loss will not be associated with
any particular disposition of shares. Thus, the wash sale rule will not
affect any shareholder that chooses to use the simplified aggregate
method. Second, for any shareholder that does not use the simplified
aggregate method, the Treasury Department and the IRS today will
release a revenue procedure that exempts from the wash sale rule
dispositions of shares in any floating NAV money market fund. This
wash-sale tax relief will be available beginning on the effective date
of our floating NAV reforms (60 days after publication in the Federal
Register). We have also considered the effect of this relief from the
tax-related burdens associated with the wash sale rule in our
discussion of operational implications below.\546\
---------------------------------------------------------------------------
\546\ See infra section III.B.8.
---------------------------------------------------------------------------
b. Accounting Implications
In the Proposing Release, we noted that some money market fund
shareholders may question whether they can treat investments in
floating NAV money market funds as ``cash equivalents'' on their
balance sheets. As we stated in the Proposing Release, and as we
discuss below, it is the Commission's position that, under normal
circumstances, an investment in a money market fund with a floating NAV
under our final rules meets the definition of a ``cash equivalent.''
\547\
---------------------------------------------------------------------------
\547\ See supra section III.A.7 for a discussion of accounting
implications related to the liquidity fees and gates aspect of our
final rules.
---------------------------------------------------------------------------
Many commenters agreed with our position regarding the treatment of
investments in floating NAV money market funds as cash
equivalents.\548\ Most of these commenters, however, suggested that the
Commission issue a more formal pronouncement and/or requested that FASB
and GASB codify our position.\549\ A few commenters
[[Page 47785]]
suggested that our floating NAV requirement raises uncertainty about
whether floating NAV money market fund shares could continue to be
classified as cash equivalents,\550\ and one commenter disagreed and
suggested that it is likely that under present accounting standards
investors would have to classify investments in shares of floating NAV
money market funds as trading securities or available-for-sale
securities (rather than as a cash equivalent).\551\ We have carefully
considered commenters' views and, for the reasons discussed below, our
position continues to be that an investment in a floating NAV money
market fund under our final rules, under normal circumstances, meets
the definition of a ``cash equivalent.'' A more formal pronouncement
(as requested by some commenters) is not required because the federal
securities laws provide the Commission with plenary authority to set
accounting standards, and we are doing so here.\552\ We reiterate our
position below.\553\
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\548\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter; Deloitte Comment Letter; Ernst & Young Comment Letter.
\549\ See, e.g., ICI Comment Letter; BlackRock II Comment
Letter; Fidelity Comment Letter. We do not have authority over the
actions that GASB may or may not take with respect to local
government investment pools (``LGIPs''). See infra section III.C.4.
\550\ See, e.g., J.P. Morgan Comment Letter; Northern Trust
Comment Letter; Boeing Comment Letter.
\551\ See, Federated X Comment Letter (citing to Statement on
Financial Accounting Standards No. 115); see also infra note 429 and
accompanying text.
\552\ The federal securities laws provide the Commission with
authority to set accounting and reporting standards for public
companies and other entities that file financial statements with the
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 29(e), section
30, and section 37(a) of the Investment Company Act.
\553\ We are also amending the Codification of Financial
Reporting Policies to reflect our interpretation under U.S. GAAP, as
discussed below. See infra section VI.
---------------------------------------------------------------------------
The adoption of a floating NAV alone for certain rule 2a-7 funds
will not preclude shareholders from classifying their investments in
money market funds as cash equivalents, under normal circumstances,
because fluctuations in the amount of cash received upon redemption
would likely be small and would be consistent with the concept of a
`known' amount of cash. As already exists today with stable share price
money market funds, events may occur that give rise to credit and
liquidity issues for money market funds so that shareholders would need
to reassess if their investments continue to meet the definition of a
cash equivalent.
7. Rule 10b-10 Confirmations
Rule 10b-10 under the Securities Exchange Act of 1934 (``Exchange
Act'') addresses broker-dealers' obligations to confirm their
customers' securities transactions.\554\ 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.\555\ Rule 10b-10(b), however, provides an
exception for certain transactions in money market funds that attempt
to maintain a stable NAV and where no sales load or redemption fee is
charged. The exception permits broker-dealers to provide transaction
information to money market fund shareholders on a monthly basis
(subject to certain conditions) in lieu of immediate confirmations for
all purchases and redemptions of shares of such funds.\556\
---------------------------------------------------------------------------
\554\ 17 CFR 240.10b-10.
\555\ 17 CFR 240.10b-10(a).
\556\ 17 CFR 240.10b-10(b).
---------------------------------------------------------------------------
Because share prices of institutional prime money market funds
likely will fluctuate, 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 floating NAV money market funds.\557\
Instead, broker-dealers will be required to provide immediate
confirmations for all such transactions. We note, however, that
contemporaneous with this Release, the Commission is providing notice
and requesting comment on a proposed order that, subject to certain
conditions, would grant exemptive relief from the immediate
confirmation delivery requirements of Rule 10b-10 for transactions
effected in shares of any open-end management investment company
registered under the Investment Company Act that holds itself out as a
money market fund operating in accordance with rule 2a-
7(c)(1)(ii).\558\
---------------------------------------------------------------------------
\557\ 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), (limiting alternative monthly reporting to money market
funds that attempt[] to maintain a stable net asset value) (emphasis
added).
\558\ See 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, Exchange Act Release No. 34-72658 (July 23,
2014) (``Notice of Proposed Exemptive Order'').
---------------------------------------------------------------------------
In the Proposing Release, we 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.\559\ Commenters noted that there would be costs of
implementing new systems to generate confirmations and ongoing costs
related to creating and sending trade-by-trade confirmations.\560\ We
estimate below the costs to broker-dealers associated with providing
securities transaction confirmations for floating NAV money market
funds.\561\
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\559\ See ICI Comment Letter; SIFMA Comment Letter at Appendices
1 and 2; Dreyfus Comment Letter; Federated X Comment Letter.
\560\ See, e.g., Federated X Comment Letter.
\561\ Broker-dealers may not incur all of these costs if the
exemptive relief we propose today is adopted.
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We believe that the initial one-time cost to implement, modify, or
reprogram existing systems to generate immediate confirmations (rather
than monthly statements) will be approximately $96,650 on average per
affected broker-dealer, based on the costs that the Commission has
estimated in a similar context of developing internal order and trade
management systems so that a registered security-based swap entity
could electronically process transactions and send trade
acknowledgments.\562\ In addition, we estimate that 320 broker-dealers
that are clearing customer transactions or carrying customer funds and
securities would be affected by this requirement because they would
likely be the broker-dealers responsible for providing trade
confirmations.\563\ As a result, the
[[Page 47786]]
Commission estimates initial costs of $30,928,000 for providing
immediate confirmations for shareholders in institutional prime money
market funds.\564\
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\562\ This estimate is based on the following: [(Sr. Programmer
(160 hours) at $285 per hour) + (Sr. Systems Analyst (160 hours) at
$251 per hour) + (Compliance Manager (10 hours) at $294 per hour) +
(Director of Compliance (5 hours) at $426 per hour) + (Compliance
Attorney (20 hours) at $291 per hour)] = $96,650 per broker-dealer.
See Trade Acknowledgement and Verification of Security-Based Swap
Transactions, Exchange Act Release No. 63727, 76 FR 3859, 3871 n.81
(Jan. 21, 2011). (We note that the original estimate in the Trade
Acknowledgment release contained a technical error in the
calculation stating a cost of $66,650 instead of $96,650 for a
security-based swap entity.) A SIFMA survey also indicates that the
costs are likely to be below $500,000 per firm. See SIFMA Comment
Letter, at Appendices 1 and 2. According to this commenter, after
surveying its members, it found that the vast majority of
respondents estimated that initial costs associated with providing
confirmation statements would fall below $500,000. However, based on
the data provided, it was unclear at what level below $500,000 its
members considered to be the actual cost and whether the firms were
a representative sample (e.g., in terms of size and sophistication)
of the type of firms that would be affected.
\563\ Based on FOCUS Report data as of December 31, 2013, the
Commission estimates that there are approximately 320 broker-dealers
that are clearing or carrying broker-dealers that do not claim
exemptions pursuant to paragraph (k) of Exchange Act rule 15c3-3.
Because not all of these clearing or carrying broker-dealers would
necessarily provide rule 10b-10 confirmations to customers of
institutional prime money market funds, the Commission anticipates
that this is a conservative estimate of the number of clearing or
carrying broker-dealers that would provide trade confirmations to
customers in money market funds subject to the floating NAV
requirement.
\564\ This estimate is based on the following: $96,650 x 320
firms = $30,928,000.
---------------------------------------------------------------------------
To estimate ongoing costs of providing immediate confirmations, one
commenter stated that, based on the data it had gathered, the median
estimated ongoing annual cost associated with confirmation statements
would constitute between 10% and 15% of the initial costs.\565\ To be
conservative, we have estimated that the ongoing annual costs would
constitute 15% of the initial costs. Applying that figure to the
initial costs, the Commission estimates ongoing annual costs of
$4,639,200 for providing immediate confirmations for shareholders in
institutional prime money market funds.\566\
---------------------------------------------------------------------------
\565\ See SIFMA Comment Letter, at Appendices 1 and 2.
\566\ This estimate is based on the following: $30,928,000 x 15%
= $4,639,200.
---------------------------------------------------------------------------
The Commission notes that benefits related to the immediate trade
confirmation requirements under Rule 10b-10 with respect to
institutional prime money market funds are difficult to quantify as
they relate to the additional value to investors provided by having
more timely confirmations with respect to funds that we expect will
experience relatively small fluctuations in value. While the Commission
did not receive any comments regarding these potential benefits, 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.\567\
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\567\ The Commission acknowledges that shareholders that invest
in institutional prime money market funds will continue to have
extensive investor protections separate and apart from the
protections provided under rule 10b-10, including that (1) funds
subject to the floating NAV requirement will continue to be subject
to the ``risk-limiting'' conditions of rule 2a-7, and (2)
information on prices will be available through other means (for
example, under the new fund disclosure requirements of Investment
Company Act Rule 2a-7(h)(10), investors will be able to access a
fund's daily market-based NAV per share on a money market fund's Web
site). See Notice of Proposed Exemptive Order, at 6-7.
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8. Operational Implications of Floating NAV Money Market Funds
a. Operational Implications to Money Market Funds and Others in the
Distribution Chain
In the Proposing Release, we stated that we expect that money
market funds and transfer agents already have laid the foundation
required to use floating NAVs because they are required under rule 2a-7
to have the capacity to redeem and sell fund shares at prices based on
the funds' current NAV pursuant to rule 22c-1 rather than $1.00, i.e.,
to transact at the fund's floating NAV.\568\ 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.\569\ We also noted that before the Commission adopted the
2010 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.\570\
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\568\ See current rule 2a-7(c)(13). See also 2010 Adopting
Release, supra note 17, at nn.362-363.
\569\ See, e.g., 2010 Adopting Release, supra note 17, 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 http://www.ici.org/pdf/ppr_12_operational_mmf.pdf (``ICI Operational Impacts Study'').
\570\ 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).
---------------------------------------------------------------------------
Commenters noted, as we recognized in the Proposing Release,
however, that some funds, transfer agents, intermediaries, and others
in the distribution chain may not currently have the capacity to
process constantly transactions at floating NAVs, as would be required
under our proposal.\571\ Accordingly, consistent with our views
reflected in the Proposing Release and as discussed below, we continue
to 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.\572\ In each case, the procedures and controls that support the
accounting systems at these entities would have to be modified to
permit those systems to calculate a money market fund's floating NAV
periodically each business day and to communicate that value to others
in the distribution chain on a permanent basis.
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\571\ See, e.g., ICI Comment Letter; Comment Letter of Chapin
Davis, Inc. (Aug. 28, 2013) (``Chapin Davis Comment Letter'');
Federated IV Comment Letter.
\572\ 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, supra note 569, at 20. The systems of
sub-transfer agents and other parties may also require modifications
related to the floating NAV requirement. We have included these
anticipated modifications in our cost estimates below.
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Some commenters noted that our floating NAV requirement would
adversely affect cash sweep programs, in which customer cash balances
are automatically ``swept'' into investments in shares of money market
funds (usually through a broker-dealer or other intermediary). For
example, one commenter suggested that sweep programs cannot accommodate
a floating NAV because such programs are predicated on the return of
principal.\573\ Another commenter suggested that the substantial cost
and complexity associated with intraday pricing makes it likely that
many intermediaries will discontinue offering floating NAV
institutional prime money market funds as sweep options, and instead
turn to alternative investment products, including stable NAV
government funds.\574\ Although we do not know to
[[Page 47787]]
what extent, if at all, intermediaries will continue to offer sweep
accounts for floating NAV money market funds, we acknowledge that there
are significant operational costs involved in order to modify sweep
platforms to accommodate a floating NAV product. Accordingly, we
anticipate that sweep account assets currently invested in
institutional prime money market funds will likely shift into
government funds that will maintain a stable NAV under our final rules.
We discuss in the Macroeconomic Effects section below potential costs
related to a migration of assets away from floating NAV funds into
alternative investments, including stable NAV money market funds such
as government funds. Because the amount of sweep account assets
currently invested in institutional prime money market funds is not
reported to us, nor are we aware of such information in the public
domain, we are not able to provide a reasonable estimate of the amount
of sweep account assets that may shift into alternative investment
products.
---------------------------------------------------------------------------
\573\ See, e.g., ICI Comment Letter. Another commenter noted
that the sweep investment product is only feasible in the current
stable-NAV environment because the client knows at the time of
submitting the purchase order how many shares it has purchased, and
how many shares it will receive the next day upon redemption, absent
a break-the-buck event. See State Street Comment Letter.
\574\ See, e.g., Wells Fargo Comment Letter (acknowledging that,
as we stated in the Proposing Release, sweep products may continue
to be viable for floating NAV money market funds because fund
sponsors and other intermediaries will make modifications to price
fund shares periodically during the day, but suggesting that the
costs for broker-dealers to reprogram their systems would be
significant and the operational complexity could be made worse to
the extent that fund sponsors do not standardize the times of day at
which they price shares).
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In the Proposing Release, we also estimated additional costs under
our floating NAV reform that would be imposed on money market funds and
other recordkeepers to track portfolio security gains and losses,
provide ``basis reporting,'' and monitor for potential wash-sale
transactions. As discussed above, we have been informed that, today,
the Treasury Department and the IRS will propose new regulations that
will eliminate the need for money market funds and others to track
portfolio gains and losses and basis information, as well as issue
today a revenue procedure that exempts money market funds from the
wash-sale rules. Accordingly, our cost estimates for the floating NAV
reform have been revised from our proposal to reflect this fact.\575\
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\575\ See supra section III.B.8.a.
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We understand that the costs to modify a particular entity's
existing controls and procedures will 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.\576\ Procedures and controls that support
systems that operate in highly automated operating environments will
likely be less costly to modify while those that support complex
operations with multiple fund types or limited automation or both will
likely be more costly to change. Because each system's capabilities and
functions are different, an entity will likely have to perform an in-
depth analysis of the new 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 \577\ of the potential costs of
modifying procedures and controls, we expect that each entity will bear
one-time costs to modify existing procedures and controls in the
functional areas that are likely to be impacted by the floating NAV
reform.
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\576\ See, e.g., Chamber I Comment Letter.
\577\ We are using the term ``point estimate'' to indicate a
specific single estimate as opposed to a range of estimates.
---------------------------------------------------------------------------
In the Proposing Release, we 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) and 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.\578\ In addition, we noted that we expect money market funds
(and their intermediaries) would incur additional costs associated with
programs and systems modifications necessary to provide shareholders
with access to information about the floating NAV per share online,
through automated phone systems, and on shareholder statements and to
explain to shareholders that the value of their money market funds
shares will fluctuate.\579\ We 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 and that the
ongoing costs to maintain automated phone systems and systems for
processing shareholder statements would range from 5% to 15% of the
one-time costs.\580\ In sum, we estimated that the total range of one-
time implementation costs to money market funds and others in the
distribution chain would be approximately $1,430,000 to $2,790,000 per
entity, with ongoing costs that range between 5% to 15% of these one-
time costs.\581\
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\578\ See Proposing Release, supra note 25, nn.285-86 and
accompanying text. We estimated 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. 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.
\579\ See id. at n.287 and accompanying text. We expect 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.
\580\ See id. at n.288 and accompanying text. We estimate 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 578.
\581\ This estimate is calculated as follows: less extensive
modifications ($1,200,000 + $230,000 = $1,430,000); more extensive
modifications ($2,300,000 + $490,000 = $2,790,000).
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Commenters did not generally disagree with the type and nature of
costs that we estimated will be imposed by our floating NAV reform. One
commenter noted that the costs required to make the necessary systems
changes would not be prohibitive and could be completed within two to
three years.\582\ A number of commenters, however, provided a wide
range of estimated operational costs to money market funds,
intermediaries, and others in the distribution chain. These commenters
suggested that estimated one-time implementation costs would be between
$350,000 to $3,000,000, depending on the affected entity.\583\ One
commenter estimated that it could cost up to $2,300,000 per fund,
transfer agent, or intermediary, to modify systems procedures and
controls to implement a floating NAV.\584\ Another commenter estimated
that it would cost each back office processing service provider
$1,725,000 in one-time costs to implement a floating NAV.\585\ We also
received from commenters some cost estimates provided on a fund complex
level. Two fund complexes estimated their total one-time costs to
implement a floating NAV to be between $10,000,000 to $11,000,000, and
one of the largest money market fund sponsors approximated its one-time
costs to be $28,000,000. Averaged across the number of money market
funds offered, these one-time implementation costs
[[Page 47788]]
range from $306,000 to $718,000.\586\ Another commenter provided survey
data stating that 40% of respondents (asset managers and
intermediaries) estimated that it would cost $2,000,000 to $5,000,000
in one-time costs to implement a floating NAV.\587\ Finally, a few
commenters estimated the one-time costs to the entire fund industry
related to implementing our floating NAV reform.\588\
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\582\ See HSBC Comment Letter.
\583\ See Chamber II Comment Letter (citing Treasury Strategies,
Operational Implications of a Floating NAV across Money Market Fund
Industry Key Stakeholders (Summer 2013) (``TSI Report'')). This
commenter estimated costs for various intermediaries in order to
implement a floating NAV: Corporate treasury management system
vendors ($350,000-$400,000); fund accounting service providers
($400,000-$425,000); broker-dealers and portals ($500,000-$600,000);
transfer agent systems ($2,000,000-$2,500,000); and sweep account
software providers ($2,000,000-$3,000,000). Another commenter
estimated that it would cost approximately $2,000,000 in one-time
costs for a large trust group to implement a floating NAV. See
Treasury Strategies Comment Letter.
\584\ See Federated II Comment Letter.
\585\ See Fin. Info. Forum Comment Letter.
\586\ See Federated X Comment Letter (estimating its one-time
costs to implement a floating NAV to be $11,200,000); Schwab Comment
Letter (estimating its one-time costs to implement a floating NAV to
be $10,000,000); Fidelity Comment Letter (estimating its one-time
costs of implement a floating NAV to be $28,000,000). Based on Form
N-MFP data as of February 28, 2014, the per fund costs are:
Federated $311,000 ($11,200,000 / 36 money market funds); Schwab
$588,000 ($10,000,000 / 17 money market funds); and Fidelity
$718,000 ($28,000,000 / 39 money market funds).
\587\ See SIFMA Comment Letter (stating that another 20% of
survey respondents estimated that one-time implementation costs for
a floating NAV would be between $5,000,000 to $15,000,000). Because
we do not have access to the names of the survey respondents or
their specific cost estimates, we are unable to approximate these
costs on a per fund basis.
\588\ See, e.g., TSI Report (estimating $1.8 to $2.0 billion in
total upfront costs for U.S. institutional money market fund
investors to modify operations in order to comply with a floating
NAV requirement); Angel Comment Letter (estimating $13.7 to $91.5
billion in initial upfront costs related to implementing a floating
NAV reform). As discussed above, we have analyzed a variety of
commenter estimates and provided cost estimates on a per-fund basis.
We are unable, however, to verify the accuracy or make a relevant
comparison between our per-fund cost estimates and the broad range
of costs provided by these commenters that apply to all U.S.
institutional money market fund investors and/or the entire fund
industry.
---------------------------------------------------------------------------
We estimated in the Proposing Release that it would cost each money
market fund, intermediary, and other participant in the distribution
chain approximately $1,430,000 (for less extensive modifications) to
$2,790,000 (for more extensive modifications) in one-time costs to
implement a floating NAV.\589\ Based on staff analysis and experience,
we are revising the estimated operational costs for our floating NAV
reform downward by 15% to reflect the tax relief discussed above.\590\
In addition, as discussed above (and, in a change from our proposal),
our final rules will permit retail and government money market funds to
continue to maintain a stable NAV as they do today and to use amortized
cost valuation and/or penny-rounding pricing. A number of commenters
noted that eliminating the ability of stable NAV funds to use amortized
cost valuation, as we proposed, would impose significant operational
costs on these funds.\591\ Accordingly, based on staff analysis and
experience, we are also revising the estimated operational costs
downward by 5% to reflect the ability of stable NAV funds to continue
to use amortized cost valuation as they do today. We therefore estimate
that it will cost each money market fund, intermediary, and other
participant in the distribution chain approximately $1,144,000 (for
less extensive modifications) to $2,232,000 (for more extensive
modifications) in one-time costs to implement the floating NAV
reform.\592\
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\589\ See supra note 581.
\590\ See supra section III.B.6.a. We note that many commenters
suggested that a primary drawback (and cost) of our floating NAV
reform is the substantial operational costs associated with
complying with tax tracking requirements in a floating NAV fund.
See, e.g., Fin. Svcs. Roundtable Comment Letter; Federated IV
Comment Letter; Fidelity Comment Letter. Although we attribute a 15%
reduction in estimated operational costs to tax-related costs, the
cost savings could be higher or lower than our estimate.
\591\ See supra note 534.
\592\ This estimate is calculated as follows: $1,430,000 x 80% =
$1,144,000 (less extensive modifications); $2,790,000 x 80% =
$2,232,000 (more extensive modifications). A few commenters also
noted that our floating NAV requirement would also result in
significant lost management fees. See, e.g., Federated X Comment
Letter (suggesting that a shift of one-third of assets away from
institutional prime funds would result in annual lost management
fees of approximately $578 million for money market fund advisers
nationwide). We acknowledge that, to the extent there is a
significant outflow of assets from the institutional prime funds
into non-money market funds as a result of the floating NAV
requirement, money market fund managers may experience declines in
management fee income. We discuss the possibility of such shifts in
money market fund assets in our discussion of macroeconomic effects
below.
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We believe that this range of estimated costs generally fits within
the range of costs suggested by commenters as described above (after
accounting for estimated costs savings related to tax relief and the
increased availability of amortized cost valuation, not contemplated by
commenters in their estimates). We note, 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 will likely experience economies of scale.
Accordingly, we expect that the cost for many individual entities that
would have to process transactions at a floating NAV will likely be
less than these estimated costs.\593\
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\593\ For example, the costs will 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.
---------------------------------------------------------------------------
In addition to the estimated one-time implementation costs, we
estimate that funds, intermediaries, and others in the distribution
chain will incur annual operating costs of approximately 5% to 15% of
initial costs. Accordingly, we estimate that funds and other
intermediaries will incur annual operating costs as a result of the
floating NAV reform that range from $57,200 to $334,800.\594\ Most
commenters that addressed this issue directly did not disagree with our
estimate of ongoing costs, although we note that a few commenters
estimated the new annual operating costs to the entire fund industry
related to implementing our floating NAV reform.\595\ One commenter
provided survey data showing that 66% of respondents (asset managers
and intermediaries) estimated that annual costs would approximate 10%
to 15% of initial costs.\596\ Another commenter, however, disagreed
with our estimate of annual operating costs of approximately 5% to 15%
of initial costs and suggested that the annual costs to fund sponsors
will actually be close to the costs of initial implementation. We
disagree. This commenter noted that most of the ongoing cost would
result from the elimination of amortized cost accounting (generally)
and more frequent price calculations using market-based factors.\597\
Because stable NAV money market funds may continue to use amortized
cost valuation under our final rules (unlike our proposal), we believe
this commenter has overstated the ongoing costs under our final
rules.\598\ Therefore, we believe consistent with the comments
received, that it is more appropriate to continue to estimate the
ongoing operational
[[Page 47789]]
costs as approximately 5% to 15% of the initial implementation costs
and are not revising the ongoing cost estimates from our proposal.
---------------------------------------------------------------------------
\594\ This estimate is calculated as follows: less extensive
modifications = $57,200 ($1,144,000 x 5%); more extensive
modifications = $334,800 ($2,232,000 x 15%).
\595\ See, e.g., Chamber II Comment Letter (estimating $2.0 to
$2.5 billion in new annual operating costs relating to the FNAV
reform). As discussed above, most commenters did not specifically
object to our estimated range of ongoing costs on a per-fund basis.
We do not, however, have information available to us to evaluate the
accuracy of cost estimates to the entire fund industry or make a
meaningful comparison of such estimates with our per-fund cost
ongoing cost estimates.
\596\ See SIFMA Comment Letter.
\597\ See Federated X Comment Letter (noting, however, that it
estimates annual operating costs of approximately $231,000 per fund
($5.7 million for pricing services + $1.5 million for transfer agent
services + $2.5 million for technology, training, and other
monitoring costs = $9.7 million / 42 money market funds managed by
Federated = approximately $231,000 per fund). This estimate is
consistent with our estimated range of ongoing costs. See supra note
594.
\598\ We recognize, however, that under our final rules,
floating NAV money market funds will incur increased costs as a
result of the elimination of amortized cost valuation. These costs,
discussed above, are significantly lower than those that funds would
incur under our proposal (that would have eliminated amortized cost
valuation for all money market funds, including those funds not
subject to our floating NAV reform).
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b. Operational Implications to Money Market Fund Shareholders
In addition to money market funds and other entities in the
distribution chain, each money market fund shareholder will also likely
be required to analyze 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. We
describe below the types of activities typically involved in making
systems modifications and estimate a range of hours and costs that we
anticipate will be required to perform these activities. We sought
comment in the Proposing Release regarding the potential costs of
system modifications for money market fund shareholders, and the
comments we received, along with the differences between our proposal
and the final rules, have informed our estimates.
In the Proposing Release, we 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. In deriving our
estimates, we considered the need to modify systems and related
procedures and controls related to recordkeeping, accounting, trading,
and cash management, and to provide training concerning these
modifications. We estimated that a shareholder whose systems (including
related procedures and controls) would require less extensive
modifications would incur one-time costs ranging from $123,000 to
$253,000, while a shareholder whose systems (including related
procedures and controls) would require more extensive modifications
would incur one-time costs ranging from $1.4 million to $2.9
million.\599\
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\599\ We estimate 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.
---------------------------------------------------------------------------
Most commenters did not disagree with our cost estimates. One
commenter stated that it expects at least 50% of institutional
investors in money market funds will require some systems development
to be able to invest in a floating NAV money market fund. This
commenter also noted that having sufficient time to implement the
changes is a more important factor than cost in determining the extent
to which corporate treasurers, for example, would use a floating NAV
fund product.\600\ Another commenter acknowledged our range of
estimated costs and suggested that while these estimates may not appear
substantial at first glance, when viewed in the context of current
money market fund returns, such costs represent a significant
disincentive to continued investment in institutional prime funds.\601\
Although we acknowledge that the costs to money market fund
shareholders may make investing in floating NAV money market funds
uneconomical given the current rates of return, we note that we are
adopting a two-year compliance period that may, to the extent that
interest rates return to more typical levels, counter any disincentive
that may exist currently.\602\
---------------------------------------------------------------------------
\600\ See HSBC Comment Letter.
\601\ See Wells Fargo Comment Letter.
\602\ See infra section III.N.2. for a discussion of the
floating NAV compliance date.
---------------------------------------------------------------------------
The TSI Report \603\ provided ranges of costs that it expects would
be imposed on floating NAV money market fund shareholders. These costs
ranged from $250,000 for a U.S. business that invests in floating NAV
money market funds and makes the fewest changes possible, to $550,000
for a government-sponsored entity money market fund shareholder.\604\
We have carefully considered this range of costs to shareholders
provided by the commenter and the changes from the proposal to the rule
that we are adopting today, and we now believe that it is appropriate
to decrease our cost estimates from the proposal. Accordingly, we
estimate that a shareholder whose systems (including related procedures
and controls) would require less extensive modifications would incur
one-time costs ranging from $212,500 to $340,000, while a shareholder
whose systems (including related procedures and controls) would require
more extensive modifications would incur one-time costs ranging from
$467,500 to $850,000. We believe that these estimates better reflect
the changes in our final rules from those that we proposed.\605\ We
also recognize that these estimates are more consistent with the range
of cost estimates provided by this commenter. We estimate that the
annual maintenance costs to these systems and procedures and controls,
and the costs to provide continuing training, will range from 5% to 15%
of the one-time implementation costs.\606\
---------------------------------------------------------------------------
\603\ See supra note 583.
\604\ See id., TSI Report (estimating that the one-time
implementation costs would range from $350,000 to $370,000 for a
corporate investor; $275,000 to $300,000 for a public university
investor; $325,000 to $350,000 for a municipality investor; and
$400,000 to $425,000 for a fiduciary investor).
\605\ Consistent with our cost estimates discussed above for
funds, intermediaries, and others in the distribution chain, we have
considered in these estimates cost savings related to the tax relief
discussed above. See supra section III.B.8.a.
\606\ See supra note 578. Commenters did not address
specifically our estimate of ongoing costs to money market fund
shareholders in floating NAV funds. Accordingly, we are not amending
our estimate from the proposal.
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c. Intraday Liquidity and Same-Day Settlement
As discussed below, we believe that floating NAV money market funds
should be able to continue to provide shareholders with intraday
liquidity and same-day settlement by pricing fund shares periodically
during the day (e.g., at 11 a.m. and 4 p.m.). In the Proposing Release,
we noted that 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.
Shareholders generally are able to transact in fund shares at a stable
value known in advance, which permits money market fund transactions to
settle on the same day that an investor places a purchase or sell order
and determine the exact value of his or her money market fund shares
(absent a liquidation event) at any time. These features have made
money market funds an important component of systems for processing and
settling various types of transactions.
Some commenters have expressed concern that intraday liquidity and/
or same-day settlement would not be available to investors in floating
NAV money market funds. These commenters point to, for example,
operational challenges such as striking the NAV multiple times during
the day while needing to value each portfolio security using market-
based values.\607\ A few commenters also noted that pricing services
may not be able to provide periodic pricing throughout the day.\608\
Some commenters also raised concerns about the additional costs
involved with striking the NAV multiple times per
[[Page 47790]]
day, including, for example, costs for pricing services to provide
multiple quotes per day and for accounting agents to calculate multiple
NAVs.\609\ On the other hand, one commenter who provides pricing
services noted that, while providing intraday liquidity and same-day
settlement for floating NAV funds would require some investment, they
believe that calculating NAVs multiple times per day is feasible within
our proposed two-year compliance period.\610\ A few commenters further
noted that transfer agents will need to enhance their systems to
account for floating NAV money market funds and condense their
reconciliation and audit processes (which may, for example, increase
the risk of errors).\611\
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\607\ See, e.g., BlackRock II Comment Letter; ICI Comment
Letter; Chamber II Comment Letter.
\608\ See, e.g., Federated IV Comment Letter; Interactive Data
Comment Letter; Chamber II Comment Letter.
\609\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter; State Street Comment Letter.
\610\ See Interactive Data Comment Letter. Another commenter
noted that money market funds would still be able to provide same-
day settlement in floating NAV funds. See State Street Comment
Letter.
\611\ See J.P. Morgan Comment Letter; Dreyfus Comment Letter;
Comment Letter of DST Systems, Inc. (Sept. 18, 2013) (``DST Systems
Comment Letter'').
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A few commenters also asserted that if floating NAV funds are
unable to provide same-day settlement, this could affect features that
are particularly appealing to retail investors, such as ATM access,
check writing, and electronic check payment processing services and
products.\612\ First, as discussed below, we believe that many floating
NAV money market funds will continue to be able to provide same-day
settlement. Second, we note that under the revised retail money market
fund definition adopted today, retail investors should have ample
opportunity to invest in a fund that qualifies as a retail money market
fund and thus is able to maintain a stable NAV. As a result, this
should significantly alleviate concerns about the costs of altering
these features and permit a number of funds to continue to provide
these features as they do today. Nonetheless, we recognize that not all
funds with these features may choose to qualify as retail money market
funds, 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.
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\612\ See, e.g., Fidelity 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.'').
---------------------------------------------------------------------------
We understand that many money market funds currently permit same-
day trading up until 5 p.m. Eastern Time. These funds do so because
amortized cost valuation allows funds to calculate their NAVs before
they receive market-based prices (typically provided at the end of the
day after the close of the Federal Reserve Cash Wire). We recognize
that, under the floating NAV reform, closing times for same-day
settlement will likely need to be moved earlier in the day to allow
sufficient time to calculate the NAV prior to the close of the Federal
Reserve Cash Wire. One commenter suggested that it will take a minimum
of three to four hours to strike a market-based NAV price.\613\ As a
result, investors in floating NAV money market funds may not have the
ability to redeem shares late in the day, as they can today. We also
recognize that floating NAV money market funds may price only once a
day, at least until such time as pricing vendors are able to provide
continuous pricing throughout the day.\614\ We considered these
potential costs as well as the benefits of our floating NAV reform and
believe that, as discussed above, it is appropriate to address, through
the floating NAV reform, the incremental incentive that exists for
shareholders to redeem in times of stress from institutional prime
money market funds. We note, however, that because stable NAV money
market funds may continue to use amortized cost as they do today (as
revised from our proposal), these same-day settlement concerns raised
by commenters here would be limited to institutional prime funds--the
only money market funds subject to the floating NAV reform.\615\
---------------------------------------------------------------------------
\613\ See Federated II Comment Letter.
\614\ See SIFMA Comment Letter (noting that in its survey of
members, 60% of asset managers expect to price their floating NAV
money market funds only once per day, which is less frequent than
currently offered by most money market funds). See also
Institutional Cash Distributors, ICD Commentary: Operational and
Accounting Issues with the Floating NAV and the Impact on Money
Market Funds (July 2013), available at http://www.sec.gov/comments/
;s7-03-13/s70313-40.pdf. One commenter noted that they are already
investing in new technology that includes real-time debt security
evaluations. See Comment Letter of Interactive Data.
\615\ See SIFMA Comment Letter (noting that, under our proposal,
the impediment to same-day settlement exists for stable NAV money
market funds as well as floating NAV money market funds because both
types of funds would be prohibited from using amortized cost for
securities with remaining maturities over 60 days). As noted above,
we are no longer prohibiting stable NAV funds from using amortized
cost.
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We sought comment in the Proposing Release on the costs associated
with providing same-day settlement and for pricing services to provide
prices multiple times each day. One commenter provided survey data that
estimated the range of costs for floating NAV funds to offer same-day
settlement. Seventy-five percent of respondents estimated the one-time
costs to be approximately $500,000 to $1 million, and 25% of
respondents estimated the one times costs to be approximately $1
million to $2 million.\616\ Sixty-six percent of respondents
approximated ongoing costs that would range between 10-15% of initial
costs.\617\ We did not receive other quantitative estimates
specifically on the costs associated with modifying systems to allow
for same-day settlement by floating NAV funds.\618\ We have carefully
considered this survey data with respect to same-day settlement issues
in arriving at our aggregate operational cost estimates discussed above
in section III.B.8.a.\619\
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\616\ As discussed supra in note 587, we do not have access to
the names of the survey respondents or their specific cost estimates
and are therefore unable to approximate these costs on a per fund
basis. Accordingly, the costs on a per fund basis will likely be
significantly lower than the figures provided here.
\617\ See SIFMA Comment Letter.
\618\ We note that some commenters may have included costs
associated with enabling floating NAV funds to provide same-day
settlement in their cost estimates of operational implications
generally. These costs are discussed above.
\619\ We have based our cost estimates for same-day settlement
principally on staff experience and expertise. In assessing the
reasonableness of our estimates, we considered as an outer bound the
survey data provided by SIFMA (although as noted above, the survey
respondents likely represent fund complexes and thus we are not able
to determine these costs on a per fund basis). We estimate that
money market funds will likely establish twice per day pricing as
the appropriate balance between current money market fund practice
to provide multiple settlements per business day and the additional
costs and complexities involved in pricing money market fund shares
using market-based values.
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9. Transition
We are providing a two-year compliance date (as proposed) for money
market funds to implement the floating NAV reform. A long compliance
period will give more time for funds to implement any needed changes to
their investment policies and train staff, and also will provide more
time for investors to analyze their cash management strategies. This
compliance period will also give time for retail money market funds to
reorganize their operations and establish new funds. Importantly, this
compliance period will allow additional time for the Treasury
Department and IRS to consider finalizing rules addressing certain tax
issues relating to a floating NAV described above and for the
[[Page 47791]]
Commission to consider final rules removing NRSRO ratings from rule 2a-
7,\620\ so that funds could make several compliance-related changes at
one time.
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\620\ See Removal of Certain References to Credit Ratings and
Amendment to the Issuer Diversification Requirement in the Money
Market Fund Rule, Investment Company Act Release No. IC-31184 (July
23, 2014).
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We acknowledge, as discussed in the Proposing Release and as noted
by some commenters, that a transition to a new regulatory regime could
itself cause the type of heavy redemptions that the amendments,
including the floating NAV reform, are designed to prevent.\621\ In the
proposal, we noted that our proposed two-year compliance period would
benefit money market funds and their shareholders by allowing money
market funds to make the transition to a floating NAV at the optimal
time and potentially not at the same time as all other money market
funds. In addition, we stated our belief that money market fund
sponsors would use the relatively long compliance period to select an
appropriate conversion date that would minimize the risk that
shareholders may pre-emptively redeem shares at or near the time of
conversion if they believe that the market value of their shares will
be less than $1.00. Several commenters reiterated this concern, with
one commenter noting that shareholders in floating NAV money market
funds may be incentivized to redeem in order to avoid losses or realize
gains, depending on the expected NAV at the time of conversion.\622\ A
few commenters suggested that money market funds will likely be
unwilling or unable to stagger their transitions over our proposed two-
year transition period, but did not provide any survey data or other
support for their beliefs.\623\
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\621\ See, e.g., Dreyfus Comment Letter; Goldman Sachs Comment
Letter. The PWG Report suggests that a transition to a floating NAV
could itself result in significant redemptions. See PWG Report,
supra note 506, at 22.
\622\ See Stradley Ronon Comment Letter.
\623\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment
Letter.
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We continue to believe that an extended compliance period (as
adopted, two years) should help mitigate potential pre-emptive
redemptions by providing money market fund shareholders with sufficient
time to consider the reforms and decide, if they determine that a
floating NAV investment product is not appropriate or desirable, to
invest a stable NAV retail or government money market fund or an
alternative investment product. We recognize that, although money
market funds may comply with the rule amendments at any time between
the effective date and the compliance date, in practice, money market
funds may implement amendments relating to floating NAV near the end of
the transition period, which may further cause the potential for
widespread redemptions prior to the transition. Although a few
commenters suggested as much,\624\ we did not receive any survey data
and we are not able to reasonably estimate the extent to which money
market funds may or may not stagger their transition to a floating NAV.
---------------------------------------------------------------------------
\624\ Id.
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We note, however, that in order to mitigate this risk, money market
fund managers could take steps to ensure that the fund's market-based
NAV is $1.00 or higher at the time of conversion and communicate to
shareholders the steps that the fund plans to take ahead of time in
order to mitigate the risk of heavy pre-emptive redemptions, though
funds would be under no obligation to do so. Even if funds took such
steps, investors may pre-emptively withdraw their assets from money
market funds that will transact at a floating NAV to avoid this risk.
We note, however, that while a two-year compliance period does not
eliminate such concerns, we expect, as discussed above, that providing
a two-year compliance period will allow money market funds time to
prepare and address investor concerns relating to the transition to a
floating NAV, and therefore possibly mitigate the risk that the
transition to a floating NAV, itself, could prompt significant
redemptions. In addition, the liquidity fees and gates reforms will be
effective and therefore available to fund boards as a tool to address
any heightened redemptions that may result from the transition to a
floating NAV.\625\
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\625\ We will monitor fund redemption activity during the
transition period and consider appropriate action if it appears
necessary. For example, such action could include SEC Staff
contacting fund groups to determine the nature of any stress from
redemption activity and the potential need for any exemptive or
other relief.
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C. Effect on Certain Types of Money Market Funds and Other Entities
1. Government Money Market Funds
The fees and gates and floating NAV reforms included in today's
Release will not apply to government money market funds, which are
defined as a money market fund that invests at least 99.5% of its total
assets in cash, government securities,\626\ and/or repurchase
agreements that are ``collateralized fully'' (i.e., collateralized by
cash or government securities).\627\ In addition, under today's
amendments, government money market funds may invest a de minimis
amount (up to 0.5%) in non-government assets,\628\ unlike our proposal
and under current rule 2a-7, which permits government money market
funds to invest up to 20% of total assets in non-government
assets.\629\
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\626\ A ``government security'' is backed by the full faith and
credit of the U.S. government. See rule 2a-7(a)(17); section
2(a)(16).
\627\ See rule 2a-7(a)(5) (defining ``collateralized fully'' by
reference to rule 5b-3(c)(1), which requires that collateral be
comprised of cash or government securities).
\628\ Non-government assets would include all ``eligible
securities'' permitted under rule 2a-7 other than cash, government
securities (as defined in section 2(a)(16), or repurchase agreements
that are ``collateralized fully'' (as defined in rule 5b-3).
\629\ Under current rule 2a-7 (and as proposed), a government
money market fund is defined based on the portfolio holdings test
used today for determining the accuracy of a fund's name (``names
rule''). See Proposing Release, supra note 25, n.169 and
accompanying text (rule 35d-1 states that 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). While in the
Proposing Release we discussed the definition of government money
market fund in the context of the proposed floating NAV reform, this
definition also was applicable to the proposed fees and gates
reform. We understand that government money market funds today
invest in other government money market funds (``fund of funds'')
and look through those funds to the underlying securities when
determining compliance with rule 35d-1, or the ``names rule.''
Accordingly, we expect that money market funds will continue to
evaluate compliance with what investments qualify under our
definition of government money market fund in the same way, and
therefore categorize, as appropriate, investments in other
government money market funds as within the 99.5% government-asset
basket.
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Additionally, as proposed, a government money market fund will not
be required to, but may, impose a fee or gate if the ability to do so
is disclosed in a fund's prospectus and the fund complies with the fees
and gates requirements in the amended rule.\630\
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\630\ See rule 2a-7(c)(2)(iii). Any government money market fund
that chooses not to rely on rule 2a-7(c)(2)(iii) may wish to
consider providing notice to shareholders. We believe at least sixty
days written notice of the fund's ability to impose fees and gates
would be appropriate.
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With respect to the floating NAV reform, most commenters supported
a reform that does not apply to government money market funds.\631\
[[Page 47792]]
Commenters noted that government funds pose significantly less risk of
heavy investor redemptions than prime funds, have low default risk and
are highly liquid even during market stress, and experienced net
inflows during the financial crisis.\632\ Also, few commenters
explicitly supported or opposed excluding government funds from the
fees and gates reforms. Of these commenters, a few supported a narrowly
tailored fees and gates reform that does not apply to government money
market funds,\633\ and a few commenters argued that all types of money
market funds--including government money market funds--should have the
ability to apply a fee or gate.\634\
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\631\ See, e.g., J.P. Morgan Comment Letter; T. Rowe Price
Comment Letter; Vanguard Comment Letter; ICI Comment Letter; IDC
Comment Letter. But see Comment Letter of J. Huston McCulloch (Sept.
13, 2013) (``McCulloch Comment Letter'') (suggesting that the
floating NAV reform also apply to government money market funds and
noting that even short-term treasury bills fluctuate in present
value). As discussed below, we continue to believe that our floating
NAV reform should not apply to government funds. Our belief is
based, in part, on the strong commenter support in favor of a more
targeted floating NAV reform that addresses the incremental
incentive for institutional investors to redeem from prime funds,
and our stated goal of preserving as much as possible the benefits
of money market funds for most investors, while appropriately
balancing concerns about the risks of heavy redemptions in prime
funds during times of stress and the harm this can cause to short-
term funding markets.
\632\ See, e.g., J.P Morgan Comment Letter; ICI Comment Letter;
IDC Comment Letter; T. Rowe Price Comment Letter.
\633\ See, e.g., BlackRock II Comment Letter, (``Government MMFs
. . . should not be required to implement liquidity fees and
gates.''); J.P. Morgan Comment Letter.
\634\ See, e.g., U.S. Bancorp Comment Letter, (``If ultimately
adopted, gating should be available to all classes of funds . .
.''); HSBC Comment Letter, (``[W]e believe all MMFs should be
required to have the power to apply a liquidity fee or gate so that
the MMF provider can manage a low probability but high impact
event.'').
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We continue to believe that government money market funds should
not be subject to the fees and gates and floating NAV reforms. As
discussed in the Proposing Release, government money market funds face
different redemption pressures and have different risk characteristics
than other money market funds because of their unique portfolio
composition.\635\ The securities primarily held by government money
market funds typically have a lower credit default risk than commercial
paper and other securities held by prime money market funds and are
highly liquid in even the most stressful market conditions.\636\ As
noted in our proposal, government funds' primary risk is interest rate
risk; that is, the risk that changes in the interest rates result in a
change in the market value of portfolio securities.\637\ Even the
interest rate risk of government money market funds, however, is
generally mitigated because these funds typically hold assets that have
short maturities and hold those assets to maturity.\638\
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\635\ Proposing Release, supra note 25, at section III.A.3. See
also DERA Study, supra note 24, at 8-9.
\636\ Proposing Release, supra note 25, at section III.A.3.; see
also J.P. Morgan Comment Letter; Vanguard FSOC Comment Letter.
\637\ See Proposing Release, supra note 25, at 66.
\638\ See Proposing Release, supra note 25, n.173.
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As discussed in the DERA Study and below, government money market
funds historically have experienced inflows, rather than outflows, in
times of stress.\639\ In addition, the assets of government money
market funds tend to appreciate in value in times of stress rather than
depreciate.\640\ Most government money market funds always have at
least 30% weekly liquid assets because of the nature of their portfolio
(i.e., the securities they generally hold, by definition, are weekly
liquid assets). Accordingly, with respect to fees and gates, the
portfolio composition of government money market funds means that these
funds are less likely to need to use these tools.
---------------------------------------------------------------------------
\639\ See DERA Study, supra note 24, at 6-13.
\640\ See Proposing Release, supra note 25, n.412.
---------------------------------------------------------------------------
We have also determined not to impose the fees and gates and
floating NAV reforms on government money market funds in an effort to
facilitate investor choice by providing a money market fund investment
option that maintains a stable NAV and that does not require investors
to consider the imposition of fees and gates. As noted above, we expect
that some money market fund investors may be unwilling or unable to
invest in a money market fund that floats its NAV and/or can impose a
fee or gate.\641\ By not subjecting government money market funds to
the fees and gates and floating NAV reforms, fund sponsors will have
the ability to offer money market fund investment products that meet
investors' differing investment and liquidity needs.\642\ We also
believe that this approach preserves some of the current benefits of
money market funds for investors. Based on our evaluation of these
considerations and tradeoffs, and the more limited risk of heavy
redemptions in government money market funds, we believe it is
preferable to tailor today's reforms and not apply the floating NAV
requirement to government funds, but to permit them to implement the
fees and gates reforms if they choose.\643\
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\641\ For example, there could be some types of investors, such
as sweep accounts, that may be unwilling to invest in a money market
fund that could impose a gate because such an investor generally
requires the ability to immediately redeem at any point in time,
regardless of whether the fund or the markets are distressed.
\642\ To the extent a number of government funds opt in to the
fees and gates requirements, and there exists investor demand to
invest in government funds that are not subject to the fees and
gates reforms, we believe market forces and competitive pressures
may lead to the creation of new government funds that do not
implement fees and gates.
\643\ Although government money market funds may opt-in to fees
and gates, we expect these funds will rarely impose fees and gates
because their portfolio assets present little credit risk.
---------------------------------------------------------------------------
We also sought comment on the appropriate size of the non-
government basket. Notwithstanding the relative safety and stability of
government money market funds, we noted our concern that a credit event
in this 20% basket or a shift in interest rates could trigger a decline
in a fund's shadow price and therefore create an incentive for
shareholders to redeem shares ahead of other investors (similar to that
described for institutional prime funds subject to the floating NAV
reform). We stated in the Proposing Release our preliminary belief that
the benefits of retaining a stable share price money market fund option
and the relative safety in a government money market fund's 80% basket
appropriately counterbalances the risks associated with the 20% portion
of a government money market fund's portfolio that may be invested in
non-government securities.\644\
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\644\ The Proposing Release also would have required unaffected
stable NAV funds, including government money market funds, to
maintain a stable NAV through penny-rounding pricing (and generally
eliminate amortized cost valuation except for securities with
remaining maturities of 60 days or less). As discussed in section
III.B.5, however, we have revised our approach and will permit
stable NAV funds to continue to value portfolio securities using
amortized cost and price fund shares using penny-rounding, as they
do today. We are also providing expanded guidance on the use of
amortized cost. See infra section III.D.
---------------------------------------------------------------------------
A number of commenters, however, raised concerns that the proposed
definition of government money market fund would permit these funds to
invest up to 20% of their portfolio in non-government assets, and,
contrary to the goals of our money market fund reforms, potentially
increase risk as stable NAV government funds may use this 20% basket to
reach for yield.\645\ One
[[Page 47793]]
commenter noted that, notwithstanding the current 20% non-government
security basket, its government money market funds invest 100% of fund
assets in government securities because doing so meets the expectations
of government money market fund investors.\646\
---------------------------------------------------------------------------
\645\ See, e.g., Goldman Sachs Comment Letter (suggesting that a
new class of money market funds could emerge that would invest 19.9%
of its assets in higher yield commercial paper and other privately
issued debt while maintaining a stable NAV, and under Commission
rules, holding itself out as a government money market fund); HSBC
Comment Letter; CFA Institute Comment Letter; Systemic Risk Council
Comment Letter; Invesco DERA Comment Letter. One commenter suggested
reducing further the percentage of portfolio assets required to be
invested in government securities and potentially including state
and local government securities in the permissible investment
basket. See Comment Letter of The Independent Trustees of the North
Carolina Capital Management Trust (``Sept. 17, 2013) (``NC Cap.
Mgmt. Trust Comment Letter''). We believe that the definition of a
government money market fund should not include state and local
government securities as suggested by this commenter. We discuss the
risks present in these types of securities and municipal money
market funds in general, infra section III.C.3. See also infra note
773 and accompanying text. In addition, as discussed above, reducing
further the percentage of assets that must be invested in government
securities undercuts the goals of this rulemaking. A few commenters
also raised concerns about the economic effects of not applying our
floating NAV reform to government funds, including promoting the
ability of the federal government to borrow at the expense of state
and local governments and private issuers. See, e.g., Comment Letter
of Arnold & Porter LLP on behalf of Federated Investors [Alternative
1] (Sept. 13, 2013) (``Federated III Comment Letter''); Mass.
Governor Comment Letter; Systemic Risk Council Comment Letter. We
address the macroeconomic effects of the floating NAV requirement
and related exemptions in section III.K. One commenter also noted
that because stable NAV funds (including government money market
funds) would no longer be permitted to value securities using
amortized cost, these funds would still incur many of the same
operational burdens as floating NAV funds. See Federated II Comment
Letter; Federated III Comment Letter. As discussed in section
III.B.5, however, we have revised our approach from the Proposing
Release and will permit both retail and government money market
funds to continue to value portfolio securities using amortized cost
and use the penny-rounding method of pricing.
\646\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------
We agree with commenters who suggested that permitting government
funds to invest potentially up to 20% of fund assets in riskier non-
government securities may promote a type of hybrid money market fund
that presents new risks that are not consistent with the purposes of
the money market reforms adopted today.\647\ One commenter suggested
that without a 20% basket, there may be an oversupply of commercial
paper that disrupts corporate funding (presumably a result of a shift
of assets out of institutional prime funds required to adopt our
floating NAV reform).\648\ As a result, this commenter suggested that
the Commission wait until after final rules are adopted to evaluate the
use of the 20% basket, including the effects on commercial paper
supply, and then consider phasing the 20% basket out over time, if
appropriate. We disagree. As stated above, the reason for not applying
our fees and gates and floating NAV reforms to government money market
funds is, in part, a recognition of the relative stability of this type
of money market fund, through its lack of credit risk. It would limit
the effectiveness of our floating NAV reform, for example, to allow a
hybrid government fund to develop and potentially present credit risk
to institutional investors seeking greater yield, while keeping the
benefit of a stable NAV.
---------------------------------------------------------------------------
\647\ See, e.g., Comment Letter of BlackRock, Inc. (June 6,
2013) (``Blackrock I Comment Letter''); CFA Institute Comment Letter
(noting that ``the 80 percent requirement [. . .] would undermine
the implied NAV stability of a [g]overnment fund[']s structure.
Allowing fund managers to invest as much as 20 percent of their
assets in securities and instruments with greater volatility in
value than government securities, while continuing to operate as
stable NAV funds creates potential problems.'').
\648\ See Blackrock DERA Comment Letter. We discuss in section
III.K below the macroeconomic effects of a potential shift in assets
out of institutional prime money market funds and into alternative
investment products.
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As noted above, many commenters suggested completely eliminating
the 20% basket.\649\ One commenter suggested a smaller de minimis
basket, for example 5%.\650\ Our approach includes a 0.5% de minimis
basket in which government funds may invest in non-government
securities. In order to evaluate an appropriate de minimis amount of
non-government securities, Commission staff, using Form N-MFP data,
analyzed the exposure of government money market funds to non-
government securities between November 2010 and November 2013.\651\
---------------------------------------------------------------------------
\649\ See, e.g., Goldman Sachs Comment Letter; HSBC Comment
Letter; see Fidelity DERA Comment Letter.
\650\ See CFA Institute Comment Letter.
\651\ See DERA Memorandum regarding Government Money Market Fund
Exposure to Non-Government Securities, dated March 17, 2014 (DERA
Government MMF Exposure Memo'') available at http://www.sec.gov/comments/s7-03-13/s70313-322.pdf. This analysis categorized
securities into two types: ``government securities'' and ``other
securities.'' ``Government securities'' includes Treasury Debt,
Treasury Repurchase Agreements, Government Agency Debt, and
Government Agency Repurchase Agreements. ``Other securities''
includes all remaining non-government securities (as referred to
above), such as non-government tri-party repurchase agreements,
financial company commercial paper, and variable rate demand notes
without a demand feature or guarantee. Although this analysis
sought, where possible, to identify ``other securities'' that may
actually qualify as ``government securities,'' it is possible that
some assets classified as other securities may still qualify as
government securities. Accordingly, the results of this analysis
should be viewed as upper bounds on the extent to which government
money market funds invest in ``other securities'' (i.e. non-
government securities).
---------------------------------------------------------------------------
This analysis showed, among other things, that as of November 2013,
approximately 17% of all money market funds were government funds and
that average total net assets of government funds remained fairly
constant at near $500 billion since March of 2012.\652\ An analysis of
the data also showed that, between November 2010 and November 2013,
government money market funds generally invested between 0.5% and 2.5%
of their total amortized cost dollar holdings in non-government
securities and, more recently closer to 0.5% in non-government
securities from November 2012 to November 2013.\653\ For example, the
90th percentile of reporting government money market funds demonstrates
that investments in non-government securities declined from 12.7%
(representing 11 funds) in November 2010 to nearly zero in November
2013.\654\
---------------------------------------------------------------------------
\652\ See id. (reporting based on Form N-MFP data, as of
November 2013, 97 government money market funds out of 565 total
money market funds).
\653\ Id.
\654\ Id.
---------------------------------------------------------------------------
A few commenters suggested that this analysis is flawed because it
inappropriately focuses on the historical use of the non-government
securities basket to predict future use of the 20% basket, when we
cannot accurately predict how investors will react following the
adoption of proposed regulatory changes, such as a floating NAV.\655\
One commenter further suggested that the analysis instead should
address the potential systemic risk posed by a hybrid fund.\656\ As
other commenters noted, however, we recognize the potential for
increased investor interest in hybrid government money market funds,
and as discussed above, we are concerned that continuing to permit
government money market funds to invest potentially up to 20% of fund
assets in non-government securities presents risks that are contrary to
goals of this rulemaking. In fact, the concern raised by these
commenters, suggesting that the historical use of the 20% basket is
irrelevant in the context of a future regulatory regime that includes a
floating NAV reform, further supports our concern that retaining the
20% non-government securities basket is likely to result in increased
risk taking by
[[Page 47794]]
institutional prime fund investors who move to government money market
funds in search of greater yield (but with the continued benefit of a
stable NAV). We also note that our staff's analysis of the historical
use of the 20% basket establishes the baseline (i.e., the extent to
which government money market funds have used the 20% basket) for our
economic analysis discussed below.
---------------------------------------------------------------------------
\655\ See, e.g., Comment Letter of the Dreyfus Corporation (Apr.
23, 2014, DERA Study) (``Dreyfus DERA Comment Letter'') (expecting
that the staff's analysis would not show significant industry
investment by government funds in non-government securities, but
suggesting that this is a result of investor preference that must be
viewed in the context of stable NAV money market funds and noting
that investor interest in hybrid government money market funds may
increase in a floating NAV context); Comment Letter of Wells Fargo
Fund Management, LLC (Apr. 23, 2014, DERA Study) (``Wells Fargo DERA
Comment Letter'') (suggesting that without the ability for
government money market funds to diversify into prime and municipal
securities, a significant inflow into government funds could force
already low yields on short-term government securities to turn
negative). Although we recognize the potentially adverse effects of
negative yields (e.g., some funds might close to further investment,
affecting capital formation), we believe that the potential risks
associated with a government fund investing up to 20% of its total
assets in non-government assets outweighs speculative concerns about
future interest rates that may or may not remain at historic lows
two years after the rules regarding our floating NAV reform become
final.
\656\ See Dreyfus DERA Comment Letter.
---------------------------------------------------------------------------
One commenter stated its belief that allowing government money
market funds to invest up to 20% in non-government securities will not
materially increase the risks of these funds to investors or the
financial system and that such a fund would have adequate liquidity to
satisfy any increased redemption pressure that results from a credit
event in the 20% basket.\657\ This commenter cites to our statement in
the Proposing Release, where we characterized as ``minimal'' the risk
of government money market funds that maintain at least 80% of their
total assets in cash, government securities, or repurchase agreements
that are collateralized by cash or government securities.\658\ We
continue to believe, however, as we also stated in the Proposing
Release, that ``a credit event in [the] 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.'' \659\ Even if we assume that a government fund had
sufficient liquidity from its 80% basket of government securities to
cover adequately increased redemptions that result from a credit event
in the 20% basket, we note that the structural incentives that exist in
stable NAV money market funds, and the associated first mover advantage
and potential shareholder dilution concerns, still exist.\660\ And,
indeed, after our floating NAV reform takes effect, the incentives
could be even more pronounced in government funds if those
institutional investors who are the most sensitive to risk move to
government funds.
---------------------------------------------------------------------------
\657\ See Wells Fargo DERA Comment Letter.
\658\ See Proposing Release, supra note 25, at text accompanying
n.176.
\659\ See id. at text following n.173.
\660\ See supra section III.B.3.
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Based on the staff's analysis, we expect that the 0.5% non-
conforming basket is consistent with current industry practices and
strikes an appropriate balance between providing government money
market fund managers with adequate flexibility to manage such funds
while preventing them from taking on potentially high levels of risk
associated with non-government assets. We therefore are revising the
definition of a government fund to require that such a fund invest at
least 99.5% (up from 80% in the proposal) of its assets in cash,
government securities, and/or repurchase agreements that are
collateralized by cash or government securities. A money market fund
may not call itself or include in its name ``government money market
fund'' or similar names unless the fund complies with this
requirement.\661\
---------------------------------------------------------------------------
\661\ Rule 2a-7(a)(16) defines a government money market fund
and requires that such funds invest at least 99.5% of fund assets in
cash, government securities, and repurchase agreements that are
collateralized fully.
---------------------------------------------------------------------------
Because we believe that the de minimis basket we are adopting is
consistent with current industry practice, we do not believe that
government funds will experience any material reduction in yield, based
on current interest rates, as a result of our amendments. In addition,
we do not believe that government funds will be required to make any
systems modifications as a result of changing to a 0.5% de minimis
basket because funds are already required to monitor compliance with
the existing 20% non-government basket requirement. As discussed below,
however, we do expect that money market funds may need to amend their
policies and procedures to reflect the changes we are adopting today,
including the new 0.5% de minimis basket.\662\ We estimate that it will
cost each money market fund complex approximately $2,580 in one-time
costs to amend their policies and procedures.\663\
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\662\ These costs are included as part of the Paperwork
Reduction Act analysis. See infra section IV.A.
\663\ Id.
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Because staff analysis shows that our 0.5% non-conforming basket is
consistent with industry practice, we believe that any effect on
efficiency, competition, or capital formation should be minimal. In
addition, any government money market funds that do currently use the
20% basket could roll out of any excess exposure to non-government
assets by the time that funds are required to comply with the amended
rule, given rule 2a-7's maturity limits on portfolio securities.
Nevertheless, reducing the size of the basket could affect efficiency,
competition, or capital formation in the future because decreasing the
size of the basket reduces a government fund's flexibility to invest in
non-government assets in the future. For example, decreasing the size
of the basket could lead to a loss of efficiency if government funds
are unable to invest in securities that government funds are currently
permitted to purchase. Reducing the basket size could also restrict
competition among money market funds because government funds would not
be able to invest more than 0.5% in non-government assets and thus will
have a reduced ability to compete with other money market funds based
on yield. Finally, capital formation in the commercial paper market
could be hindered by reducing the 20% basket and reducing these funds'
ability to invest in commercial paper. We do not expect any such effect
to be substantial, however, given the very small extent to which
government funds have recently used the non-government basket.
We also recognize the potential for a significant inflow of money
market fund assets into government money market funds from
institutional prime investors (seeking a stable NAV alternative) and
investors that are unable or unwilling to invest in a product that may
restrict liquidity (through our liquidity fees and gates reform). As we
discuss in section III.K below, we do not anticipate that the impact
from the final rule amendments, including those related to our floating
NAV reform, will be large enough to constrain government funds and
their potential investors.
2. Retail Money Market Funds
As was proposed, our fees and gates reform will apply to retail
money market funds, but our floating NAV reform will not. However, as
discussed more below, we are revising the definition of a retail money
market fund from our proposal to address concerns raised by commenters.
As amended, a retail money market fund means a money market fund that
has policies and procedures reasonably designed to limit all beneficial
owners of the fund to natural persons.\664\
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\664\ See infra note 679 and accompanying text.
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As discussed in the Proposing Release and the DERA Study, retail
investors historically have behaved differently from institutional
investors in a crisis, being less likely to make large redemptions
quickly in response to the first sign of market stress. During the
financial crisis, institutional prime money market funds had
substantially larger redemptions than prime money market funds that
self-identify as retail.\665\ As noted in the Proposing Release, for
example, approximately 4-5% of retail prime money market funds had
outflows of greater than 5% on each
[[Page 47795]]
of September 17, 18, and 19, 2008, compared to 22-30% of institutional
prime money market funds.\666\ 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.\667\ Studies of money
market fund redemption patterns in times of market stress also have
observed this difference.\668\ As we noted in the Proposing Release and
discussed above, we believe that 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 more sophisticated tools to
monitor and analyze the portfolio holdings of the funds in which they
invest.\669\ We discuss below our fees and gates and floating NAV
reforms and their application to retail money market funds, as defined
by our amendments adopted today.
---------------------------------------------------------------------------
\665\ See Proposing Release, supra note 25, at n.185 and
accompanying text.
\666\ See id.
\667\ See Proposing Release, supra note 25, at n.187 and
accompanying text. We noted that, based on iMoneyNet data, retail
money market funds experienced 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. We have also reviewed the redemption activity for
institutional prime funds during this same time period and note that
institutional prime funds experienced net redemptions of
approximately 9% between June 14, 2011 and July 5, 2011, and 46
institutional prime money market funds had redemptions in excess of
5% during that period (and of these funds 35 had redemptions in
excess of 10% during this period), far greater redemptions than
those incurred by retail funds.
\668\ See, e.g., DERA Study, supra note 24, at 8; Cross Section,
supra note 35, at 9 (noting that institutional prime money market
funds experienced 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
experienced net redemptions of $40 billion (or 5% of assets under
management) during this same time period); Marcin Kacperczyk &
Philipp Schnabl, How Safe are Money Market Funds?, 128 Q. J. Econ.
1017 (April 5, 2013) (``Kacperczyk & Schnabl''); Wermers Study,
supra note 35.
\669\ We also understand that retail money market funds'
shareholder base tends to be less concentrated and, thus, less
likely to move large amounts of money at once. We believe this may
be, in part, why retail money market funds experienced fewer
redemptions during the financial crisis.
---------------------------------------------------------------------------
a. Fees and Gates
Largely for the reasons discussed above, several commenters argued
that our fees and gates reforms should not apply to retail money market
funds, in the same way that our floating NAV reform would not apply to
retail funds.\670\ More specifically, commenters argued that retail
investors behave differently than institutional investors and,
therefore, retail money market funds are insulated from runs and sudden
losses of liquidity.\671\
---------------------------------------------------------------------------
\670\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Comment
Letter of United Services Automobile Association (Sept. 17, 2013)
(``USAA Comment Letter''); MFDF Comment Letter; see also Fidelity
Comment Letter (arguing that the fees and gates requirements should
be limited to institutional prime funds).
\671\ See, e.g., USAA Comment Letter; MFDF Comment Letter
(``Because retail investors are demonstrably slower to redeem their
shares, the fund's adviser will have greater ability to manage the
fund's liquidity in a way necessary to meet redemptions, even in
times of market stress, without necessitating the cost of that
liquidity being imposed on redeeming retail shareholders.'');
Comment Letter of Financial Services Institute (Sept. 17, 2013)
(``Fin. Svcs. Inst. Comment Letter'') (``Retail investors pose a
substantially lower risk of high redemption activities during
periods of market stress . . . .'').
---------------------------------------------------------------------------
Although, as discussed above, the evidence suggests that retail
investors historically have exhibited much lower levels of redemptions
or a slower pace of redemptions in times of stress,\672\ we cannot
predict future investor behavior with certainty and, thus, we cannot
rule out the potential for heavy redemptions in retail funds in the
future. Empirical analyses of retail money market fund redemptions
during the financial crisis show that at least some retail investors
eventually began redeeming shares.\673\ Similarly, we note that when
the Reserve Primary Fund, which was a mixed retail and institutional
money market fund, ``broke the buck'' as a result of the Lehman
Brothers bankruptcy, almost all of its investors ran--retail and
institutional alike. Additionally, we note that it is possible that the
introduction of the Treasury Temporary Guarantee Program on September
19, 2008 (a few days after institutional prime money market funds
experienced heavy redemptions) lessened the incentive for shareholders
to redeem from retail money market funds. Moreover, as we recognized in
the Proposing Release, retail prime money market funds, unlike
government money market funds, generally are subject to the same credit
and liquidity risks as institutional prime money market funds.\674\ As
such, absent fees and gates, there would be nothing to help manage or
prevent a run on retail prime money market funds in the future.
---------------------------------------------------------------------------
\672\ See Proposing Release, supra note 25, at n.199 and
accompanying text.
\673\ See Proposing Release, supra note 25, at n.197 and
accompanying text; see also Wermers Study, supra note 35.
\674\ See Proposing Release, supra note 25, at 199.
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As noted in the Proposing Release, we also believe there is a
difference in the anticipated shareholder behaviors we are trying to
address by the fees and gates requirements and floating NAV requirement
as applied to retail funds.\675\ The floating NAV requirement is
specifically designed to address shareholders' incentive to redeem to
take advantage of pricing discrepancies between a money market fund's
market-based NAV per share and its stable share price. As discussed
above, we believe this incentive likely is greatest among institutional
investors because they are more likely to have significant sized
investments at stake and the sophistication and resources to monitor
actively such discrepancies.\676\ While retail investors are unlikely
to be motivated to a substantial degree by the first-mover advantage
created by money market funds' stable pricing convention, they may be
motivated to redeem heavily in flights to quality, liquidity, and
transparency (even if they may do so somewhat slower than institutional
investors). Fees and gates are designed to address these types of
redemptions.\677\ We also note that retail money market funds today
operate with the potential for gates under rule 22e-3, which allows a
fund board to permanently gate and liquidate a money market fund under
certain circumstances. Today's amendments include a number of
disclosure reforms that are designed to ensure that retail investors
will understand this new additional fee and gate regime for money
market funds.\678\
---------------------------------------------------------------------------
\675\ See Proposing Release, supra note 25, at 200.
\676\ See generally supra note 669 and accompanying text.
\677\ See supra section III.B.1; see also Invesco Comment Letter
(suggesting that liquidity fees would mitigate the ``first-mover''
advantage); UBS Comment Letter.
\678\ See infra section III.E.
---------------------------------------------------------------------------
In addition, the floating NAV requirement will affect a
shareholder's experience with an institutional prime money market fund
on a daily basis. It thus is a significant reform that is targeted only
at those investors that we consider most likely to be motivated to
redeem at least in part on the basis of pricing discrepancies in the
fund. In contrast, and as discussed above, the fees and gates
requirements will not affect a money market fund on a day-to-day basis;
its effect will be felt only if the fund's weekly liquid assets fall
below 30% of its total assets--i.e., unless it comes under potential
stress--and even then, only if the board determines that a fee and/or
gate is in
[[Page 47796]]
the best interests of the fund. Further, while we recognize that a
retail money market fund may be less likely to experience strained
liquidity (and thus less likely to need to impose a fee or gate), we
believe there is still a sufficient risk of this occurring that we
should allow such funds to impose a fee or gate to manage any related
heavy redemptions when the weekly liquid assets fall below 30% and
doing so is in the fund's best interests. For the same reasons, we
believe requiring a fund to impose a liquidity fee when weekly liquid
assets fall below 10% is also appropriate, unless the board determines
otherwise based on the fund's best interests. Accordingly, retail money
market funds will be subject to the fees and gates reform.
b. Floating NAV
i. Definition of Retail Money Market Fund
As we proposed, however, we are not imposing the floating NAV
reform on retail money market funds. For purposes of the floating NAV
reform, we are defining a retail money market fund to mean a money
market fund that has policies and procedures reasonably designed to
limit all beneficial owners of the fund to natural persons (``retail
funds'').\679\
---------------------------------------------------------------------------
\679\ See rule 2a-7(a)(25). ``Beneficial ownership'' typically
means having voting and/or investment power. See, e.g., Securities
Exchange Act rules 13d-3 and 16a-1(a)(2); Metropolitan Life
Insurance Company, SEC Staff No-Action Letter (Nov. 23, 1999) (``Met
Life No-Action Letter'') at n.9 and accompanying text. We note that
our definition of retail money market fund is consistent with the
way in which Congress defined a ``retail customer'' in section
913(a) of the Dodd-Frank Act (defining ``retail customer,'' among
other things, as a natural person). 15 U.S.C. 80b-11(g)(2). A retail
fund may disclose in its prospectus that it limits investments to
accounts beneficially owned by natural persons and describe in its
policies and procedures how the fund complies with the retail fund
limitation when a shareholder of record is an omnibus account holder
that does not provide transparency down to the beneficial ownership
level. We discuss omnibus account issues below. See infra section
III.C.2.b.iii.
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Many commenters generally supported not applying a floating NAV
requirement to retail money market funds, noting, for example, retail
investors' moderate redemption activity during the financial crisis as
compared with institutional prime funds and the importance of retaining
a stable NAV investment product for retail investors that facilitates
cash management, particularly where there are few alternatives offering
diversification, stability, liquidity, and a market-based rate of
return for these investors.\680\ Some commenters, however, objected to,
or expressed concerns about not applying a floating NAV to retail
funds. These commenters noted, for example, that (i) retail investors
in the future may not behave the way we observed in 2008; (ii)
increases in sophistication of retail investors (for example, through
technological advancements) may lead retail investors to act more like
institutional investors over time; and (iii) any differentiation
between retail and institutional funds provides opportunities for
gaming behavior by institutional investors.\681\
---------------------------------------------------------------------------
\680\ See, e.g., Blackrock I Comment Letter; Blackrock II
Comment Letter; Vanguard Comment Letter; T. Rowe Price Comment
Letter; ICI Comment Letter.
\681\ See, e.g., Goldman Comment Letter; J.P. Morgan Comment
Letter; HSBC Comment Letter; Hanson et al. Comment Letter.
---------------------------------------------------------------------------
We recognize, as discussed above, that we cannot be certain how
retail investors would have reacted during the financial crisis had the
Treasury Temporary Guarantee Program not been implemented. Similarly,
we cannot predict whether retail investors, in light of new tools to
manage liquidity (e.g., fees and gates) and enhanced disclosure and
transparency, will behave more like institutional investors in the
future. But the evidence to date suggests that retail investors do not
present the same risks associated with high levels of redemptions posed
by institutional investors.\682\ We continue to believe that the
significant benefits of providing an alternative stable NAV fund option
justify the risks associated with the potential for a shift in retail
investors' behavior in the future, particularly given that retail money
market funds will be able to use fees and gates as tools to stem heavy
redemptions should they occur. We also note that, as discussed below,
our revised approach to defining a retail fund based on shareholder
characteristics should minimize the potential for gaming behavior by
institutional investors.
---------------------------------------------------------------------------
\682\ See supra notes 666 and 667 and accompanying text.
---------------------------------------------------------------------------
As of February 28, 2014, funds that self-report as retail money
market funds held nearly $998 billion in assets, which is approximately
one-third of all assets held in money market funds.\683\ Unlike under
our proposal, which would have required retail funds generally to value
portfolio securities using market-based factors rather than amortized
cost, money market funds that qualify as retail funds may continue to
offer a stable value as they do today--and facilitate their stable
price by use of amortized cost valuation and/or penny-rounding pricing
of their portfolios. As discussed below, our definition of a retail
fund reflects several modifications from our proposal (in which a
retail fund was defined as a fund that limits redemptions to $1 million
in a single business day) and reflects an approach suggested by a
number of commenters.\684\
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\683\ Staff estimates were derived by using self-reported data
from iMoneyNet as of February 28, 2014 to estimate percentages for
retail and institutional segments by money market fund type. Staff
then applied these percentages to the total market size segments
based on Form N-MFP data as of February 28, 2014. Of these assets,
approximately $593 billion are held by prime money market funds and
another $209 billion are in government funds. Because the final
rules do not subject government funds to the floating NAV
requirement, funds that qualify as retail money market funds would
be potentially relevant only to the investors holding the $593
billion in retail prime funds.
\684\ The definition of retail money market fund we are adopting
is informed by a joint comment letter submitted by eight fund
complexes that manage approximately $1.2 trillion of U.S. money
market funds (representing approximately 45% of the total U.S. money
market fund industry assets) as of September 30, 2013. See Comment
Letter dated October 31, 2013 (submitted by BlackRock, Fidelity,
Invesco, Legg Mason & Western Asset, Northern Trust, T. Rowe,
Vanguard, and Wells Fargo) (``Retail Fund Joint Comment Letter'').
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We proposed to define a fund as retail, and thus not subject to the
floating NAV reform, if it is a fund that restricts a shareholder of
record from redeeming more than $1 million in any one business day. We
explained our belief that this approach should be relatively simple to
implement because it would only require a fund to establish a one-time,
across-the-board redemption policy, unlike other approaches based on
shareholder characteristics that would require ongoing monitoring by
the fund. We also stated our belief that our proposed approach would
reduce the risk that a retail fund would experience heavier redemption
requests than it could effectively manage in a crisis because it would
limit the total amount of redemptions a fund can experience in a single
day and therefore provide the fund time to better predict and manage
its liquidity.
In the Proposing Release, we selected a $1 million redemption limit
because we expected this amount would be high enough to make money
market funds a viable cash management tool for retail investors, but
low enough that institutional investors would likely self-select out of
these funds because it would not satisfy their operational needs.\685\
Under the proposed retail fund definition, a fund would be able to
permit an ``omnibus account holder'' to
[[Page 47797]]
redeem more than $1 million in a single business day provided the fund
has policies and procedures reasonably designed to allow the conclusion
that the omnibus account holder does not permit any beneficial owner to
directly or indirectly redeem more than $1 million in a single
day.\686\ The Proposing Release also considered and sought comment on
other ways to distinguish a retail fund from an institutional fund,
including applying limitations based on maximum account balance,
shareholder concentration, or shareholder characteristics (e.g., a
social security number that would identify the shareholder as an
individual person and not an institution).\687\ We discuss below
comments received on these alternative means for distinguishing retail
funds from institutional funds.
---------------------------------------------------------------------------
\685\ The Proposing Release also noted that a money market fund
that sought to qualify as a retail fund would need to effectively
describe that it is intended for retail investors and include in the
fund's prospectus and advertising materials information about the
fund's daily redemption limitations. See Proposing Release, supra
note 25, at section III.A.4.b.i.
\686\ We proposed to define an ``omnibus account holder'' 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).
\687\ See infra note 701 and accompany text for a discussion of
social security numbers as a means for distinguishing retail from
institutional funds in the Proposing Release.
---------------------------------------------------------------------------
A number of commenters supported (some with suggested scope
modifications) our proposed approach to define a retail investor by
means of a daily redemption limit.\688\ Many commenters, however,
raised concerns with defining a retail fund as a fund that imposes a
daily redemption limit on its investors, stating, for example, that the
$1 million daily redemption limit would (i) unduly limit liquidity by
prohibiting transactions by shareholders whose behavior does not
present run risk; (ii) restrict full liquidity not only in times of
market stress, but also when the markets are operating effectively; and
(iii) be costly and difficult to implement, monitor, and enforce.\689\
As noted above, however, a number of commenters have suggested defining
a retail money market fund as a fund that seeks to limit beneficial
ownership interest to natural persons.\690\ After analyzing the
comments received, we agree that defining a retail fund as a fund that
has policies and procedures reasonably designed to limit beneficial
ownership to natural persons (``natural person test'') provides a
simpler and more cost-effective way to accomplish our goal of targeting
the floating NAV reform to the type of money market fund that has
exhibited greater tendencies to redeem first in times of market stress
and has the investors most likely to seek to take advantage of any
pricing discrepancies and therefore dilute the interests of remaining
shareholders.\691\ We discuss below the operation of the natural person
test and its economic effects.
---------------------------------------------------------------------------
\688\ See, e.g., CFA Institute Comment Letter; Northern Trust
Comment Letter; Schwab Comment Letter; USAA Comment Letter; Vanguard
Comment Letter. These commenters also offered suggested scope
modifications, including increasing or decreasing the daily
redemption limit, creating an advance notice provision (pre-approved
redemptions over $1 million in a single business day), applying the
daily redemption limit on a per-account basis rather than a per-
shareholder basis, and exempting certain transactions from the daily
redemption limit.
\689\ See, e.g., Comment Letter of John D. Hawke, Jr., Arnold
and Porter, LLP on behalf of Federated Investors, Inc., Washington,
District of Columbia (Nov. 21, 2013) (``Federated XIII Comment
Letter''); Federated II Comment Letter; Fidelity Comment Letter; ICI
Comment Letter; SIFMA Comment Letter.
\690\ See supra note 684 and accompanying text. In addition to
the eight commenters who submitted a joint comment letter in support
of defining a retail fund by limiting beneficial ownership to
natural persons, a number of other commenters also supported this
definition. See, e.g., SunTrust Comment Letter; ICI Comment Letter;
SIFMA Comment Letter.
\691\ A number of commenters supported alternate means of
defining a retail investor. See, e.g., Schwab Comment Letter
(supporting defining retail investors based on concentration risk);
Deutsche Comment Letter (supporting defining retail investors based
on a maximum account balance limit); SIFMA Comment Letter
(supporting defining retail investors based on a minimum initial
investment, but also supporting the ``natural person'' approach we
are adopting today); Dreyfus Comment Letter (supporting defining
retail investors based on settlement times); Fin. Svcs. Roundtable
Comment Letter (supporting defining institutional investors, rather
than retail investors, by, for example, reference to assets under
management). We have carefully considered these alternative means of
defining a retail investor, but we believe, as discussed below, that
the ``natural person'' approach suggested by a number of other
commenters is a simpler and more cost effective way to distinguish
between institutional and retail investors.
---------------------------------------------------------------------------
ii. Operation of the Natural Person Test
As discussed in the Proposing Release, it currently is difficult to
distinguish precisely 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. We noted that the operational challenges of
defining a retail fund are numerous and complex. In addition, as
discussed below, drawing a distinction between retail and institutional
investors is complicated by the extent to which shares of money market
funds are held by investors through omnibus accounts and other
financial intermediaries. We also recognize that any distinction
between retail and institutional funds could result in ``gaming
behavior'' whereby investors having the general attributes of an
institution might attempt to fit within the confines of whatever retail
fund definition we craft. We believe, however, that defining a retail
fund using the natural person test will, as a practical matter,
significantly reduce opportunities for gaming behavior because we
believe that most funds will use social security numbers as part of
their compliance process to limit beneficial ownership to natural
persons, and institutional investors are not issued social security
numbers.
A money market fund that has policies and procedures reasonably
designed to limit beneficial owners to natural persons will not be
subject to the floating NAV reform. We expect that a fund that intends
to qualify as a retail money market fund would disclose in its
prospectus that it limits investments to accounts beneficially owned by
natural persons.\692\ Funds will have flexibility in how they choose to
comply with the natural person test. As noted by commenters, we expect
that many funds will rely on social security numbers to confirm
beneficial ownership by a natural person. The social security number is
one well-established method of identification, issued to natural
persons who qualify under the Social Security Administration's
requirements. Because social security numbers are in nearly all cases
obtained as part of the account-opening process (for natural persons)
and are populated in transfer agent and intermediary recordkeeping
systems, this approach should reduce significantly the required
enhancements to systems, processes, and procedures that would be
required under alternative approaches, including our proposed daily
redemption limit.\693\ In addition, for intermediaries using omnibus
account registrations where the beneficial owners are natural persons
(e.g., retail brokerage accounts, certain trust accounts, and defined
contribution plan accounts), a social security number is a key
component of customer account-opening procedures and compliance and
therefore should allow intermediaries to distinguish retail from
institutional investors (and therefore assist retail funds in
satisfying the retail fund definition).\694\ In many cases, funds and
intermediaries already collect this data to comply with ``know your
customer'' practices and anti-money laundering laws and should easily
be
[[Page 47798]]
able to identify if a beneficial owner is a natural person.\695\
---------------------------------------------------------------------------
\692\ For example, a fund could disclose that it is a retail-
only money market fund not subject to the floating NAV requirement,
consistent with the requirements of Form N-1A. See, e.g., Item 6 and
Item 11 of Form N-1A; see also infra note 940 and accompanying text.
\693\ See, e.g., ICI Comment Letter.
\694\ Id.
\695\ Id.
---------------------------------------------------------------------------
As commenters noted, defining a retail fund in this way encompasses
a large majority of individual investors who use retail accounts
today.\696\ For example, we understand that many tax-advantaged savings
accounts and ordinary trusts are beneficially owned by natural persons,
and therefore would likely qualify under the natural person test.\697\
We understand that, often, in these types of accounts, natural persons
are responsible for making the decision to redeem from a fund during a
time of crisis (rather than an institutional decision maker). We
acknowledge, however, that a fund may still qualify as a retail money
market fund notwithstanding having an institutional decision maker
(e.g., a plan sponsor in certain retirement arrangements, or an
investment adviser managing discretionary investment accounts) that
could eliminate or change an investment option, such as offering or
investing in a money market fund. We also recognize that there is a
potential risk that an institutional decision maker may react
differently in times of market stress than the individuals that we
expect will invest in retail money market funds as defined under our
amended rule. We believe that in many instances, however, this risk can
be mitigated. A number of commenters noted, for example, that under
section 3(34) of ERISA, the plan sponsor of a defined contribution plan
can eliminate or change an investment option without providing notice
of the change, but stated that the plan sponsor would likely provide 30
days' notice of any change in order to obtain the benefit of the
fiduciary safe harbor in section 404(c) of ERISA.\698\ To the extent
that there remains a risk that an institutional decision maker
associated with a qualifying retail fund makes decisions inconsistent
with how we understand retail funds generally behave, we believe that
our approach appropriately balances this potential risk against the
substantial benefits of providing a simple and cost-effective way to
distinguish retail funds and provide a targeted floating NAV
requirement.
---------------------------------------------------------------------------
\696\ See Retail Fund Joint Comment Letter.
\697\ Natural persons often invest in money market funds through
a variety of tax-advantaged accounts and trusts, including, for
example: (i) participant-directed defined contribution plans
(section 3(34) of the Employee Retirement Income Security Act
(``ERISA'')); (ii) individual retirement accounts (section 408 or
408A of the Internal Revenue Code (``IRC'')); (iii) simplified
employee pension arrangements (section 408(k) of the IRC); (iv)
simple retirement accounts (section 408(p) of the IRC); (v)
custodial accounts (section 403(b)(7) of the IRC); (vi) deferred
compensation plans for government or tax-exempt organization
employees (section 457 of the IRC); (vii) Keogh plans (section
401(a) of the IRC); (viii) Archer medical savings accounts (section
220(d) of the IRC); (ix) college savings plans (section 529 of the
IRC); (x) health savings account plans (section 223 of the IRC); and
(xi) ordinary trusts (section 7701 of the IRC). Accounts that are
not beneficially owned by natural persons (for example, accounts not
associated with social security numbers), such as those opened by
businesses, including small businesses, defined benefit plans, or
endowments, would not qualify as retail money market funds.
\698\ See Retail Fund Joint Comment Letter.
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As noted above, funds that intend to satisfy the retail fund
definition will be required to adopt and implement policies and
procedures reasonably designed to restrict beneficial ownership to
natural persons.\699\ For example, funds could have policies and
procedures that will help enable the fund to ``look through'' these
types of accounts and reasonably conclude that the beneficial owners
are natural persons. A fund's policies and procedures could, for
example, require that the fund reasonably conclude that ownership is
limited to natural persons and do so (i) directly, such as when the
investor provides a social security number to the fund adviser, when
opening a taxable or tax-deferred account through the adviser's
transfer agent or brokerage division; or (ii) indirectly, such as when
a social security number is provided to the fund adviser in connection
with recordkeeping for a retirement plan, or a trust account is opened
with information regarding the individual beneficiaries. We note that
our definition of a retail money market fund provides a fund with the
flexibility to develop policies and procedures that best suit its
investor base and does not require that the fund use social security
numbers to reasonably conclude that investors are natural persons. For
example, a money market fund or the appropriate intermediary could
determine the beneficial ownership of a non-U.S. natural person by
obtaining other government-issued identification, for example, a
passport.\700\
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\699\ See rule 2a-7(a)(25).
\700\ See, e.g., 31 CFR 1023.220(a)(2)(i)(A)(4)(ii) (requiring a
broker-dealer to obtain for non-U.S. persons [a] taxpayer
identification number, a passport number and country of issuance, an
alien identification card number, or the number and country of
issuance of any other government-issued document evidencing
nationality or residence and bearing a photograph or similar
safeguard).
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In the Proposing Release, we discussed as an alternative to the
daily redemption limit approach requiring that funds consider
shareholder characteristics, such as whether the investor has a social
security number or a taxpayer identification number. We noted our
concern, however, that social security numbers do not necessarily
correlate to an individual, and taxpayer identification numbers do not
necessarily correlate to a business (for example, businesses operated
as pass-through entities).\701\ One commenter reiterated this
concern.\702\ We note, however, that the definition of a retail fund
does not rely solely on each investor having a social security number.
Rather, our approach recognizes that in most cases, a fund or
intermediary may often satisfy the natural person test by implementing
policies and procedures that require verifying a social security number
at the time of account opening. But, the fund or intermediary may, for
example, determine that a non-U.S. investor who does not have a social
security number is a natural person (e.g., using a passport).
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\701\ See Proposing Release, supra note 25, at section
III.A.4.c.iii.
\702\ See Schwab Comment Letter (suggesting that any final rule
identify accounts that are inherently retail and include them as
part of the definition of a retail fund so that, for example,
estates and trusts would qualify to invest in a retail money market
fund (despite having a tax identification number, rather than a
social security number). We note that an estate or trust would be
able to qualify for investment in a retail fund under our
definition, provided the fund reasonably concludes that the
beneficial owner(s) is a natural person.
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Finally, we note that, currently, it is not uncommon for a money
market fund to be owned by both retail and institutional investors,
typically through a retail and institutional share class,
respectively.\703\ In order to qualify as a retail money market fund,
funds with separate share classes for different types of investors (as
well as single-class funds for both types of investors) will need to
reorganize into separate money market funds for retail and
institutional investors, which may be separate series of the fund.\704\
In the case of a money market fund with retail and institutional
[[Page 47799]]
share classes, two commenters suggested that the Commission provide
relief from section 18(f)(1) of the Act (designed, in part, to prohibit
material differences among the rights of shareholders in a fund) \705\
to allow the fund to reorganize the classes into separate money market
funds.\706\
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\703\ Rule 18f-3 under the Investment Company Act enables a
money market fund to offer retail and institutional share classes by
providing an exemption from sections 18(f)(1) and 18(i) of the
Investment Company Act. We are amending, as proposed, rule 18f-3
(the multiple class rule) 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 the money market funds that are subject the floating NAV
requirement would not use the amortized cost method to a greater
extent than mutual funds generally.
\704\ Each series of a series investment company is a separate
investment company under the Investment Company Act. See, e.g., Fair
and Equitable Treatment of Series Type Investment Company
Shareholders, Rel. No. IC-7276 (Aug. 8, 1972). See also J.R.
Fleming, Regulation of Series Investment Companies under the
Investment Company Act of 1940, 44 Bus. Law. 1179 (Aug. 1989).
\705\ See Exemption for Open-End Management Investment Companies
Issuing Multiple Classes of Shares; Disclosure by Multiple Class and
Master-Feeder Funds, Investment Company Act Release No. 19955 (Dec.
15, 1993), at n.19 and accompanying text.
\706\ See Dechert Comment Letter; NYC Bar Committee Comment
Letter. Section 18(f)(1) of the Act generally prohibits a fund from
issuing any ``senior security'' and section 18(i) of the Act
generally requires that every share of stock issued by a fund
``shall be a voting stock and have equal voting rights with every
other outstanding voting stock.'' Rule 18f-3 under the Act provides
a conditional exemption from sections 18(f)(1) and 18(i) of the Act,
but Rule 18f-3 does not provide an exemption to permit a fund with
multiple classes of shares to separate a class from the other
class(es) and reorganize it into a separate fund, and such a
reorganization may implicate the concerns underlying sections
18(f)(1) and 18(i) of the Act.
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We recognize that a reorganization of a share class of a money
market fund into a new series may implicate section 18 of the
Investment Company Act, as well as section 17(a) of the Investment
Company Act (section 17(a) prohibits, among other things, certain
transactions between a fund and an affiliated person of the fund to
prevent unfairness to the fund or overreaching by the affiliated
person).\707\ Notwithstanding the prohibitions in sections 17(a) and
18(f)(1) and 18(i) of the Act, in the context of distinguishing between
retail and institutional money market funds when implementing the
reforms we are adopting today, the Commission is of the view that a
reorganization of a class of a fund into a new fund may take place
without separate exemptive relief, provided that the fund's board of
directors, including a majority of the directors who are not interested
persons of the fund, determines that the reorganization results in a
fair and approximately pro rata allocation of the fund's assets between
the class being reorganized and the class remaining in the fund.\708\
As is the case with any board determination, the basis for the fund
board's determination should be documented fully in the fund's
corporate minutes.\709\ We believe that a reorganization accomplished
in this manner would be consistent with the investor protection
concerns in sections 17(a) and 18 of the Act in this context. More
specifically, we believe that this board determination, in the context
of a one-time reorganization related specifically to effectuating a
split of separate share classes in order to qualify as a retail money
market fund, addresses the primary concerns that sections 17 and 18 of
the Act are intended, in part, to address--to ensure that shareholders
in a fund are treated fairly and prohibit overreaching by affiliates.
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\707\ See section 17(b) (setting forth, among other things, the
standards for exempting a transaction from the prohibition). Section
17(a) of the Act, among other things, generally prohibits any
affiliated person of a fund, acting as principal, from knowingly
selling to or buying from the fund, any security or other property,
with certain limited exceptions. A fund whose class of shares is
being reorganized into a new fund may be an affiliated person of the
new fund, due to, among other possibilities, sharing an investment
adviser or board of directors. Similarly, the new fund may be an
affiliated person of the fund. Accordingly, the sale of the assets
of the fund to the new fund, and the new fund's purchase of those
assets from the fund, in a reorganization of a class of the fund may
be prohibited under sections 17(a)(1) and (2) of the Act. Rule 17a-8
under the Act provides an exemption from sections 17(a)(1) and
17(a)(2) of the Act for a transaction that is a ``merger,
consolidation, or purchase or sale of substantially all of the
assets'' of a fund that meets the rule's conditions. A
reorganization of a class of a fund into a new fund may not be
covered by rule 17a-8.
\708\ A pro rata allocation ensures, for example, that portfolio
securities with different liquidity and/or quality characteristics
are distributed equally among each fund class. The board's
determination requires a finding that the reorganization results in
a fair and approximately pro rata allocation of the fund's assets in
order to acknowledge that there may be limited situations in which a
100% pro rata allocation may not be practical (e.g., an odd-lot
portfolio security).
\709\ All registered investment companies, including money
market funds, must maintain as part of their records minute books
for board of directors' meetings and preserve such records
permanently, the first two years in an easily accessible place. See
rules 31a-1(b)(4) and 31a-2(a)(1).
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The Commission's position is that, as part of implementing a
reorganization in response to the amendments we are adopting today, a
money market fund may involuntarily redeem certain investors that will
no longer be eligible to invest in the newly established or existing
money market fund. We recognize that such an involuntary redemption (or
cancellation) of fund shares may implicate section 22(e) of the Act,
which, among other things, generally prohibits a fund from suspending
(or postponing) the right of redemption for any redeemable security for
more than seven days after tender of such shares.\710\ Our staff has,
in the past, however, provided no-action relief under section 22(e) of
the Act in similar situations (e.g., where an investor's account
balance falls below a certain value, provided shareholders are notified
in advance).\711\ Notwithstanding the prohibitions in section 22(e) of
the Act, in the context of a one-time reorganization to distinguish
between retail and institutional money market funds (either in
separating classes into new funds or in ensuring that an existing fund
only has retail or institutional investors), the Commission's position
is that a fund may involuntarily redeem investors who no longer meet
the eligibility requirements in a fund's retail and/or institutional
money market funds without separate exemptive relief, provided that the
fund notifies in writing such investors who become ineligible to invest
in a particular fund at least 60 days before the redemption occurs.
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\710\ For example, if a shareholder may not redeem a portion of
his shares without causing an involuntary redemption of his or her
entire account balance, the shareholder may be deprived of the right
to redeem that portion of his account balance, in contravention of
section 22(e).
\711\ See, e.g., Scudder Group of Funds (pub. avail. Sept. 15,
1992) (no-action relief granted to a fund that proposed to, upon
providing 30 days' notice, involuntarily redeem accounts whose
shareholders failed to provide taxpayer identification numbers); DFA
U.S. Large Cap Portfolio Inc. (pub. avail. Sept. 7, 1990) (no-action
relief provided to a fund that may, upon providing 30 days' notice,
involuntarily redeem investors who failed to maintain at least $15
million in a private advisory account with the investment adviser
that produced annual advisory fees of at least $100,000; Axe-
Houghton Income Fund, Inc. (pub. avail. Mar. 19, 1981) (no-action
relief provided to a fund that may, upon providing a number of
notice and delayed effectiveness provisions, involuntarily redeem
investors whose account balances fall below a prescribed threshold).
---------------------------------------------------------------------------
Accordingly, the Commission is exercising its authority under
section 6(c) of the Act to provide exemptions from these provisions of
the Act to permit a money market fund to reorganize a class of a fund
into a new fund in order to qualify as a retail money market fund and
make certain involuntary redemptions as discussed above.\712\ As
discussed above, 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 discuss the potential costs of
reorganizing funds below.\713\
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\712\ See section 6(c).
\713\ We expect that money market funds that choose to rely on
our exemptive relief above and make this determination in order to
separate an existing retail share class into a new fund would do so
only where the fund's adviser believes it would result in cost
savings as compared with the costs of establishing entirely new
funds (these costs are estimated below). We do not estimate any
additional costs for funds to document the board's determination
that the reorganization results in a fair and approximately pro rata
allocation of the fund's assets. See supra note 709.
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iii. Omnibus Account Issues
As we discussed in the Proposing Release, most money market funds
do
[[Page 47800]]
not have the ability to look through omnibus accounts to determine the
characteristics 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, net redemptions, and they
often present a single buy and single sell order to the fund.
Accordingly, omnibus accountholders may make it more difficult for a
money market fund to assure itself that it is able to operate as a
retail fund.\714\
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\714\ As we noted in the Proposing Release, the challenges of
managing implementation of fund policies through omnibus accounts
are not unique to distinguishing between retail and institutional
funds. 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. Service providers also offer services designed to
facilitate compliance and evaluation of intermediary activities.
---------------------------------------------------------------------------
A money market fund that seeks to qualify as a retail fund must
have policies and procedures that are reasonably designed to limit the
fund's beneficial owners to natural persons. Because an omnibus
accountholder is the shareholder of record (and not the beneficial
owner), retail funds will need to determine that the underlying
beneficial owners of the omnibus account are natural persons. We are
not prescribing the ways in which a fund may seek to satisfy the retail
fund definition, including how the fund will reasonably conclude that
underlying beneficial owners of an omnibus account are natural
persons.\715\ There are many ways for a fund to effectively manage
their relationships with their intermediaries, including contractual
arrangements or periodic certifications. Funds may manage these
relations in the manner that best suits their circumstances. We note
that a fund's policies and procedures could include, for example,
relying on periodic representations of a third-party intermediary or
other verification methods to confirm the individual's ownership
interest, such as when a fund is providing investment only services to
a retirement plan or an omnibus provider is unable or unwilling to
share information that would identify the individual. Regardless of the
specific policies and procedures followed by a fund in reasonably
concluding that the underlying beneficial owners of an omnibus account
are natural persons, we expect that a fund will periodically review the
adequacy of such policies and procedures and the effectiveness of their
implementation.\716\ Accordingly, such periodic reviews would likely
assist funds in detecting and correcting any gaps in funds' policies
and procedures, including a fund's ability to reasonably conclude that
the underlying beneficial owners of an omnibus account are natural
persons. As discussed below in the economic analysis, we have included
in our aggregate cost estimate costs for funds to establish policies
and procedures with respect to omnibus accounts, but we expect that
funds generally will rely on financial intermediaries to implement such
policies (rather than, for example, entering into contractual
arrangements).
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\715\ We note that although it is a fund's obligation to satisfy
the retail fund definition, an intermediary could nonetheless be
held liable for violations of other federal securities laws,
including the antifraud provisions, where institutional investors
are improperly funneled into retail funds.
\716\ See rule 38a-1(a)(3).
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iv. Economic Analysis
In addition to the costs and benefits discussed above, implementing
any reform that distinguishes between retail and institutional money
market funds will likely have similar effects on efficiency,
competition, and capital formation, regardless of how we define a
retail money market fund (or retail investor). We discussed these
effects in the Proposing Release and they are described below.\717\ To
the extent that retail investors prefer a stable NAV money market fund,
our floating NAV reform (that does not apply to retail funds) helps to
maintain the utility of such a money market fund investment product.
However, to the extent that funds seek to maintain a stable NAV by
qualifying as a retail fund, there may be an adverse effect on capital
formation if the associated costs incurred by funds are passed on to
shareholders. Funds that choose to qualify as retail money market funds
will incur some operational costs (discussed below) and, depending on
their magnitude, these costs might affect capital formation and
competition (depending on the varied ability of funds to absorb these
costs).
---------------------------------------------------------------------------
\717\ Commenters did not specifically address our discussion in
the Proposing Release of the effects on efficiency, competition, and
capital formation. A few commenters raised concerns about the costs
associated with reorganizing money market funds into separate retail
and institutional funds (or series), but did not quantify those
costs or object specifically to the costs we estimated in the
Proposing Release. See, e.g., Goldman Sachs Comment Letter; UBS
Comment Letter.
---------------------------------------------------------------------------
To the extent that retail investors prefer a stable NAV product and
funds seek to qualify as retail money market funds under the amended
rules, there may be negative effects on competition by benefitting fund
groups with large percentages of retail investors relative to other
funds. The Commission estimates that, as of February 28, 2014, 39 fund
complexes (or 46% of all fund complexes) have 75% or more of their
total assets self-reported as ``retail.'' \718\ There also could be a
negative effect on competition to the extent that certain fund groups
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 (retail and institutional). The Commission estimates
that, as of February 28, 2014, there are approximately 76 fund
complexes that currently offer separately designated retail and
institutional money market funds (or series).\719\ 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 an
existing structure that includes separate retail and institutional
funds.
---------------------------------------------------------------------------
\718\ Based on iMoneyNet data (39 fund complexes / 84 total fund
complexes reported = 46%).
\719\ Based on data from iMoneyNet.
---------------------------------------------------------------------------
Two commenters also suggested that a bifurcation of existing assets
in money market funds into retail and institutional funds might lead to
a significant reduction in scale and therefore some funds may become
uneconomical to operate, leading to further consolidation in the
industry and a reduction in competition.\720\ As noted above, many fund
complexes already operate under structures that separate retail and
institutional investors, either by established funds, series, or
classes, and therefore demonstrate that doing so is not uneconomical.
We recognize, however, that to the extent there are money market funds
or fund groups that determine that it would not be economical to
operate separate retail and institutional individual money market
funds, there may be a reduction in competition. We believe that such
effects would be relatively small, as discussed in section III.K below.
Finally, we note that there may be an adverse effect on competition to
the extent that large money market funds are able, based on information
from broker-dealers and other intermediaries, to receive full
transparency into
[[Page 47801]]
beneficial owners. In this way, larger money market funds may find it
easier to comply with their policies and procedures (and, in
particular, with regard to omnibus account holders) to qualify as
retail money market funds.
---------------------------------------------------------------------------
\720\ See HSBC Comment Letter; M&T Bank Comment Letter.
---------------------------------------------------------------------------
To the extent that money market funds are not able to distinguish
effectively institutional from retail shareholders, it may have
negative effects on efficiency by permitting ``gaming behavior'' by
shareholders with institutional behavior patterns who nonetheless
invest in retail funds. As discussed above, however, we believe the
natural person test we are adopting reduces significantly the
opportunity for ``gaming behavior'' when compared with our proposal. We
also recognize that establishing qualifying retail money market funds
may also negatively affect fund efficiency to the extent that 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.\721\ The costs of such a re-
organization are discussed below.
---------------------------------------------------------------------------
\721\ We provide exemptive relief from certain provisions of the
Act to facilitate the ability of money market funds to convert an
existing retail fund share class into a separate retail fund series.
See supra notes 706-709 and accompanying text.
---------------------------------------------------------------------------
The costs and benefits of the natural person test are discussed
above. In the Proposing Release, we also quantified the operational
costs that money market funds, intermediaries, and money market fund
service providers might incur in implementing and administering a $1
million daily redemption limit.\722\ As commenters noted, however, we
expect that the approach we are adopting today, based on limiting
beneficial ownership to natural persons, is a simpler and more cost-
effective way to achieve our goals. Commenters noted that the natural
person approach provides a front-end qualifying test that effectively
requires intermediaries and/or fund advisers to verify the nature of
each investor only once. As a result, the natural person test reduces
operational complexity and eliminates some of the need for costly
programming and ongoing monitoring.\723\ These commenters also noted
that, although this approach will require some refinements to existing
systems, these modifications will be significantly less costly than
building a new system for tracking and aggregating daily shareholder
redemption activity (as would be required under our proposal). Below,
we quantify the estimated operational costs associated with
implementing the natural person test.\724\
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\722\ We estimated that the initial costs would range from
$1,000,000 to $1,500,000 for each fund that chooses to qualify as a
retail money market fund and that money market funds and
intermediaries implementing policies and procedures to qualify as
retail money market funds likely would incur ongoing costs of 20%-
30% of the one-time costs, or between $200,000 and $450,000 per
year. See Proposing Release, supra note 25, at nn.245 and 246 and
accompanying text.
\723\ See Retail Fund Joint Comment Letter.
\724\ Our cost estimates are informed by the analysis in the
Proposing Release, comments received, and adjusted to reflect the
definition of a retail money market fund we are adopting today. See
Proposing Release, supra note 25, at section III.A.4.d.
---------------------------------------------------------------------------
The Commission estimates that based on those money market funds
that self-report as ``retail,'' approximately 195 money market funds
are likely to seek to qualify as a retail money market fund under our
amended rules.\725\ We have estimated the ranges of hours and costs
associated with the natural person test that may be required to perform
activities typically involved in making systems modifications,
implementing fund policies and procedures, and performing related
activities.\726\ Although we do not have the information necessary to
provide a point estimate of the potential costs associated with the
natural person test, these estimates include one-time and ongoing costs
to establish separate funds (or series) if necessary, modify systems
and related procedures and controls, update disclosure in a fund's
prospectus, as well as ongoing operational costs. All estimates are
based on the staff's experience, commenter estimates, and discussions
with industry representatives. We expect that only funds that determine
that the benefits of qualifying as a retail money market fund justify
the costs would seek to qualify and thus bear these costs. Otherwise,
they would incur the costs of implementing a floating NAV generally or
decide to liquidate the fund.
---------------------------------------------------------------------------
\725\ Based on iMoneyNet, as of February 28, 2014.
\726\ The costs estimated in this section would be spread among
money market funds, intermediaries, and money market fund service
providers (e.g., transfer agents and custodians). 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, we have 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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As discussed above, many money market funds currently are owned by
both retail and institutional investors, although they often are
separated into retail and institutional share classes. A fund that
seeks to qualify as a retail money market fund under our amended rules
will need to be structured to limit beneficial ownership to only
natural persons, 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. In addition, funds may
have one-time costs to obtain shareholder approval to the extent that a
money market fund's charter documents and/or applicable state law
require shareholder approval to effect a reorganization into separate
retail and institutional money market funds.\727\ Funds and
intermediaries also may incur one-time costs in training staff to
understand the operation of the fund and effectively implement the
natural person test.
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\727\ One commenter provided survey data suggesting that the
one-time range of costs of a shareholder vote to segregate retail
from institutional investors could range from $2 million--$5 million
(57% of respondents) or $1 million--$2 million (14% of respondents).
See SIFMA Comment Letter. No other commenters provided cost
estimates regarding shareholder votes.
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In order to qualify as a retail money market fund, a fund will be
required to adopt and implement policies and procedures reasonably
designed to restrict beneficial owners to natural persons. Adopting
such policies and procedures and modifying systems to identify an
investor as a natural person who is eligible for investment in the fund
also would involve one-time costs for funds and intermediaries.
Regarding omnibus accounts, the rule does not prescribe the way in
which funds should determine that underlying beneficial owners of an
omnibus account are natural persons. We note that a fund may require
(as a matter of doing business) that its intermediaries implement its
policies, including those related to qualification as a retail fund.
However, there are also other ways for a fund to manage their
relationships with their intermediaries, such as entering into a
contractual arrangement or obtaining certifications from the omnibus
account holder. In preparing
[[Page 47802]]
the following cost estimates, we assumed that funds will generally rely
on financial intermediaries to implement their policies without
undergoing the costs of entering into a contractual arrangement with
the financial intermediaries because funds and intermediaries would
typically take the approach that is the least expensive. However, some
funds may choose to undertake voluntarily the costs of obtaining an
explicit contractual arrangement despite the expense.\728\
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\728\ A fund might, as a general business practice, prefer to
enter into a formal contractual arrangement.
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In our proposal, we estimated that the initial costs would range
from $1,000,000 to $1,500,000 for each fund that seeks to satisfy the
retail money market fund definition (as proposed, using a daily
redemption limit).\729\ One commenter provided specific cost estimates
related to our proposal to define a retail money market fund based on a
$1,000,000 daily redemption limit, estimating that it would cost the
fund complex $11,200,000, or $311,000 per fund.\730\
---------------------------------------------------------------------------
\729\ See supra note 722.
\730\ See Federated X Comment Letter (``Federated would have to
create new funds and fund classes in order to implement retail vs.
institutional fund structures. This would cost approximately $1.7
million. In order to accomplish client outreach, effect shareholder
votes, print new regulatory documents, create new sales literature
and engage with investors as to the new nature of their shares and
alternatives, we estimate that Federated will expend another $4
million. Revisiting and revising contractual relationships with
broker-dealers and other intermediaries to provide for enforcement
of the $1 million redemption limit would cost a further $1.3
million. Charges from independent pricing services, custodians,
record-keepers, and transfer agents are expected at nearly $3
million. Upgrades to Federated's internal systems and systems that
interface with customers and transfer agents would cost another $1.2
million.''). These costs total $11,200,000. Averaged across the
number of money market funds offered, this commenter estimates the
one-time implementation costs to be $311,000 per fund ($11,200,000 /
36 money market funds). See supra note 586 (using Form N-MFP data,
Federated manages 36 money market funds).
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Based on staff experience and review of the comments received, as
well as the changes to the retail definition in the final amendments,
we estimate that the one-time costs necessary to implement policies and
procedures and/or for a fund to qualify as a retail money market fund
under our amended rules, including the various organizational,
operational, training, and other costs discussed above, will range from
$830,000 to $1,300,000 per entity.\731\ Our estimates represent a
decrease of $170,000 on the low end, and a decrease of $200,000 on the
high end from our proposed range of estimated operational costs.\732\
Our revised cost estimates reflect, as noted by commenters, a more
cost-effective way to define a retail money market fund. Accordingly,
our cost estimates take into account the fact that most money market
funds will largely be able to satisfy the natural person test using
information that funds already collect and have readily available, and
reduce the estimated amount of resources necessary, for example, to
program systems capable of tracking and aggregating daily shareholder
redemption activity (that would have been required under our
proposal).\733\
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\731\ Estimates also include costs to intermediaries to
implement systems and procedures to satisfy money market fund
requirements regarding omnibus accounts. We estimate that the 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
documents necessary to reorganize fund structures into retail and
institutional funds; and (iii) preparing training materials and
administering training sessions for staff in affected areas. Our
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 2013 at infra note
2214. See infra note 2228 for the various types of professionals we
estimate 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 estimates generally are based on our assumption that
funds would use 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.A.2 of this Release.
\732\ These amounts are calculated as follows: $1,000,000
(proposed)--$830,000 = $170,000 (low end); $1,500,000 (proposed)--
$1,300,000 = $200,000 (high end). See Proposing Release, supra note
25, at n.245 and accompanying text.
\733\ See supra notes 722-724 and accompanying text.
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In addition to these one-time costs, as discussed above, funds may
have one-time costs to obtain shareholder approval to the extent that a
money market fund's charter documents and/or applicable state law
require shareholder approval to effect a reorganization into separate
retail and institutional money market funds. One commenter provided
survey data that estimated the one-time costs would be between
$1,000,000 to $5,000,000.\734\ We note, however, that the survey
respondents are asset managers, many of whom may be responsible for
fund complexes, and it is not clear whether these cost estimates
represent costs to a fund complex or to a single fund. Although the
Commission does not have the information necessary to estimate the
number of funds that may seek shareholder approval to effect a
reorganization, we estimate that it will cost, on average,
approximately $100,000 per fund in connection with a shareholder
vote.\735\ Finally, money market funds that seek to qualify as retail
funds will be required to adopt policies and procedures that are
reasonably designed to limit beneficial owners of the fund to natural
persons. As discussed in section IV.A.2 (Retail Funds) below, we
estimate that the initial time costs associated with adopting policies
and procedures will be $492,800 for all fund complexes.
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\734\ See supra note 727.
\735\ Our estimate is based on the most recently approved
Paperwork Reduction Act renewal for rule 17a-8 under the Act
(Mergers of Affiliated Companies), OMB Control No. 3235-0235,
available at http://reginfo.gov/public/do/PRAViewICR?ref_nbr=201304-3235-015. Our estimate includes legal, mailing, printing,
solicitation, and tabulation costs in connection with a shareholder
vote.
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Funds that intend to qualify as retail money market funds will 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. Other ongoing costs may include
systems maintenance, periodic review and updates of policies and
procedures, and additional staff training. Finally, our estimates
include ongoing costs for funds to manage and monitor intermediaries'
compliance with fund policies regarding omnibus accounts. Accordingly,
we continue to estimate, as we did in the proposal, that money market
funds and intermediaries likely will incur ongoing costs related to
implementation of a retail money market fund definition of 20%-30% of
the one-time costs, or between $166,000 and $390,000 per year.\736\ We
received no comments on this aspect of our proposal.
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\736\ 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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3. Municipal Money Market Funds
Both the fees and gates reform and floating NAV reform will apply
to municipal money market funds (or tax-exempt funds \737\). We discuss
below the
[[Page 47803]]
key characteristics of tax-exempt funds, commenter concerns regarding
our proposal (and final amendments) to apply the fees and gates and
floating NAV reforms to tax-exempt funds, and an analysis of potential
economic effects. We note, as addressed below, that the majority of the
comments received relating to tax-exempt funds were given in the
context of our floating NAV reform.\738\
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\737\ ``Municipal money market fund'' and ``tax-exempt fund''
are used interchangeably throughout this Release. A municipal money
market fund that qualifies as a retail money market fund would not
be subject to the floating NAV reform. See supra section III.C.2.
\738\ Section III.C.7 below discusses more general reasons for
not excluding specific types of money market funds from the fees and
gates amendments. These reasons apply equally to our analysis of
municipal money market funds and the fees and gates amendments.
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a. Background
Tax-exempt funds primarily hold obligations of state and local
governments and their instrumentalities, which pay interest that
generally is exempt from federal income taxes.\739\ Thus, the majority
of investors in tax-exempt money market funds are those investors who
are subject to federal income tax and therefore can benefit from the
funds' tax-exempt interest. As discussed below, state and local
governments rely in part on tax-exempt funds to fund public
projects.\740\ As of February 28, 2014, tax-exempt funds held
approximately $279 billion of assets, out of approximately $3.0
trillion in total money market fund assets.\741\
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\739\ See 2009 Proposing Release, supra note 66.
\740\ See infra section III.C.3.c; see also Investment Company
Institute, Report of the Money Market Working Group, at 18 (Mar. 17,
2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI
Report'').
\741\ Based on data from Form N-MFP.
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Industry data suggests institutional investors hold approximately
29% ($82 billion) of municipal money market fund assets.\742\ This
estimate is likely high, as omnibus accounts (which often represent
retail investors) are often categorized as institutional by third-party
researchers. One commenter, for example, surveyed its institutional
tax-exempt money market funds, and found that approximately 50% of the
assets in these ``institutional'' funds were beneficially owned by
institutions.\743\
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\742\ Based on data from iMoneyNet and Form N-MFP as of February
28, 2014. See supra note 683.
\743\ See Comment Letter of the Dreyfus Corporation (Mar. 5,
2014) (``Dreyfus II Comment Letter'').
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On average, over 70% of tax-exempt funds' assets (valued based upon
amortized cost) are comprised of municipal securities issued as
variable-rate demand notes (``VRDNs'').\744\ The interest rates on
VRDNs are typically reset either daily or every seven days.\745\ VRDNs
include a demand feature that provides the investor with the option to
put the issue back to the trustee at a price of par value plus accrued
interest.\746\ This demand feature is supported by a liquidity facility
such as letters of credit, lines of credit, or standby purchase
agreements provided by financial institutions.\747\ The interest-rate
reset and demand features shorten the duration of the security and
allow it to qualify as an eligible security under rule 2a-7. Tax-exempt
funds also invest in tender option bonds (``TOBs''), which typically
are floating rate securities that provide the holder with a put option
at par, supported by a liquidity facility provided by a commercial
bank.\748\
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\744\ Based on Form N-MFP data as of February 28, 2014 (the
remaining holdings are ``other municipal debt'').
\745\ See Frank J. Fabozzi & Steven V. Mann eds, Handbook of
Fixed Income Securities 237 (8th ed. 2012).
\746\ Id.
\747\ See Neil O'Hara, The Fundamentals of Municipal Bonds 40-41
(6th ed. 2012).
\748\ See id. at 43-44.
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b. Discussion
In the Proposing Release, we noted that because most municipal
money market funds tend to be owned by retail investors, who are among
the greatest beneficiaries of the funds' tax advantages, most tax-
exempt funds would qualify under our proposed definition of retail
money market fund and therefore would continue to offer a stable share
price.\749\ We stated that, although there are some tax-exempt money
market funds that self-classify as institutional funds, we believed
these funds' shareholder base typically is comprised of omnibus
accounts with underlying individual investors. As noted by commenters
and discussed below, we now understand that only some (and not all) of
these funds' shareholder base is comprised of omnibus accounts with
underlying individual investors. We also stated our belief that, like
many securities in prime funds, municipal securities present greater
credit and liquidity risk than U.S. government securities and could
come under pressure in times of stress.
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\749\ A few commenters noted that, in addition to individuals,
corporations, partnerships, and other business entities may enjoy
the tax benefits of investments in tax-exempt funds. See, e.g.,
Comment Letter of Federated Investors (Regulation of Tax-Exempt
Money Market Funds) (Sept. 16, 2013) (``Federated VII Comment
Letter''). One commenter noted that, while corporations may not
enjoy the tax advantages afforded under the Internal Revenue Code to
exempt dividends to the full degree that individuals can enjoy them,
eligible corporations can benefit from a tax exemption under certain
conditions (such as meeting a minimum holding period). See Dreyfus
II Comment Letter.
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Many commenters suggested that we not apply our floating NAV reform
\750\ or our fees and gates reform \751\ to municipal money market
funds. Commenters raised specific concerns about the ability and extent
to which tax-exempt funds would qualify as retail money market funds as
proposed (and therefore be permitted to maintain a stable NAV). Several
commenters noted that high-net-worth individuals, who often invest in
tax-exempt funds because of the tax benefits, engage in periodic
transactions that exceed the proposed $1 million daily redemption
limit, which would effectively disqualify them from investing in a
retail municipal fund, as proposed.\752\ We are addressing these
concerns by adopting a definition of retail money market fund that will
allow many of these individuals to invest in tax-exempt funds that
offer a stable NAV. Funds that wish to qualify as retail money market
funds will be required to limit beneficial ownership interests to
``natural persons'' (e.g., individual accounts registered with social
security numbers). Because the retail money market fund definition is
not conditioned on a daily redemption limitation, but instead requires
that retail money market funds restrict beneficial ownership to natural
persons, high-net-worth individuals will not be subject to a redemption
limit and thus should be able to continue investing in tax-exempt funds
much like they do today.\753\
---------------------------------------------------------------------------
\750\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter; ICI Comment Letter.
\751\ See, e.g., ICI Comment Letter; J.P. Morgan Comment Letter;
Vanguard Comment Letter; see also Dreyfus II Comment Letter,
(suggesting the fees and gates requirements should be limited to
taxable prime funds); Legg Mason & Western Asset Comment Letter.
\752\ See, e.g., Fidelity Comment Letter; Dechert Comment
Letter; Fin. Svcs. Roundtable Comment Letter.
\753\ Tax-exempt funds would, however, be potentially subject to
our fees and gates reform.
---------------------------------------------------------------------------
Several commenters expressed concern that a number of municipal
money market funds would not qualify as retail money market funds, as
proposed, because institutional investors hold them. Commenters noted
that approximately 30% (and historically between 25% and 40%\754\) of
tax-exempt funds currently self-report as institutional funds.\755\ We
understand that some but not all of these funds' shareholder base is
comprised of
[[Page 47804]]
omnibus accounts with underlying individual investors. A number of
commenters supported the view that most investors in tax-exempt funds
are individuals.\756\ One commenter stated its belief, however, that
institutions rather than individuals or natural persons beneficially
own a significant, if not majority, portion of the assets invested in
these self-reported institutional tax-exempt funds.\757\ Although we
understand that some omnibus accounts may be comprised of institutions
without underlying individual beneficial owners, the lack of a
statutory or regulatory definition of institutional and retail funds,
along with a lack of information regarding investor attributes in
omnibus accounts, prevents us from estimating with precision the
portion of investors and assets in tax-exempt funds that self-report as
institutional that are beneficially owned by institutions. As discussed
above, however, industry data suggests that approximately 30% of
municipal money market fund assets are held by institutional
investors--investors that may not qualify to invest in a retail
municipal money market fund.\758\
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\754\ Our staff's analysis, based on iMoneyNet data, shows that
the amount of municipal money market fund assets held by
institutional investors varied between 25% to 43% between 2001 to
2013.
\755\ See, e.g., BlackRock II Comment Letter; Federated VII
Comment Letter; J.P. Morgan Comment Letter; Dreyfus II Comment
Letter.
\756\ See, e.g., T. Rowe Price Comment Letter (``[t]he tax-
exempt money market is retail-dominated''); Schwab Comment Letter;
SIFMA Comment Letter.
\757\ See Dreyfus II Comment Letter, supra note 743 and
accompanying text. This commenter provided data suggesting that
approximately 50% of the assets of its self-reported
``institutional'' tax-exempt funds are beneficially owned by
institutional investors. We acknowledge that certain tax-exempt
funds may be beneficially owned by a large number of institutional
investors. However, this data, which reflects only an analysis of
this commenter's money market funds (rather than industry-wide
data), does not necessarily support a finding that a majority of
such assets is ``institutional'' in nature.
\758\ See supra note 742.
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Several commenters argued that tax-exempt funds should not be
subject to the fees and gates and floating NAV reforms because the
municipal money market fund industry is not systemically risky. In
support, commenters pointed to the relatively small amount of assets
managed by municipal money market funds, the stability of tax-exempt
funds during recent periods of market stress, and the diversity of the
municipal issuer market.\759\ As discussed above, we acknowledge that
the current institutional municipal money market fund industry is small
relative to the overall money market fund industry. Despite its
relatively small size, however, we are concerned that institutional
investors that currently hold prime funds might be incentivized to
shift assets from prime funds to municipal money market funds as an
alternative stable NAV investment. This could undermine the goals of
reform with respect to the floating NAV requirement by providing an
easy way for institutional investors to keep stable value pricing while
continuing to invest in funds with assets that, relatively speaking,
have a risk character that is significantly closer to prime funds than
government funds.\760\
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\759\ See, e.g., Fidelity Comment Letter; Schwab Comment Letter;
Deutsche Comment Letter; T. Rowe Price Comment Letter; Dreyfus
Comment Letter.
\760\ In addition, as discussed below, municipal money market
funds may be subject to heavy redemptions, even if they have not
been in the past. The fees and gates amendments are intended to give
funds and their boards tools to stem such heavy redemptions.
---------------------------------------------------------------------------
Commenters argued that historical shareholder flows in municipal
money market funds, as well as their past resiliency, demonstrate that
they are not prone to runs or especially risky.\761\ They pointed out
that shareholder flows from tax-exempt funds were moderate during times
of recent market stress compared to significant outflows from
institutional prime money market funds.\762\ A review of money market
fund industry asset flows during the market stress in 2008 and 2011
shows that tax-exempt funds remained relatively flat and tracked
investor flows in other retail prime funds.\763\ We believe that some
of this stability may be attributable to municipal money market funds'
significant retail investor base rather than low portfolio risk.\764\
In this regard, we note that although investors did not flee municipal
funds in times of market stress, they also did not move assets into
municipal funds as they did into government funds.\765\ Accordingly, it
appears that those investors did not perceive the risk characteristics
of municipal funds to be similar to those of government funds.
Consistent with this observation, our analysis indicates that the
shadow price of tax-exempt funds is distributed more similarly to that
of prime funds than government funds.\766\ Specifically, the volatility
of the distribution of municipal money market fund shadow prices is
significantly larger than the volatility of government funds.\767\ In
addition, our staff's analysis of historical shadow prices shows that
tax-exempt funds are more likely than government funds to experience
large losses.\768\ Thus, we believe municipal funds are more similar in
nature to prime funds than government funds for purposes of the
floating NAV reform.
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\761\ See, e.g., Fidelity Comment Letter (noting that, more
recently, the largest municipal bankruptcy (City of Detroit) had no
discernible effects on money market funds); ICI Comment Letter; J.P.
Morgan Comment Letter. A number of commenters also noted that during
these periods of market stress, tax-exempt funds did not experience
contagion from heavy redemptions like those experienced by
institutional prime funds. See, e.g., ICI Comment Letter (noting
that a tax-exempt fund sponsored by Lehman Brothers (the Neuberger
Berman Tax-Free Fund) had two-thirds of its total net assets
redeemed, but had no ripple effect on other tax-exempt funds or the
broader municipal market); Dechert Comment Letter; BlackRock II
Comment Letter.
\762\ Id.
\763\ See iMoneyNet (analyzing money market fund industry flows
from September 12-December 19, 2008 and June 1-November 16, 2011).
See also DERA Study, supra note 24, at 11, Figure 3.
\764\ See ICI Comment Letter (stating that ``[t]he calm response
of tax-exempt money market fund investors to events in Detroit is
characteristic of how retail [emphasis added] investors are
generally perceived to respond to market stresses.'').
\765\ See DERA Study, supra note 24, at 7-8.
\766\ Using data collected from Form N-MFP and iMoneyNet, the
standard deviation of shadow prices (which is a measure used to
assess the overall riskiness of a fund) estimated over the time
period from November 2010 to February 2014 are 0.00023, 0.00039, and
0.00052 for government, prime, and tax-exempt funds, respectively.
This data shows that the standard deviation of tax-exempt funds is
statistically significantly larger than the other two types of funds
with a 99% confidence level. Furthermore, the frequency at which the
shadow prices for tax-exempt funds is less than 1.000 is greater
than for government funds and is increasing at lower shadow price
values. Accordingly, this means that the likelihood for large
negative returns and hence large losses is greater for tax-exempt
funds than for government funds.
\767\ Id.
\768\ Id.
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Several commenters noted that the diversity of the municipal issuer
market reduces the risks associated with municipal money market
funds.\769\ We note that although there is some diversity among the
direct issuers of municipal securities, the providers of most of the
demand features for the VRDNs, most of which are financial services
firms, are highly concentrated.\770\ This is a significant
countervailing consideration because VRDNs comprise the majority of
tax-exempt funds' portfolios.\771\ This level of concentration
increases municipal funds' exposure to financial sector risk relative
to, for example, government funds.\772\ And, in this regard, we are
mindful of the potential for increased sector risk to the financial
services firms that provide the demand features if investors reallocate
assets to tax-exempt funds that are not subject to the fees and gates
and floating NAV reforms.
---------------------------------------------------------------------------
\769\ See supra note 759 and accompanying text.
\770\ See DERA memo ``Municipal Money Market Funds Exposure to
Parents of Guarantors'' http://www.sec.gov/comments/s7-03-13/s70313-323.pdf.
\771\ See supra note 744 and accompanying text.
\772\ Based on a review of Form N-MFP data as of February 28,
2014, over 10% of the amortized cost value of VRDNs are guaranteed
by a single bank, and approximately 54% of the amortized cost value
is guaranteed by 10 banks.
---------------------------------------------------------------------------
A number of commenters cited the resilient portfolio construction
of municipal money market funds and
[[Page 47805]]
argued that the liquidity risk, interest rate risk, issuer risk, and
credit/default risk of tax-exempt funds are more similar to government
funds than prime funds.\773\ As discussed above, however, staff
analysis shows that the distribution of fluctuations in the shadow NAV
of tax-exempt funds is more similar to that of prime funds than
government funds.\774\ Municipal securities typically present greater
credit and liquidity risk than government securities.\775\ We believe
that recent municipal bankruptcies have highlighted liquidity concerns
related to municipal money market funds and note that, although
municipal money market funds have previously weathered these events,
there is no guarantee that they will be able to do so in the future.
---------------------------------------------------------------------------
\773\ See, e.g., Fidelity Comment Letter (weekly liquid assets
of tax-exempt funds is typically more than double the current 30%
requirement under rule 2a-7). See also, e.g., ICI Comment Letter;
SIFMA Comment Letter; Invesco Comment Letter; Legg Mason & Western
Asset Comment Letter. Interest rate risk, as measured by weighted
average maturity, is consistently lower for tax-exempt funds
(averaging 35 days, well below the 60-day requirement in rule 2a-7)
than prime and government funds. See Fidelity Comment Letter (citing
iMoneyNet). Commenters also argued that the credit risk of tax-
exempt funds is more similar to government funds than prime funds.
See, e.g., ICI Comment Letter (tax-exempt securities have low credit
risk because municipalities are not generally interconnected and
deterioration occurs over a protracted time); Dreyfus Comment Letter
(many distressed issues (e.g., City of Detroit) become ineligible
under rule 2a-7s risk-limiting conditions and therefore bankruptcy
does not affect direct holdings of tax-exempt funds).
\774\ See supra note 766.
\775\ See, e.g., Notice of the City of Detroit, Michigan's
bankruptcy filing with the United States Bankruptcy Court, Eastern
District of Michigan, available at http://www.mieb.uscourts.gov/sites/default/files/detroit/Chp%209%20Detroit.pdf.
---------------------------------------------------------------------------
Further, although we recognize that the structural features of
VRDNs may provide tax-exempt funds with higher levels of weekly liquid
assets and reduced interest rate risk as compared with prime funds, we
do not find that on balance that warrants treating municipal funds more
like government funds than prime funds. This is so because, among other
things, the liquidity risk, interest rate risk, and credit risk
characteristics result from concentrated exposure to VRDNs, and not
because the municipal debt securities underlying the VRDNs or the
related structural support are inherently liquid, free from interest
rate risk, or immune from credit risks in the way that government
securities generally are.\776\ Indeed, long-term municipal debt
securities underlie most VRDNs, and these securities infrequently
trade.\777\ Instead, the liquidity is provided through the demand
feature to a concentrated number of financial institutions, and money
market funds have experienced problems in the past when a large number
of puts on securities were exercised at the same time.\778\
---------------------------------------------------------------------------
\776\ See supra note 744 and accompanying text.
\777\ See supra notes 744-748 and accompanying text.
\778\ See DERA Study, supra note 24, at Table 1 (discussing how
money market funds were adversely affected because of credit events
that resulted in large numbers of securities being ``put'' back to
demand feature providers, which resulted in bankruptcy, including
Mutual Benefit Life Insurance Company and General American Life
Insurance Co.).
---------------------------------------------------------------------------
In fact, when we adopted the 2010 amendments to rule 2a-7, we cited
to commenter concerns regarding the market structure of VRDNs and heavy
reliance of tax-exempt funds on these security investments in
determining not to require that municipal money market funds meet the
10% daily liquid asset requirement that other money market funds must
satisfy.\779\ Commenters did not generally support adding such a
requirement, but the lack of a mandated supply of daily liquid assets
leaves these funds more exposed to potential increases in redemptions
in times of fund and market stress.\780\ As a result, the portfolio
composition of some tax-exempt funds may change and present different
risks in the future. In addition, because of the daily liquidity issues
associated with VRDNs and the fact that tax-exempt money market funds
are not required to maintain 10% daily liquid assets,\781\ these funds
in particular may experience stress on their liquidity necessitating
the use of fees and gates to manage redemptions (even with respect to
the lower level of redemptions expected in a tax-exempt retail money
market fund as compared to an institutional prime fund).
---------------------------------------------------------------------------
\779\ See 2010 Adopting Release, supra note 17, at nn.240-243
and accompanying text.
\780\ See Fidelity Comment Letter; but see Wells Fargo Comment
Letter. We note also that new regulations also may affect the
issuance of the dominant types of securities that now provide the
stability of tax-exempt funds. For example, because TOB programs are
not exempt from the Volcker rule, banks and their affiliates will no
longer be able to sponsor or provide support to a TOB program. See
Volcker Rule, infra note 782. As a result, the portfolio composition
of some tax-exempt funds may change and present different risks in
the future.
\781\ See rule 2a-7(d)(4)(ii).
---------------------------------------------------------------------------
Several commenters also argued that certain structural features of
tax-exempt funds make them more stable than prime money market funds
and therefore these commenters believe that the floating NAV reform
should not apply to tax-exempt funds. For example, these commenters
observed that a tax-exempt fund's investments, primarily VRDNs, and, to
a lesser extent, TOBs,\782\ have structural features (e.g., contractual
credit enhancements or liquidity support provided by highly rated banks
and one-to-seven day interest rate resets) that facilitate trading at
par in the secondary market.\783\ We agree that these features lower
the risk of portfolio holdings as compared to prime money market funds,
but also recognize that holding municipal money market funds presents
higher risks than those associated with government or Treasury funds.
Not all VRDNs have credit support,\784\ and tax-exempt funds present
credit risk.\785\ Accordingly, we
[[Page 47806]]
do not agree with commenters that, as noted above, suggest that the
credit risk of tax-exempt funds is more similar to government funds
than prime funds.
---------------------------------------------------------------------------
\782\ Participation by banks and their affiliates in TOB
programs are subject to the prohibitions and restrictions applicable
to covered funds under the recently adopted Volcker Rule
(implemented by Title VI of the Dodd-Frank Act, named for former
Federal Reserve Chairman Paul Volcker, Section 619 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (12 U.S.C. 1851)
(``Volcker Rule'')).
\783\ See, e.g., Fidelity Comment Letter; ICI Comment Letter;
SIFMA Comment Letter.
\784\ Based on Form N-MFP data as of February 28, 2014, only 57%
of VRDNs, which make up a majority of the assets in municipal money
market funds, have a guarantee that protects a fund in case of
default. In comparison, the federal government guarantees all
government securities held by government funds.
\785\ Credit risk may result from the financial health of the
issuer itself, such as when the city of Detroit recently filed for
bankruptcy, becoming the largest municipal issuer default in U.S.
history, leading to significant outflows from municipal bond funds.
See Jeff Benjamin, Detroit bankruptcy has surprising long-term
implications for muni bond market, Crain's Detroit Business (Dec. 3,
2013) http://www.crainsdetroit.com/article/20131203/NEWS/131209950/detroit-bankruptcy-has-surprising-long-term-implications-for-muni#.
Although Detroit's credit deteriorated over a long period of time
and thus the bankruptcy did not cause tax-exempt money market funds,
which had largely anticipated the event, to experience significant
losses, in the past there have not have not been significant lead
times before a municipality evidenced a credit deterioration. See,
e.g., ICI Comment Letter. For example, Orange County, California,
had high-quality bond credit ratings just before filing one of the
largest municipal bankruptcies in U.S. history on December 6, 1994.
See Handbook of Fixed Income Securities, supra note 745, at 239.
Orange County caused one money market fund to break the buck and
several sponsors to inject millions of dollars of additional cash to
rescue their funds. See, e.g., Viral V. Acharya et al, Regulating
Wall Street: The Dodd-Frank Act and the New Architecture of Global
Finance 308 (2011); see also Suzanne Barlyn, Investing Strategy What
the Orange County Fiasco Means to the Muni Bond Market, Fortune
(Jan. 16, 1995), http://archive.fortune.com/magazines/fortune/fortune_archive/1995/01/16/201819/index.htm. Another type of credit
risk arises when financial institutions provide credit enhancement
to municipal securities. For example, in 1992, Mutual Benefit Life
Insurance Company (``Mutual Benefit'') went into conservatorship
with the New Jersey Insurance Commissioner. The company had
guaranteed forty-three municipal bond issues totaling $600 million,
which financed money-losing real estate projects. Mutual Benefit's
insolvency resulted in the termination of its guarantee on the bonds
and halted interest payments resulting in losses for investors. See
C. Richard Lehmann, Municipal Bond Defaults, in The Handbook of
Municipal Bonds 509 (Susan C. Heide et al. eds., 1994).
---------------------------------------------------------------------------
For all of the above reasons, we believe that tax-exempt funds
should be subject to the fees and gates and floating NAV reforms. As
discussed, the risk profile of institutional municipal money market
funds more closely approximates that of prime funds than government
funds. Tax-exempt funds present credit risk, typically rely on a
concentrated number of financial sector put or guarantee providers, and
have portfolios comprised largely of a single type of structured
investment product--all of which may present future risks that may be
exacerbated by a potential migration of investors from prime funds that
are unable or unwilling to invest in a floating NAV money market fund
or money market fund that may impose fees and gates. Accordingly, we
believe that tax-exempt funds should be subject to the fees and gates
and floating NAV reforms adopted today.\786\
---------------------------------------------------------------------------
\786\ Our rationale is consistent with our finding, discussed
above, that we no longer believe that exempting institutional prime
money market funds under section 6(c) of the Act is appropriate. See
supra note 446 and accompanying text .
---------------------------------------------------------------------------
c. Economic Analysis of FNAV
Although we expect that many tax-exempt funds will qualify as
retail money market funds and therefore be able to maintain a stable
NAV (as they do today), there are, as we discussed above, some
institutional investors in municipal money market funds that may be
unable or unwilling to invest in a floating NAV fund.\787\ To the
extent that institutional investors continue to invest in a floating
NAV municipal money market fund, the benefits of a floating NAV
discussed in section III.B extend to these types of funds. Because a
floating NAV requirement may reduce investment in those funds, however,
we recognize that there will likely be costs for the sponsors of tax-
exempt funds, the institutions that invest in these types of funds, and
tax-exempt issuers. These costs are the same as those described in
section III.B for institutional prime funds and the costs described in
section III.I for corporate issuers.
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\787\ We believe that the economic analysis that follows would
apply equally in the context of the fees and gates reform. For a
discussion of the economic implications that may arise for
investors, including retail investors who may be unable or unwilling
to invest in a fund that can impose fees and gates, including
potential implications on state and local funding, see infra section
III.K.
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To the extent that institutions currently invest in tax-exempt
funds and are unwilling to invest in a floating NAV tax-exempt fund,
the demand for municipal securities, for example, may fall and the
costs of financing for municipalities may rise.\788\ We anticipate the
impact, however, will likely be relatively small. As of the last
quarter of 2012, tax-exempt funds held approximately 7% of the
municipal debt outstanding.\789\ Of that 7%, institutional investors,
who might divest their municipal fund assets if they do not want to
invest in a floating NAV fund, held approximately 30% of municipal
money market fund assets.\790\ Accordingly, we estimate institutional
tax-exempt funds hold approximately 2% of the total municipal debt
outstanding and thus 2% is at risk of leaving the municipal debt
market.\791\ Although this could impact capital formation for
municipalities, there are several reasons to believe that the impact
would likely be small (including minimal impact on efficiency and
competition, if any). First, institutional investors that currently
invest in municipal funds likely value the tax benefits of these funds
and many may choose to remain invested in them to take advantage of the
tax benefits even though they might otherwise prefer stable to floating
NAV funds. Second, to the extent that institutional investors divesting
municipal funds lead to a decreased demand for municipal debt
instruments, other investors may fill the gap. As discussed in the
Proposing Release, ``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.\792\ 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.'' \793\
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\788\ A number of commenters argued that applying our floating
NAV reform to tax-exempt funds would reduce demand for municipal
securities and raise the costs of financing. See, e.g., Fidelity
Comment Letter (noting that tax-exempt funds purchase approximately
65% of short-term municipal securities and that fewer institutional
investors in tax-exempt funds will lead to less purchasing of short-
term municipal securities by tax-exempt funds and a corresponding
higher yield paid by municipal issuers to attract new investors);
BlackRock II Comment Letter; Federated VII Comment Letter; ICI
Comment Letter; Comment Letter of Mayors, City of Irving, TX, et al
(Sept. 12, 2013) (``U.S. Mayors Comment Letter'').
\789\ Other published data is consistent with this estimate.
See, for example, the Federal Reserve Board ``Flow of Funds Accounts
of the United States'' (Z.1), which details the flows and levels of
municipal securities and loans, to estimate outstanding municipal
debt (March 6, 2014), available at http://www.federalreserve.gov/releases/z1/current/. These estimates are consistent with previous
estimates presented in U.S. Securities and Exchange Commission. 2012
Report on the Municipal Securities Market. The estimates in the 2012
report were based on data from Mergent's Municipal Bond Securities
Database.
\790\ See supra note 742 and accompanying text.
\791\ This estimate is calculated as follows: tax-exempt funds
hold 7% of municipal debt outstanding x 30% of tax-exempt assets
held by institutional investors = 2.1% of total tax-exempt debt held
by institutions.
\792\ The statistics in this paragraph are based on the Federal
Reserve Board's Flow of Funds data.
\793\ See Proposing Release, supra note 25, at 309.
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Although institutional municipal funds represent a relatively small
portion of the municipal debt market, we recognize that these funds
represent a significant portion of the short-term municipal debt
market.\794\ According to Form N-MFP data, municipal money market funds
held $256 billion in VRDNs and short-term municipal debt as of the last
quarter of 2013.\795\ Effectively, municipal money market funds
absorbed nearly 100% of the outstanding VRDNs and short-term municipal
debt. Considering that institutional tax-exempt funds represented
approximately 30% of the municipal money market fund market, it follows
that institutional tax-exempt funds likely held about $77 billion in
VRDNs and short-term municipal debt. Any reduction in municipal funds
therefore could have an appreciable impact on the ability of
municipalities to obtain short-term lending. That said, this impact
could be substantially mitigated because, as discussed above, other
market participants may buy these securities or municipalities will
adapt to a changing market by, for example, altering their debt
structure. As discussed in the Proposing Release, ``[t]o make their
issues attractive to alternative lenders, municipalities lengthened the
terms of some of their debt securities,'' \796\ in the face of changing
market conditions in recent years. To the extent that other market
participants step in and fill the potential gap in demand, competition
may increase. To the extent other market participants do not step in
and fill the gap, capital formation may be adversely affected. Finally,
if municipalities are required to alter their debt structure to foster
demand for their securities (e.g.,
[[Page 47807]]
because demand declined as a result of our amendments), there may be an
adverse effect on efficiency. Although we discuss above ways in which
the short-term municipal debt market may adapt to continue to raise
capital as it does today, we acknowledge that our floating NAV reform
will impact institutional investors in tax-exempt funds and therefore
likely impact the short-term municipal markets. On balance, however, we
believe that realizing the goals of this rulemaking, including
recognizing the concerns discussed above with respect to the risks
presented by tax-exempt funds, justifies the potential adverse effects
on efficiency, competition, and capital formation.
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\794\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter.
\795\ Based on data from N-MFP and iMoneyNet.
\796\ See Proposing Release, supra note 25, at 309.
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4. Implications for Local Government Investment Pools
As we discussed in the Proposing Release, we recognize that many
states have established local government investment pools (``LGIPs''),
money market fund-like investment pools that invest in short-term
securities,\797\ which are required by law or investment policies to
maintain a stable NAV per share.\798\ Accordingly, as we discussed in
the Proposing Release, the floating NAV reform may have implications
for LGIPs, including the possibility that state statutes and policies
may need to be amended to permit the operation of investment pools that
adhere to amended rule 2a-7.\799\ In addition, some commenters
suggested that our floating NAV reform, as well as the liquidity fees
and gates requirement, may result in outflows of LGIP assets into
alternative investments that provide a stable NAV and/or do not
restrict liquidity.\800\
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\797\ LGIPs tend to emulate typical money market funds by
maintaining a stable NAV per share through investments in short-term
securities. See infra III.K.1, Table 1, note N.
\798\ See, e.g., Comment Letter of U.S. Chamber of Commerce to
the Hon. Elisse Walter (Feb. 13, 2013) (``Chamber III Comment
Letter''), available at http://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 http://www.trs.virginia.gov/cash/lgip.aspx. Not all LGIPs are currently managed to maintain a
stable NAV, however, see infra section III.K.1, Table 1, note N.
\799\ GASB states that LGIPs that are operated in a manner
consistent with rule 2a-7 (i.e., a ``2a-7-like pool'') may use
amortized cost to value securities (and presumably, facilitate
maintaining a stable NAV per share). See GASB, Statement No. 31,
Accounting and Financial Reporting for Certain Investments and for
External Investment Pools (Mar. 1997).
\800\ See, e.g., Comment Letter of TRACS Financial/Institute of
Public Investment Management (Sept. 17, 2013) (``TRACS Financial
Comment Letter''); Comment Letter of Treasurer, State of Georgia
(Sept. 16, 2013) (``Ga. Treasurer Comment Letter''); Comment Letter
of County of San Diego Treasurer-Tax Collector (Sept. 17, 2013)
(``San Diego Treasurer Comment Letter''). Because we are unable to
predict how GASB will respond to our final amendments to rule 2a-7,
we cannot quantify the extent to which LGIP assets may migrate into
alternative investments.
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A few commenters noted that it is the GASB reference to ``2a-7
like'' funds that links LGIPs to rule 2a-7, and not state
statutes.\801\ Some commenters noted that our money market fund reforms
do not directly affect LGIPs because the decision as to whether LGIPs
follow our changes to rule 2a-7 is determined by GASB and the states,
not the Commission.\802\ Some commenters suggested that, in response to
our floating NAV reform, GASB and the states might decouple LGIP
regulation from rule 2a-7 and continue to operate at a stable
value.\803\ A few commenters suggested that we make clear that the
changes we are adopting to rule 2a-7 are not intended to apply to
LGIPs,\804\ and also reiterated concerns similar to those raised by
other commenters on our floating NAV reform more generally (e.g.,
concerns about using market-based valuation, rather than amortized
cost).\805\
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\801\ See, e.g., TRACS Financial Comment Letter; Federated IX
Comment Letter.
\802\ See, e.g., Federated II Comment Letter; Ga. Treasurer
Comment Letter; Va. Treasury Comment Letter.
\803\ See, e.g., Federated II, Comment Letter; Federated IV
Comment Letter; TRACS Financial Comment Letter.
\804\ See, e.g., Ga. Treasurer Comment Letter; Va. Treasury
Comment Letter.
\805\ See Ga. Comment Letter; Comment Letter of West Virginia
Board of Treasury Investments (Sept. 17, 2013) (``WV Bd. of Treas.
Invs. Comment Letter'').
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We acknowledge, as noted by commenters, that there may be effects
and costs imposed on LGIPs as a result of the reforms we are adopting
today. We expect it is likely that GASB will reevaluate its accounting
standards in light of the final amendments to rule 2a-7 that we are
adopting today and take action as it determines appropriate.\806\ We do
not, however, have authority over the actions that GASB may or may not
take, nor do we regulate LGIPs under rule 2a-7 or otherwise. In order
for certain investors to continue to invest in LGIPs as they do today,
state legislatures may determine that they need to amend state statutes
and policies to permit investment in investment pools that adhere to
rule 2a-7 as amended (unless GASB were to de-couple LGIP accounting
standards from rule 2a-7). GASB and state legislatures may address
these issues during the two-year compliance period for the fees and
gates and floating NAV reforms.\807\ As noted above, a few commenters
suggested that state statutes and investment policies may need to be
amended, but did not provide us with information regarding how various
state legislatures and other market participants might react.
Accordingly, we remain unable to predict how various state legislatures
and other market participants will react to our reforms, nor do we have
the information necessary to provide a reasonable estimate of the
impact on LGIPs or the potential effects on efficiency, competition,
and capital formation.\808\
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\806\ GASB has currently included as a potential project in 2014
an agenda item to identify potential alternative pool structures
that could be suitable in the event that the Commission amends the
way in which money market funds operate under rule 2a-7, including a
move to a floating NAV. See Government Accounting Standards Board,
Technical Plan for the First Third of 2014: Technical Projects (2a7-
Like External Investment Pools), available at http://gasb.org/cs/ContentServer?c=Document_C&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=1176163713461.
\807\ See infra section III.N.
\808\ As noted above, we do not have authority over the actions
of GASB and/or its decision to facilitate the operation of LGIPs as
stable value investment vehicles through linkage to rule 2a-7
(including, as amended today).
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5. Unregistered Money Market Funds Operating Under Rule 12d1-1
Several commenters expressed concern regarding amended rule 2a-7's
effect on unregistered money market funds that choose to operate under
certain provisions of rule 12d1-1 under the Investment Company
Act.\809\ Rule 12d1-1 permits investment companies (``acquiring
investment companies'') to acquire shares of registered money market
funds in the same or in a different fund group in excess of the
limitations set forth in section 12(d)(1) of the Investment Company
Act.\810\ In
[[Page 47808]]
addition to providing an exemption from section 12(d)(1) of the
Investment Company Act, rule 12d1-1 also provides exemptions from
section 17(a) and rule 17d-1, which restrict a fund's ability to enter
into transactions and joint arrangements with affiliated persons.\811\
A fund's investments in unregistered money market funds is not
restricted by section 12(d)(1).\812\ Nonetheless, these investments are
subject to the affiliate transaction restrictions in section 17(a) and
rule 17d-1 and therefore require exemptive relief from such
restrictions.\813\ Rule 12d1-1 thus permits a fund to invest in an
unregistered money market fund without having to comply with the
affiliate transaction restrictions in section 17(a) and rule 17d-1,
provided that the unregistered money market fund satisfies certain
conditions in rule 12d1-1.
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\809\ Dechert Comment Letter; Comment Letter of Russell
Investments (Sept. 17, 2013) (``Russell Comment Letter'');
Oppenheimer Comment Letter; UBS Comment Letter. See also Wells Fargo
Comment Letter (arguing that proposed amendments to Form PF should
not apply to unregistered liquidity vehicles owned exclusively by
registered funds and complying with rule 12d1-1 under the Investment
Company Act). We address the Form PF requirements for unregistered
money market funds below. See infra section III.H.
\810\ Under section 12(d)(1)(A), an investment company (and
companies or funds it controls) is generally prohibited from
acquiring more than three percent of another investment company's
outstanding voting securities, investing more than five percent of
its total assets in any given investment company, and investing more
than 10 percent of its total assets in investment companies in the
aggregate. See also section 12(d)(1)(B) (limiting the sale of
registered open-end fund shares to other funds).
\811\ Section 17(a) generally prohibits affiliated persons of a
registered fund (``first-tier affiliates'') or affiliated persons of
the fund's affiliated persons (``second-tier affiliates'') from
selling securities or other property to the fund (or any company the
fund controls). Section 17(d) of the Investment Company Act makes it
unlawful for first- and second-tier affiliates, the fund's principal
underwriters, and affiliated persons of the fund's principal
underwriters, acting as principal, to effect any transaction in
which the fund, or a company it controls, is a joint or a joint and
several participant in contravention of Commission rules. Rule 17d-
1(a) prohibits first- and second-tier affiliates of a registered
fund, the fund's principal underwriters, and affiliated persons of
the fund's principal underwriter, acting as principal, from
participating in or effecting any transaction in connection with any
joint enterprise or other joint arrangement or profit-sharing plan
in which the fund (or any company it controls) is a participant
unless an application regarding the enterprise, arrangement or plan
has been filed with the Commission and has been granted.
\812\ Private funds are generally excluded from the definition
of an ``investment company'' for purposes of the Investment Company
Act. However, private funds that fall under section 3(c)(1) or
3(c)(7) are deemed to be an investment company for purposes of the
limitations set forth in section 12(d)(1)(A)(i) and 12(d)(1)(B)(i)
governing the purchase or other acquisition by such private fund of
any security issued by any registered investment company and the
sale of any securities issued by any registered investment company
to any such private fund. Although a private fund is subject to the
limitations set forth in section 12(d) with respect to its
investment in a registered investment company, a registered
investment company is not subject to the limitations set forth in
section 12(d) with respect to its investment in any such private
fund.
\813\ See Funds of Funds Investments, Investment Company Act
Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)].
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Unregistered money market funds typically are organized by a fund
adviser for the purpose of managing the cash of other investment
companies in a fund complex and operate in almost all respects as a
registered money market fund, except that their securities are
privately offered and thus not registered under the Securities
Act.\814\ For purposes of investments in an unregistered money market
fund, the rule 12d1-1 exemption from the affiliate transaction
restrictions is available only for investments in an unregistered money
market fund that operates like a money market fund registered under the
Investment Company Act. To be eligible, an unregistered money market
fund is required to (i) limit its investments to those in which a money
market fund may invest under rule 2a-7, and (ii) undertake to comply
with all other provisions of rule 2a-7.\815\ Therefore, unless
otherwise exempted, unregistered money market funds choosing to operate
under rule 12d1-1 would need to comply with the amendments to rule 2a-7
we are adopting today.
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\814\ Id.
\815\ Rule 12d1-1(d)(2)(ii). In addition, the unregistered money
market fund's adviser must be registered as an investment adviser
with the Commission. See rule 12d1-1(b)(2)(ii). In order for a
registered fund to invest in reliance on rule 12d1-1 in an
unregistered money market fund that does not have a board of
directors, the unregistered money market fund's investment adviser
must perform the duties required of a money market fund's board of
directors under rule 2a-7. See rule 12d1-1(d)(2)(ii)(B). Lastly, the
investment company is also required to reasonably believe that the
unregistered money market fund operates like a registered money
market fund and that it complies with certain provisions of the
Investment Company Act. See rule 12d1-1(b)(2)(i).
---------------------------------------------------------------------------
Several commenters argued that unregistered money market funds that
currently conform their operations to the requirements of rule 12d1-1
should not be required to comply with certain provisions of our
amendments to rule 2a-7, particularly our floating NAV and liquidity
fees and gates amendments,\816\ and no commenters argued otherwise.
Some of these commenters argued that the ability to invest in
unregistered money market funds is a valuable tool for investment
companies, because such unregistered money market funds are designed to
accommodate the daily inflows and outflows of cash of the acquiring
investment company, and can be operated at a lower cost than registered
investment companies.\817\ Some of these commenters also argued that
requiring unregistered money market funds to adopt a floating NAV would
reduce the attractiveness of unregistered money market funds and
possibly eliminate the unregistered fund as a cash management tool for
an acquiring investment company.\818\
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\816\ Dechert Comment Letter; Russell Comment Letter;
Oppenheimer Comment Letter; UBS Comment Letter.
\817\ See, e.g., Dechert Comment Letter; Russell Comment Letter;
UBS Comment Letter.
\818\ See, e.g., Dechert Comment Letter; Russell Comment Letter.
---------------------------------------------------------------------------
Although we recognize the benefits of using unregistered money
market funds for these purposes, we do not believe that these types of
funds are immune from the risks posed by money market funds generally.
Several commenters argued that unregistered money market funds relying
on rule 12d1-1 do not present the type of risk that our amendments are
designed to reduce.\819\ These commenters also argued that, given that
unregistered money market funds often are created solely for investment
by acquiring investment companies and typically have the same sponsor,
there is little concern of unforeseeable large-scale redemptions or
runs on these funds.\820\
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\819\ Id.
\820\ Id.
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We disagree, and we believe that if registered funds invest in
unregistered money market funds in a different fund complex, these
unregistered funds are equally susceptible to the concerns that our
amendments are designed to address, including concerns about the risks
of investors' incentives to redeem ahead of other investors in times of
market stress and the resulting potential dilution of investor shares.
For example, if multiple registered funds are investing in an
unregistered money market fund in a different fund complex, a
registered fund in one fund complex may have an incentive to redeem
shares in times of market stress prior to the redemption of shares by
funds in other fund complexes. This redemption could have a potentially
negative impact on the remaining registered funds that are investing in
the unregistered money market and could increase the risk of dilution
of shares for the remaining registered funds.
We also believe that unregistered money market funds that are being
used solely as investments by investment companies in the same fund
complex remain susceptible to redemptions in times of fund and market
stress. For example, if multiple registered funds are invested in an
unregistered money market fund in the same fund complex, a portfolio
manager of one registered fund may have an incentive to redeem shares
in times of market stress, which could have a potentially negative
impact on the other registered funds that may also be invested in the
unregistered fund. After further consideration regarding the
comparability of risk in these funds, we believe that it is appropriate
that our floating NAV
[[Page 47809]]
amendments apply to unregistered money market funds that conform their
operations to the requirements of rule 12d1-1.\821\
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\821\ We note that unregistered money market funds that
otherwise meet the definition of a government money market fund as
defined in rule 2a-7(c)(2)(iii) would not be subject to the floating
NAV requirement. See rule 2a-7(a)(16).
---------------------------------------------------------------------------
Some commenters also argued that our liquidity fees and gates
amendments are ill-suited for unregistered money market funds.\822\
Specifically, these commenters noted that under rule 12d1-1, the
adviser typically performs the function of the unregistered fund's
board for purposes of compliance with rule 2a-7.\823\ Therefore, these
commenters argued, if fees and gates are implemented, the adviser would
be called upon to make decisions about liquidity fees and gates, which
could present a potential conflict of interest in situations when an
affiliated investment company advised by the same adviser would be the
redeeming shareholder.\824\
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\822\ See Dechert Comment Letter; Russell Comment Letter; UBS
Comment Letter.
\823\ Id.
\824\ Id.
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We recognize that in many cases the adviser to an unregistered
money market fund typically performs the function of the fund's
board,\825\ and that this may create conflicts of interest. We continue
to believe that, as discussed above in section III.A.2.b and given the
role of independent directors, a fund's board is in the best position
to determine whether a fee or gate is in the best interests of the
fund. However, when there is no board of directors, we believe that it
is appropriate for the adviser to the fund to determine when and how a
fund will impose liquidity fees and/or redemption gates. We have
previously stated that, in order for a registered fund to invest in
reliance on rule 12d1-1 in an unregistered money market fund that does
not have a board of directors (because, for example, it is organized as
a limited partnership), the unregistered money market fund's investment
adviser must perform the duties required of a money market fund's board
of directors under rule 2a-7.\826\ In addition, we note that investment
advisers are subject to a fiduciary duty, which requires them, when
faced with conflicts of interest, to fully disclose to clients all
material information, a duty that is intended ``to eliminate, or at
least expose, all conflicts of interest which might include an
investment adviser--consciously or unconsciously--to render advice
which was not disinterested.'' \827\ While we cannot determine whether
a conflict of interest exists in every case of an adviser advising both
a registered fund and unregistered money market fund under rule 12d1-1,
we note that the adviser is subject to the requirement to adopt and
implement written policies and procedures reasonably designed to
prevent violation of the Advisers Act and the rules thereunder, as
required by rule 206(4)-7 under the Advisers Act.\828\
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\825\ See supra note 815.
\826\ See Funds of Funds Release, supra note 813, at n.42. See
also supra note 815.
\827\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,
194 (1963).
\828\ See rule 206(4)-7 of the Advisers Act (making it unlawful
for an investment adviser registered with the Commission to provide
investment advice unless the adviser has adopted and implemented
written policies and procedures reasonably designed to prevent
violation of the Advisers Act by the adviser or any of its
supervised persons).
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6. Master/Feeder Funds--Fees and Gates Requirements
We are adopting, as suggested by a commenter, a provision
specifying the treatment of feeder funds in a master/feeder fund
structure under the fees and gates requirements.\829\ This provision
will not allow a feeder fund to independently impose a fee or gate in
reliance on today's amendments.\830\ However, under the amended rule, a
feeder fund will be required to pass through to its investors a fee or
gate imposed by the master fund in which it invests.\831\ In response
to our request for comment on whether particular funds or redemptions
should not be subject to fees and gates, a commenter recommended that
we permit a master fund and its board, but not a feeder fund and its
board, to impose and set the terms of a fee or gate.\832\ The feeder
fund would then have to ``institute'' the fee or gate on its
redemptions ``at the times and in the amounts instituted by the master
fund.'' \833\ Another commenter suggested, however, that fund boards
should be given discretion to impose fees and/or gates on either or
both a master or feeder fund(s).\834\
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\829\ See rule 2a-7(c)(2)(v) (defining ``feeder fund'' as any
money market fund that owns, pursuant to section 12(d)(1)(E), shares
of another money market fund).
\830\ See id.
\831\ Id.
\832\ See Stradley Ronon Comment Letter.
\833\ Id.
\834\ See UBS Comment Letter.
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We have considered the comments received and have been persuaded
that a feeder fund in a master/feeder structure should only be
permitted to pass through the fees and gates imposed by the master
fund.\835\ The master/feeder structure is unique in that the feeder
fund serves as a conduit to the master fund--the master fund being the
fund that actually invests in money market securities. As a commenter
pointed out, ``the master feeder structure comprises one pool of
assets, managed by the master fund's investment adviser, under the
oversight of the master fund's board of directors.'' \836\ Because the
feeder fund's investments consist of the master fund's securities, its
liquidity is determined by the master fund's liquidity. Accordingly,
because a feeder fund's liquidity is dictated by the liquidity of the
master fund, we believe the master fund and its board are best suited,
in consultation with the master fund's adviser, to determine whether
liquidity is under stress and a fee or gate should be imposed. We note
that we took a similar approach with respect to master/feeder funds in
rule 22e-3.\837\
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\835\ For example, if a master fund's board determines that the
master fund should impose a liquidity fee, a feeder fund must pass
through that liquidity fee to its investors and we would expect it
would subsequently remit such fee to the master fund.
\836\ See Stradley Ronon Comment Letter. We note that only the
master fund has an investment adviser because a master fund's shares
are the only investment securities that may be held by the feeder
fund. See section 12(d)(1)(E).
\837\ See rule 22e-3(b).
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7. Application of Fees and Gates to Other Types of Funds and Certain
Redemptions
We have determined that all money market funds, other than
government money market funds and feeder funds in a master/feeder fund
structure, should be subject to the fees and gates requirements. We
received a number of comments suggesting types of funds that should not
be subject to the fees and gates requirements.\838\ In addition to the
comments we received regarding the application of fees and gates to the
types of funds discussed above, commenters also proposed other specific
types of funds or entities that should not be subject to the fees and
gates requirements, including, for example, money market funds with
assets of less than $25 billion under management,\839\ or securities
lending cash collateral reinvestment pools.\840\
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\838\ See, e.g., supra sections III.C.2 and III.C.3 (discussing
commenter support for excluding retail and municipal money market
funds); but see, HSBC Comment Letter (``[W]e believe all MMFs should
be required to have the power to apply a liquidity fee or gate so
that the MMF provider can manage a low probability but high impact
event.''); U.S. Bancorp Comment Letter.
\839\ See PFM Asset Mgmt. Comment Letter.
\840\ See State Street Comment Letter.
---------------------------------------------------------------------------
Because of the board flexibility and discretion included in the
fees and gates amendments we are adopting today, as well as for the
reasons discussed
[[Page 47810]]
below,\841\ we are requiring all funds, other than government money
market funds and feeder funds in a master/feeder structure (for the
reasons discussed above),\842\ to comply with the fees and gates
requirements. As noted above, the fees and gates amendments do not
require a fund to impose fees and gates if it is not in the fund's best
interests. Thus, even if a particular type of fund is subject to the
fees and gates provisions, it does not have to impose fees and gates.
Rather, a fund's board may use fees and gates as tools to limit heavy
redemptions and must act in the best interests of the fund in
determining whether fees and gates should be imposed.
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\841\ See also supra sections III.C.2-III.C.5 for a discussion
of reasons specific to certain types of funds.
\842\ See supra sections III.C.1 and III.C.6. As discussed above
with respect to feeder funds, we believe feeder funds in a master/
feeder structure are distinguishable from other funds in that their
liquidity is dictated by the liquidity of the master fund. Thus, we
believe the flexibility and discretion afforded to boards in today's
amendments should be limited to a master fund's board. We note that
although feeder funds may not individually impose fees and gates in
reliance on today's amendments, master funds are subject to today's
amendments and their imposition of fees and gates will be passed
through to feeder funds' investors.
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In addition, we note that the fees and gates amendments will not
affect a money market fund's investors unless the fund's weekly liquid
assets fall below 30% of its total assets--i.e., the fund shows
possible signs of heavy redemption pressure--and even then, it is up to
the board to determine whether or not such measures are in the best
interests of the fund. Allowing specific types of money market funds
(other than government funds and feeder funds for the reasons discussed
above) to not be subject to the fees and gates requirements could leave
funds and their boards without adequate tools to protect shareholders
in times of stress. Also, allowing funds not to comply with the fees
and gates requirements would merely relieve a fund during normal market
conditions of the costs and burdens created by the prospect that the
fund could impose a fee or gate if someday it was subject to heavy
redemptions.\843\ In considering these risks, costs, and burdens, as
well as the possibility of unprotected shareholders and broader
contagion to the short-term funding markets, we believe it is
appropriate to subject all money market funds (other than government
funds and feeder funds for the reasons discussed above) to the fees and
gates requirements.
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\843\ We noted in the Proposing Release that retail money market
funds experienced fewer redemptions than institutional money market
funds during the financial crisis and thus may be less likely to
suffer heavy redemptions in the future. Nonetheless, we cannot
predict if this will be the case if there is a future financial
crisis.
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In addition to the reasons discussed above, we describe more fully
below our rationale for subjecting particular types of funds and
redemptions to the fees and gates amendments.
a. Small Redemptions and Irrevocable Redemptions
Some commenters suggested that small redemptions should not be
subject to fees and gates because they are less likely to materially
impact the liquidity position of a fund.\844\ As discussed in the
Proposing Release, we also have considered whether irrevocable
redemption requests (i.e. requests that cannot be rescinded) that are
submitted at least a certain period in advance should not be subject to
fees and gates as the fund should be able to plan for such liquidity
demands and hold sufficient liquid assets.\845\ We are concerned,
however, that shareholders could try to ``game'' the fees and gates
requirements if we took such an approach with respect to these
redemptions, for example, by redeeming small amounts every day to fit
under a redemption size limit or by redeeming a certain irrevocable
amount every week and then reinvesting the redemption proceeds
immediately if the cash is not needed.\846\ We also remain concerned
that allowing certain redemptions to not be subject to fees and gates
could add cost and complexity to the fees and gates requirements both
as an operational matter (e.g., fund groups would need to be able to
separately track which shares are subject to a fee or gate and which
are not, and create the system and policies to do so) and in terms of
ease of shareholder understanding without providing substantial
benefits.\847\
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\844\ See, e.g., Fin. Info. Forum Comment Letter.
\845\ See Proposing Release, supra note 25, at 200-201.
\846\ See supra note 315 and accompanying text. Commenters
suggested that concerns over gaming could be addressed by putting
additional policies in place, such as placing limits on the number
of redemptions in any given period. See, e.g., Fin. Info. Forum
Comment Letter. We believe that such a solution to gaming, much like
an exception to the fees and gates requirements, would create
additional cost and complexity to the amendments without substantial
benefit.
\847\ See supra note 315 and accompanying text.
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b. ERISA and Other Tax-Exempt Plans
Many commenters raised concerns regarding the application of fees
and gates to funds offered in Employee Retirement Income Security Act
(``ERISA'') and/or other tax-exempt plans.\848\ Some commenters
expressed concern that fees and gates would create issues for these
plans.\849\ For example, commenters were worried about potential
violations of certain minimum required distribution rules that could be
impeded by the imposition of a gate,\850\ potential taxation as a
result of an inability to process certain mandatory refunds on a timely
basis,\851\ problems arising in plan conversions or rollovers in the
event of a fee or gate,\852\ possible conflicts with the Department of
Labor's (``DOL'') qualified default investment (``QDIA'') rules,\853\
and certain general fiduciary requirements on plan fiduciaries with
respect to adequate liquidity in their plan.\854\
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\848\ See, e.g., Schwab Comment Letter; Fin. Svcs. Inst. Comment
Letter; Oppenheimer Comment Letter; TIAA-CREF Comment Letter.
\849\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab
Comment Letter; Comment Letter of American Benefits Council (Sept.
16, 2013) (``American Benefits Council Comment Letter'').
\850\ See, e.g., Schwab Comment Letter; American Benefits
Council Comment Letter; SPARK Comment Letter.
\851\ See, e.g., id.
\852\ See, e.g., American Benefits Council Comment Letter (``In
some circumstances, retirement assets must be moved because of
mandatory rollover requirements or because a plan has been
abandoned. Certain safe harbor regulations and prohibited
transaction class exemptions effectively require that funds be
placed in an investment that seeks to maintain the dollar value that
is equal to the amount invested, generally is liquid and does not
impose `substantial restrictions' on redemptions.'') (citations
omitted); Schwab Comment Letter.
\853\ See, e.g., Schwab Comment Letter; American Benefits
Council Comment Letter.
\854\ See, e.g., American Bankers Ass'n Comment Letter; American
Benefits Council Comment Letter.
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As an initial point, we note that money market funds are currently
permitted to use a redemption gate and liquidate under rule 22e-3, and
they still continue to be offered as investment options under tax-
qualified plans. However, in light of the commenters' concerns, we have
consulted the DOL's Employee Benefits Security Administration
(``EBSA'') regarding potential issues under ERISA. With respect to
general fiduciary requirements on plan fiduciaries obligating them to
prudently manage the anticipated liquidity needs of their plan, EBSA
staff advised our staff that a money market fund's liquidity and its
potential for redemption restrictions is just one of many factors a
plan fiduciary would consider in evaluating the role that a money
market fund would play in assuring adequate liquidity in a plan's
investment portfolio.
Additionally, we believe that certain other potential concerns
presented by commenters, such as concerns regarding QDIAs and the
imposition of a fee or
[[Page 47811]]
gate within 90 days of a participant's first investment, are unlikely
to materialize. We understand that the imposition of a liquidity fee or
gate would have to relate to a liquidation or transfer request within
this 90-day period in order to create an issue with QDIA fiduciary
relief. Even if this occurred with respect to a specific participant,
steps may be taken to avoid concerns with the QDIA. We understand, for
instance, that a liquidity fee otherwise assessed to the account of a
plan participant or beneficiary could be paid by the plan sponsor or a
service provider, and not by the participant, beneficiary or plan.\855\
In addition, a plan sponsor or other party in interest could loan funds
to the plan for the payment of ordinary operating expenses of the plan
or for a purpose incidental to the ordinary operation of the plan to
avoid the effects of a gate.\856\ We understand that if necessary,
other steps may also exist.
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\855\ See Department of Labor, Employee Benefits Security
Administration Field Assistance Bulletin 2008-03, Q11 (Apr. 29,
2008).
\856\ See Prohibited Transaction Exemption 80-26, [45 FR 28545
(Apr. 29, 1980)], as amended at, [65 FR 17540 (Apr. 3, 2000)], [67
FR 9485 (Mar. 1, 2002)] and [71 FR 17917 (Apr. 7, 2006)].
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DOL staff has also advised the SEC that the ``substantial
restrictions'' requirement, contained in Prohibited Transaction
Exemptions 2004-16 \857\ and 2006-06,\858\ does not apply to money
market funds.\859\ DOL staff further indicated to us, however, that a
liquidity fee could raise issues under the conditions of these
prohibited transaction exemptions that require that the IRA owner be
able to transfer funds to another investment or another IRA ``within a
reasonable period of time after his or her request and without penalty
to the principal amount of the investment.'' \860\ We understand that
while a gate of no longer than 10 business days would not amount to an
unreasonable period of time under the conditions, DOL staff has advised
us that, in order for a fiduciary to continue to rely on the exemptions
for the prohibited transactions arising from the initial decision to
roll over amounts to a money market fund that is sponsored by or
affiliated with the fiduciary, additional steps would need to be taken
to protect the principal amount rolled over in the event that a
liquidity fee is imposed. We understand that examples of such
additional steps would include a contractual commitment by the
fiduciary or its affiliate to pay any liquidity fee otherwise assessed
to the IRA, to the extent such fee would be deducted from the principal
amount rolled over. Additionally, to the extent plan fiduciaries do not
wish to take such steps, they can instead select government money
market funds, which are not subject to the fees and gates amendments,
or other funds that do not create prohibited transactions issues.
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\857\ [69 FR 57964 (Sept. 28, 2004)].
\858\ [71 FR 20856 (Apr. 21, 2006)], as amended, [73 FR 58629
(Oct. 7, 2008)].
\859\ See section IV(e) of PTE 2004-16 and section V(c) of PTE
2006-06.
\860\ See section II(i) of PTE 2004-16 and section III(h) of PTE
2006-06.
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Staff at EBSA have communicated that they will work with staff at
the SEC to provide additional guidance as needed.
With respect to the minimum distribution requirement and the
ability to process certain mandatory distributions or refunds on a
timely basis, we understand that although gates can hypothetically
prevent required distributions or refunds, in practice it will be
unlikely to occur as participants are unlikely to have their entire
account invested in prime money market funds or, more precisely, one or
more prime money market funds that determine to impose a gate at the
same time.\861\ In addition, to the extent a gate does prevent a timely
minimum distribution or refund, we understand that there are potential
steps an individual or plan/IRA can take to avoid the negative
consequences that may result from failure to meet the minimum
distribution or refund requirements. For example, with respect to the
minimum distribution requirement, an individual who fails to meet this
requirement as a result of a gate is entitled to request a waiver with
respect to potential excise taxes by filing a form with the IRS that
explains the rationale for the waiver.\862\ In addition, with respect
to plan qualification issues that may arise in the event a plan does
not make timely minimum required distributions or refunds as a result
of a gate, we understand that a plan sponsor may obtain relief pursuant
to the Employee Plans Compliance Resolution System (``EPCRS'').\863\
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\861\ In addition, with respect to the minimum distribution
requirement, we note that participants could be encouraged to take
required distributions before the deadline to avoid the possibility
that a gate could prevent them from meeting the requirements.
\862\ See section 4974(d) of the Tax Code. We understand that to
request a waiver, a taxpayer would file Form 5329 with the IRS.
Whether to grant a waiver request is within the IRS's discretion.
\863\ See Rev. Proc. 2013-12. We understand that, pursuant to
the EPCRS, if a minimum required distribution or refund timing
failure is insignificant or is corrected within a limited time
period, and certain other requirements are satisfied, then the
failure can be voluntarily corrected without filing with the IRS.
Otherwise, we understand that a filing is required to correct
qualification failures.
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c. Insurance Funds
A few commenters requested special treatment for money market funds
underlying variable annuity contracts or other insurance products,
citing contractual and state law restrictions affecting insurance and
annuity products that would conflict with the ability of a money market
fund's board to impose a fee or gate.\864\ Some commenters further
noted that money market funds underlying variable contract separate
accounts are not prone to runs.\865\ Another commenter noted that most
insurance products have ``free-look'' provisions, allowing an owner to
return his/her contract for full value if he/she is not satisfied with
its terms.\866\ During such initial periods, insurance companies
typically keep client funds in money market funds, which might be
incompatible with fees and gates.\867\
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\864\ See, .e.g., Dechert Comment Letter; Comment Letter of
American Council of Life Insurers (Sept. 17, 2013) (``ACLI Comment
Letter''); TIAA-CREF Comment Letter.
\865\ See ACLI Comment Letter; Comment Letter of Committee of
Annuity Insurers (Sept. 17, 2013) (``CAI Comment Letter'').
\866\ See Comment Letter of John Sklar (July 9, 2013) (``Sklar
Comment Letter'').
\867\ See id.
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We have determined not to provide special treatment for money
market funds underlying variable annuity contracts or other insurance
products for the fees and gates requirements. We recognize money market
funds underlying variable annuity contracts or other insurance products
may be indirectly subject to certain restrictions or requirements that
do not apply to other money market funds. We note, however, that these
same funds currently are permitted to suspend redemptions pursuant to
rule 22e-3 and their ability to do so has not prevented them from being
offered in connection with variable annuity and other insurance
products. In addition, to the extent today's fees and gates amendments
are incompatible with contractual or state law, or with free look
provisions, we note that an insurance company can instead offer a
government money market fund as an investment option under its
contract(s).\868\ Moreover, fees and gates will not affect the everyday
activities of money market funds. They are instead
[[Page 47812]]
designed to be used during times of potential stress.\869\ If the
market or a money market fund is experiencing stress, an insurance
company could choose not to place contract holders' investments into a
money market fund during free look periods, subject to contractual
provisions and prospectus disclosures.
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\868\ To the extent an insurance company determines to offer a
government money market fund as a new investment option under a
contract, we recognize that there may be costs associated with this
process, including costs associated with disclosing a new investment
option to contract-holders, negotiating arrangements with new
government money market funds, and filing with the Commission a
substitution application under section 26(c).
\869\ We note that if, as suggested by commenters, money market
funds underlying variable annuity or other insurance contracts are
less prone to runs, then under the terms of our final rule
amendments, such funds may be less likely to reach the liquidity
thresholds that would trigger board consideration of fees or gates
and, thus, may be less likely to be affected by today's amendments.
See supra text accompanying note 865.
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D. Guidance on the Amortized Cost Method of Valuation and Other
Valuation Concerns
After further consideration, and as suggested by a number of
commenters, our final rules will permit stable NAV money market funds
(i.e., government and retail money market funds) to maintain a stable
NAV by using amortized cost valuation and/or the penny rounding method
of pricing.\870\ In addition, all other registered investment companies
and business development companies (including floating NAV money market
funds under our amendments) may, in accordance with Commission
guidance, continue to use amortized cost to value debt securities with
remaining maturities of 60 days or less if fund directors, in good
faith, determine that the fair value of the debt securities is their
amortized cost value, unless the particular circumstances warrant
otherwise.\871\ Accordingly, even for floating NAV money market funds,
amortized cost will continue to be an important part of the valuation
of money market fund portfolio securities.\872\
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\870\ See supra section III.B.5.
\871\ See ASR 219, Financial Reporting Codification (CCH)
section 404.05.a and .b (May 31, 1977), supra note 5. 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.' ''
\872\ For a mutual fund not regulated under rule 2a-7, the
Investment Company Act and applicable rules generally require that
it price its shares at the current NAV by valuing portfolio
securities for which market quotations are readily available 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) and rules 2a-4 and 22c-1.
Notwithstanding these provisions, rule 2a-7 currently permits money
market funds to use the amortized cost method of valuation and/or
the penny rounding method of pricing. See current rule 2a-7(c).
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We believe the expanded valuation guidance, discussed below, will
help advance the goals of our money market fund reform rulemaking,
because, among other things, stronger valuation practices may lessen a
money market fund's susceptibility to heavy redemptions by decreasing
the likelihood of sudden portfolio write-downs that may encourage
financially sophisticated investors to redeem early. We provide below
expanded guidance on the use of amortized cost valuation as well as
other related valuation issues.\873\
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\873\ Although discussed here primarily in the context of money
market funds, except as noted below, this guidance is applicable to
all registered investment companies and business development
companies. For ease of reference, throughout this section we refer
to all of these entities as ``funds.'' We note that stable NAV money
market funds that qualify as retail or government money market funds
may use the amortized cost method of valuation to compute the
current share price provided, among other things, the board of
directors believes that the amortized cost method of valuation
fairly reflects the market-based NAV and does not believe that such
valuation may result in material dilution or other unfair results to
investors or existing shareholders. See generally rule 2a-7(c)(1)(i)
and rule 2a-7(g)(1)(i)(A)-(C). We also note that stable NAV money
market funds that qualify as retail or government money market funds
may not rely on this guidance to use amortized cost valuation in
shadow pricing because rule 2a-7 specifically requires shadow prices
to reflect ``the current net asset value per share calculated using
available market quotations (or an appropriate substitute that
reflects current market conditions),'' and we would not consider
amortized cost valuation to be an appropriate substitute that
reflects current market conditions. See also 1983 Adopting Release,
supra note 3, at n.44 and accompanying text (``In determining the
market-based value of the portfolio for purposes of computing the
amount of deviation, all portfolio instruments, regardless of the
time to maturity, should be valued based upon market factors and not
their amortized cost value.'').
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1. Use of Amortized Cost Valuation
We consider it important, for a number of reasons, that funds and
their investment advisers and boards of directors have clear guidance
regarding amortized cost valuation. Typically, money market funds hold
a significant portion of portfolio securities with remaining maturities
of 60 days or less,\874\ and therefore, a floating NAV money market
fund may use the amortized cost method to value these portfolio
securities if the fund's board determines that the amortized cost value
of the security is fair value. In addition, managers of floating NAV
money market funds may have an incentive to use amortized cost
valuation whenever possible in order to help stabilize the funds' NAV
per share.
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\874\ For example, we estimate that approximately 56% of prime
money market funds' portfolio securities had remaining maturities of
60 days or less (not including interest-rate resets) as of February
28, 2014. This estimate is based on Form N-MFP data.
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As noted above, under existing Commission guidance, funds would not
be able to use amortized cost valuation to value certain debt
securities when circumstances dictate that the amortized cost value of
the security is not fair value.\875\ The Commission's guidance in the
Proposing Release construed the statute to effectively limit the use of
amortized cost valuation to circumstances where it is the same as
valuation using market-based factors.\876\ Some commenters objected to
this interpretation and suggested that the Commission more generally
clarify this guidance.\877\
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\875\ See ASR 219, Financial Reporting Codification (CCH)
section 404.05.a and .b (May 31, 1977), supra note 5 (``Although
debt securities with remaining maturities in excess of 60 days
should not be valued at amortized cost, the Commission will not
object if the board of directors of a money market fund, in good
faith, determines that the fair value of debt securities originally
purchased with remaining maturities of 60 days or less shall be
their amortized cost value, unless the particular circumstances
dictate otherwise. Nor will the Commission object if, under similar
circumstances, the fair value of debt securities originally
purchased with maturities of in excess of 60 days, but which
currently have maturities of 60 days or less, is determined by using
amortized cost valuation for the 60 days prior to maturity, such
amortization being based upon the market or fair value of the
securities on the 61st day prior to maturity'' (footnotes omitted)).
\876\ See Proposing Release, supra note 25, n.136.
\877\ See, e.g., Invesco Comment Letter (``one of the footnotes
to the Proposed Rule . . . refers to amortized cost pricing being
available when it is the same as valuation based on market factors,
implying that MMF could be barred from using amortized cost pricing
if it differs even minutely from the market value of the securities.
While we believe this implication to have been unintentional, we
nevertheless request the Commission to reaffirm clearly that MMFs,
as all other mutual funds, can continue to use amortized cost
pricing for securities with maturities of 60 days and less.''
(internal citations omitted)); ICI Comment Letter (also referring to
this footnote and stating ``It is unclear whether this means that
amortized cost must at all times be identical to market-based price,
or whether it is just another way of saying funds must use market-
based pricing and not amortized cost. We urge the SEC to clarify
that ASR 219 and its interpretations remain unchanged.'').
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We recognize that existing valuation guidance may not be clear on
how frequently funds should compare a debt security's amortized cost
value to its fair value determined using market-based factors and what
extent of deviation between the two values is permissible. We generally
believe that a fund may only use the amortized cost method to value a
portfolio security with a remaining maturity of 60 days or less when it
can reasonably conclude, at each time it makes a valuation
determination,\878\ that the amortized
[[Page 47813]]
cost value of the portfolio security is approximately the same as the
fair value of the security as determined without the use of amortized
cost valuation. Existing credit, liquidity, or interest rate conditions
in the relevant markets and issuer specific circumstances at each such
time should be taken into account in making such an evaluation.
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\878\ As discussed below, we believe that, in some circumstances
(e.g., intraday), a fund may rely on the last obtained market-based
data to assist it when valuing its portfolio securities using
amortized cost.
---------------------------------------------------------------------------
Accordingly, it would not be appropriate for a fund to use
amortized cost to value a debt security with a remaining maturity of 60
days or less and thereafter not continue to review whether amortized
cost continues to be approximately fair value until, for example, there
is a significant change in interest rates or credit deterioration. We
generally believe that a fund should, at each time it makes a valuation
determination, evaluate the use of amortized cost for portfolio
securities, not only quarterly or each time the fund produces financial
statements. We note that, under the final rules, each money market fund
will be required to value, on a daily basis, the fund's portfolio
securities using market-based factors and disclose the fund's share
price (or shadow price) rounded to four decimal places on the fund's
Web site. As a result, we believe that each money market fund should
have readily available market-based data to assist it in monitoring any
potential deviation between a security's amortized cost and fair value
determined using market-based factors. We believe that, in certain
circumstances, such as intraday, a fund may rely on the last obtained
market-based data to assist it when valuing its portfolio securities
using amortized cost. To address this, a fund's policies and procedures
could be designed to ensure that the fund's adviser is actively
monitoring both market and issuer-specific developments that may
indicate that the market-based fair value of a portfolio security has
changed during the day, and therefore indicate that the use of
amortized cost valuation for that security may no longer be
appropriate.
2. Other Valuation Matters
Rule 2a-4 under the Investment Company Act provides that
``[p]ortfolio securities with respect to which market quotations are
readily available shall be valued at current market value, and other
securities and assets shall be valued at fair value as determined in
good faith by the board of directors of the registered company.'' As we
discussed in the Proposing Release, the vast majority of money market
fund portfolio securities do not have readily available market
quotations because most portfolio securities such as commercial paper,
repos, and certificates of deposit are not actively traded in the
secondary markets.\879\ Accordingly, most money market fund portfolio
securities are valued largely based upon ``mark-to-model'' or ``matrix
pricing'' estimates.\880\ In matrix pricing, portfolio asset values are
derived from a range of different inputs, with varying weights attached
to each input, such as pricing of new issues, yield curve information,
spread information, and yields or prices of securities of comparable
quality, coupon, maturity, and type.\881\ Money market funds also may
consider evaluated prices from third-party pricing services, which may
take into account these inputs as well as prices quoted from dealers
that make markets in these instruments and financial models.\882\
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\879\ See Proposing Release, supra note 25, at section II.B.1.
\880\ See, e.g., Harvard Business School FSOC Comment Letter
(``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 http://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 therefore there are relatively few prices from the
secondary market or broker quotes).
\881\ See, e.g., Federated VI Comment Letter; Hai Jin, et al.,
Liquidity Risk and Expected Corporate Bond Returns, 99 J. of Fin.
Econ. 628, at n.4 (2011) (``Matrix prices are set according to some
algorithm based on prices of bonds with similar characteristics'').
\882\ See, e.g., Federated VI Comment Letter; Angel Comment
Letter.
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We received a number of comments regarding the utility of market-
based valuation for money market securities and other securities that
do not frequently trade in secondary markets. We also received comments
discussing certain other valuation matters more generally, such as the
use of pricing services in valuing such securities. Together, these
comments indicated to us the need for further guidance in this area,
which we provide below.
a. Fair Value for Thinly Traded Securities
First, some commenters suggested that market-based valuations of
money market fund portfolio securities are not particularly meaningful,
given the infrequent trading in money market fund portfolio securities
and the use of matrix or model-based pricing or evaluated prices from
third-party pricing services.\883\ One commenter stated that ``it does
not follow that the normal arguments for using actual market prices for
calculating mutual fund NAVs apply to using noisy guesstimates of true
value of non-traded assets.'' \884\ Another commenter stated that, with
regard to matrix-priced money market fund portfolio securities,
``[m]arket-based valuations are not more accurate valuations than
amortized cost.'' \885\
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\883\ See, e.g., Federated IV Comment Letter; Legg Mason &
Western Asset Comment Letter; Chamber II Comment Letter.
\884\ See Angel Comment Letter.
\885\ See Federated VI Comment Letter (``Pricing experts have
confirmed to us that only a small percentage of money market
instruments actually trade daily in secondary markets. While the
amortized cost method of valuing MMF portfolios is a simple and
accurate means of valuing these types of high-quality, short-term
instruments that generally are held to maturity, the effort to
arrive at market-based valuations for these types of instruments is
time-consuming, complicated and less exact.'').
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We acknowledge that matrix pricing and similar pricing methods
involve estimates and judgments--and thus may introduce some ``noise''
into portfolio security prices, and therefore into the fund's NAV per
share when rounded to one basis point. However, we do not agree that
market-based prices of portfolio securities do not provide meaningful
information or that amortized cost generally provides better or more
accurate values of securities that do not frequently trade or that may
or may not be held to maturity given the fund's statutory obligation to
investors to satisfy redemptions within seven days (and a fund's
disclosure commitment to generally satisfy redemptions much
sooner).\886\ Indeed, many debt securities held by other types of funds
do not frequently trade, but our long-standing guidance on the use of
amortized cost valuation is limited to debt securities with remaining
maturities of 60 days or less and even then only if the amortized cost
value of these securities is fair value.\887\ This guidance was based
on our concern that ``the use of the amortized cost method i[n] valuing
portfolio securities of registered investment companies may result in
overvaluation or undervaluation of the portfolios of such
[[Page 47814]]
companies, relative to the value of the portfolios determined with
reference to current market-based factors.'' \888\ Such guidance is
based on a preference embodied in the Investment Company Act that funds
value portfolio securities taking into account current market
information.\889\
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\886\ Many money market funds promise in fund disclosures to
satisfy redemption requests on the same day as the request, except
in extraordinary conditions. In addition, funds that are sold
through broker-dealers seek to satisfy redemption requests within
three business days because broker-dealers are subject to Securities
Exchange Act rule 15c6-1, which establishes three business days as
the standard settlement period for securities trades effected by a
broker or a dealer.
\887\ See ASR 219, Financial Reporting Codification (CCH)
section 404.05.a and .b (May 31, 1977), supra note 5. We have said
that it is inconsistent with rule 2a-4 to use the amortized cost
method of valuation to determine the fair value of debt securities
that mature at a date more than 60 days after the valuation date.
\888\ Id.
\889\ Section 22(c) and rules 2a-4 and 22c-1(a).
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Because most money market fund portfolio securities are not
frequently traded and thus are not securities for which market
quotations are readily available, we understand that they are typically
fair valued in good faith by the fund's board.\890\ As a general
principle, the fair value of a security is the amount that a fund might
reasonably expect to receive for the security upon its current
sale.\891\ Determining fair value requires taking into account market
conditions existing at that time. Accordingly, funds holding debt
securities generally should not fair value these securities at par or
amortized cost based on the expectation that the funds will hold those
securities until maturity, if the funds could not reasonably expect to
receive approximately that value upon the current sale of those
securities under current market conditions.\892\ We recognize that
valuing thinly traded debt securities can be more complicated and time-
consuming than valuing liquid equity securities based on readily
available market quotations or than valuing debt securities using the
amortized cost method. However, given the redeemable nature of mutual
fund shares and the mandates of the Investment Company Act to sell and
redeem fund shares at prices based on the current net asset values of
those shares, we believe it is important for funds to take steps to
ensure that they are properly valuing fund shares and treating all
shareholders fairly.
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\890\ As discussed further below, although a fund's directors
cannot delegate their statutory duty to determine the fair value of
fund portfolio securities, the board may appoint others, such as the
fund's investment adviser or a valuation committee, to assist them
in determining fair value. See infra note 898 and accompanying text.
\891\ See Securities and Exchange Commission Codification of
Financial Reporting Policies, Statement Regarding ``Restricted
Securities,'' Investment Company Act Release No. 5847 (Oct. 21,
1969) [35 FR 19989 (Dec. 31, 1970)] (``ASR 113''); Investment
Companies, Investment Company Act Release No. 6295 (Dec. 23, 1970)
[35 FR 19986 (Dec. 31, 1970)], Financial Reporting Codification
(CCH) section 404.03 (Apr. 15, 1982) (``ASR 118''). We generally
believe that the current sale standard appropriately reflects the
fair value of securities and other assets for which market
quotations are not readily available within the meaning of section
2(a)(41)(B). The price that an unrelated willing buyer would pay for
a security or other asset under current market conditions is
indicative of the value of the security or asset. See also FASB ASC
paragraph 820-10-35-3 and FASB ASC paragraph 820-10-20 (``A fair
value measurement assumes that the asset or liability is exchanged
in an orderly transaction between market participants to sell the
asset or transfer the liability at the measurement date under
current market conditions.''; Fair Value means ``the price that
would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date'').
\892\ As we have previously stated: ``Fair value cannot be based
on what a buyer might pay at some later time, such as when the
market ultimately recognizes the security's true value as currently
perceived by the portfolio manager. Funds also may not fair value
portfolio securities at prices not achievable on a current basis on
the belief that the fund would not currently need to sell those
securities.'' See, e.g., In the Matter of Jon D. Hammes, et al.,
Investment Company Act Release No. 26290 (Dec. 11, 2003) at n.5
(settlement). See also FASB ASC 820, at paragraph 820-10-35-54H (``A
reporting entity's intention to hold the asset or to settle or
otherwise fulfill the liability is not relevant when measuring fair
value because fair value is a market-based measurement, not an
entity-specific measurement.'').
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b. Use of Pricing Services
As noted above, many funds, including many money market funds, use
evaluated prices provided by third-party pricing services to assist
them in determining the fair values of their portfolio securities. Some
commenters have raised concerns that money market funds will place
undue reliance on a small market of third-party pricing vendors, even
though they acknowledge that they provide only ``good faith'' opinions
on valuation.\893\ A few commenters argued that eliminating amortized
cost valuation for money market funds and requiring market-based
pricing could provide third-party pricing services with a much greater
degree of influence on fund's portfolio valuation, which could increase
operational complexity and risks.\894\
---------------------------------------------------------------------------
\893\ See, e.g., Federated VI Comment Letter; SIFMA Comment
Letter; Angel Comment Letter.
\894\ See, e.g., Federated VI Comment Letter; Chamber II Comment
Letter.
---------------------------------------------------------------------------
We recognize that pricing services employ a wide variety of pricing
methodologies in arriving at the evaluated prices they provide, and the
quality of those prices may vary widely. We note that the evaluated
prices provided by pricing services are not, by themselves, ``readily
available'' market quotations or fair values ``as determined in good
faith by the board of directors'' as required under the Investment
Company Act.\895\ To the extent that certain money market funds are no
longer permitted to use the amortized cost method to value all of their
portfolio securities and all money market funds will be required to
perform daily market-based valuations, funds may decide to rely more
heavily on third parties, such as pricing services, to provide market-
based valuation data. Accordingly, we believe it is important to
provide guidance to funds and their boards regarding reliance on
pricing services.
---------------------------------------------------------------------------
\895\ See section 2(a)(41)(B) and rule 2a-4.
---------------------------------------------------------------------------
We note that a fund's board of directors has a non-delegable
responsibility to determine whether an evaluated price provided by a
pricing service, or some other price, constitutes a fair value for a
fund's portfolio security.\896\ In addition, we have stated that ``it
is incumbent upon the [fund's] Board of Directors to satisfy themselves
that all appropriate factors relevant to the value of securities for
which market quotations are not readily available have been
considered,'' and that fund directors ``must . . . continuously review
the appropriateness of the method used in valuing each issue of
security in the [fund's] portfolio.'' \897\ Although a fund's directors
cannot delegate their statutory duty to determine the fair value of
fund portfolio securities for which market quotations are not readily
available, the board may appoint others, such as the fund's investment
adviser or a valuation committee, to assist them in determining fair
value, and to make the actual calculations pursuant to the fair
valuation methodologies previously approved by the directors.\898\
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\896\ See ASR 118, supra note 891 (``[i]t is incumbent upon the
Board of Directors to satisfy themselves that all appropriate
factors relevant to the fair value of securities for which market
quotations are not readily available have been considered and to
determine the method of arriving at the fair value of each such
security.'' A fund's directors cannot delegate this responsibility
to anyone else). See, e.g., In the Matter of Seaboard Associates,
Inc. (Report of Investigation Pursuant to Section 21(a) of the
Exchange Act), Investment Company Act Release No. 13890 (Apr. 16,
1984) (``The Commission wishes to emphasize that the directors of a
registered investment company may not delegate to others the
ultimate responsibility of determining the fair value of any asset
not having a readily ascertainable market value. . . .'').
\897\ See ASR 118, supra note 891.
\898\ See id.
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Before deciding to use evaluated prices from a pricing service to
assist it in determining the fair values of a fund's portfolio
securities, the fund's board of directors may want to consider the
inputs, methods, models, and assumptions used by the pricing service to
determine its evaluated prices, and how those inputs, methods, models,
and assumptions are affected (if at all) as market conditions change.
In choosing a particular pricing service, a fund's board may want to
assess, among other things, the quality of the evaluated prices
provided by the service and the extent to which the service determines
its evaluated prices as close as possible to the time as of which the
fund calculates its net asset value. In addition, the
[[Page 47815]]
fund's board should generally consider the appropriateness of using
evaluated prices provided by pricing services as the fair values of the
fund's portfolio securities where, for example, the fund's board of
directors does not have a good faith basis for believing that the
pricing service's pricing methodologies produce evaluated prices that
reflect what the fund could reasonably expect to obtain for the
securities in a current sale under current market conditions.\899\
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\899\ See ASR 113 and ASR 118, supra note 891; see also 1983
Adopting Release supra note 3 (``If the [money market] fund uses an
outside service to provide this type of pricing for its portfolio
instruments, it may not delegate to the provider of the service the
ultimate responsibility to check the accuracy of the system.'').
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E. Amendments to Disclosure Requirements
We are amending a number of disclosure requirements related to the
liquidity fees and gates and floating NAV requirements adopted today,
as well as other disclosure enhancements discussed in the proposal.
These disclosure amendments improve transparency related to money
market funds' operations, as well as their overall risk profile and any
use of affiliate financial support. In the sections that follow, we
first discuss amendments to rule and form provisions applicable to
various disclosure documents, including disclosures in money market
funds' advertisements, the summary section of the prospectus, and the
statement of additional information (``SAI'').\900\ Next, we discuss
amendments to the disclosure requirements applicable to money market
fund Web sites, including information about money market funds'
liquidity levels, shareholder flows, market-based NAV per share
(rounded to four decimal places), imposition of liquidity fees and
gates, and any use of affiliate sponsor support.
---------------------------------------------------------------------------
\900\ In keeping with the enhanced disclosure framework we
adopted in 2009, the amendments are intended to provide a layered
approach to disclosure in which key information about the 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. 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).
---------------------------------------------------------------------------
1. Required Disclosure Statement
a. Overview of Disclosure Statement Requirements
As discussed in the Proposing Release, and as modified to reflect
commenters' concerns, we are adopting amendments to rule 482 under the
Securities Act and Item 4 of Form N-1A to revise the disclosure
statement requirements concerning the risks of investing in a money
market fund in its advertisements or other sales materials that it
disseminates (including on the fund Web site) and in the summary
section of its prospectus (and, accordingly, in any summary prospectus,
if used).
Money market funds are currently required to include a specific
statement concerning the risks of investing in their advertisements or
other sales materials and in the summary section of the fund's
prospectus (and, accordingly, in any summary prospectus, if used).\901\
In the Proposing Release, we proposed to modify the format and content
of this required disclosure. Specifically, we proposed to require money
market funds to present certain disclosure statements in a bulleted
format. The content of the proposed disclosure statements would have
differed under each of the proposed reform alternatives. Under each
reform alternative, the proposed statement would have included
identical wording changes designed to clarify, and inform investors
about, the primary risks of investing in money market funds generally,
including new disclosure emphasizing that money market fund sponsors
are not obligated to provide financial support. Additionally, the
proposed statement under the fees and gates alternative would have
included disclosure that would call attention to the risks of investing
in a money market fund that could impose liquidity fees or gates, and
the proposed statement under the floating NAV alternative would have
included disclosure to emphasize the particular risks of investing in a
floating NAV money market fund.
---------------------------------------------------------------------------
\901\ Rule 482(b)(4); Item 4(b)(1)(ii) of Form N-1A. Money
market funds are currently required to include the following
statement: 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.
---------------------------------------------------------------------------
Comments regarding the amended disclosure statement were mixed. Two
commenters generally supported the proposed amendments to the
disclosure statement under both alternatives, and one commenter
expressed general support for the proposed disclosure under the fees
and gates alternative.\902\ Two commenters generally opposed the
proposed disclosure statement, arguing that it would overstate the
risks relative to other mutual funds and overwhelm investors with
standardized mandated legends, which investors might ignore as
``boilerplate.'' \903\ Some commenters expressed concerns with
particular aspects of the proposed disclosure, such as the required
disclosure regarding sponsor support.\904\ These comments are discussed
in more detail below.
---------------------------------------------------------------------------
\902\ See CFA Institute Comment Letter (noting that the proposed
disclosures would put investors on notice that money market funds
are not riskless and would provide the information in a clear and
succinct manner); HSBC Comment Letter (generally supporting both
statements but suggesting additions to cross-reference the
prospectus's risk warnings and to make clear fees and gates would be
used to protect investors); Federated II Comment Letter; Comment
Letter of Federated Investors (Disclosure Requirements for Money
Market Funds and Current Requirements of Rule 2a-7) (Sept. 17, 2013)
(``Federated VIII Comment Letter'') (concurring with the risk
disclosure under the fees and gates alternative).
\903\ See ABA Business Law Section Comment Letter; NYC Bar
Committee Comment Letter.
\904\ See, e.g., Dreyfus Comment Letter; NYC Bar Committee
Comment Letter.
---------------------------------------------------------------------------
Today we are adopting amendments to the requirements for disclosure
statements that must appear in money market funds' advertisements or
other sales materials, and in the summary section of money market
funds' statutory prospectus. As discussed in more detail below, these
amendments are being adopted largely as proposed, but with some
modifications to the proposed format and content. These modifications
respond to comments we received and also reflect that we are adopting a
liquidity fees and gates requirement for all non-government money
market funds, including municipal money market funds, as well as a
floating NAV requirement for institutional prime funds. As we stated in
the Proposing Release, we are modifying the current disclosure
requirements because we believe that enhancing the disclosure required
to be included in fund advertisements and other sales materials, and in
the summary section of the prospectus, will help change the investment
expectations of money market fund investors, including any erroneous
expectation that a money market fund is a riskless investment.\905\ In
addition, without such modifications, we believe that investors may not
be fully aware of potential restrictions on fund redemptions or, for
floating NAV funds, the fact that the value of their money market fund
shares will, as a result of
[[Page 47816]]
these reforms, increase and decrease as a result of the changes in the
value of the underlying securities.\906\
---------------------------------------------------------------------------
\905\ See Proposing Release, supra note 25, at sections III.A.8
and III.B.8.
\906\ Id.
---------------------------------------------------------------------------
Specifically, we are requiring money market funds that maintain a
stable NAV to include the following disclosure statement in their
advertisements or other sales materials and in the summary section of
the statutory prospectus:
You could lose money by investing in the Fund. Although the Fund
seeks to preserve the value of your investment at $1.00 per share,
it cannot guarantee it will do so. The Fund may impose a fee upon
the sale of your shares or may temporarily suspend your ability to
sell shares if the Fund's liquidity falls below required minimums
because of market conditions or other factors.\907\ 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.\908\
---------------------------------------------------------------------------
\907\ Government funds that are not subject to the fees and
gates requirements pursuant to rule 2a-7(c)(2)(iii) may omit the
following sentence: ``The Fund may impose a fee upon the sale of
your shares or may temporarily suspend your ability to sell shares
if the fund's liquidity falls below required minimums because of
market conditions or other factors.'' See rule 482(b)(4)(iii); Form
N-1A Item 4(b)(1)(ii)(C).
\908\ See Rule 482(b)(4)(ii); Form N-1A Item 4(b)(1)(ii)(B).
Besides the amendments to the disclosure statement requirements set
forth in Rule 482(b)(4)(ii) and Form N-1A Item 4(b)(1)(ii)(B), we
also are adopting non-substantive changes to the text of these rule
and form provisions. If an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of such person, has
contractually committed to provide financial support to the fund,
the fund would be permitted to omit the last sentence from the
disclosure statement in advertisements and sales materials for the
term of the agreement. See Note to paragraph (b)(4), rule 482(b)(4).
Likewise, if an affiliated person, promoter, or principal
underwriter of the fund, or an affiliated person of such person, has
contractually committed 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 sentence from the
disclosure statement that appears in the fund's registration
statement. See Instruction to Item 4(b)(1)(ii) of Form N-1A.
The proposal likewise would have permitted a similar omission
from the proposed disclosure statement. See Proposing Release, supra
note 25, at nn.429 and 431. As proposed, such omission would have
been permitted 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.'' We have modified the language of the Note to paragraph
(b)(4), rule 482(b)(4) and the Instruction to Item 4(b)(1)(ii) of
Form N-1A to clarify that the omission would be permitted only in
the case of contractual commitments to provide financial support,
and not in the case of informal agreements that may not be
enforceable.
As discussed in more detail below, we are adopting amendments
that would require money market funds to disclose current and
historical instances of affiliate financial support on Form N-CR and
Form N-1A, respectively. See infra sections III.F.3, III.E.7.
Funds with a floating NAV will also be required to include a
similar disclosure statement in their advertisements or other sales
materials and in the summary section of the statutory prospectus,
modified to account for the characteristics of a floating NAV, as
---------------------------------------------------------------------------
follows:
You could lose money by investing in the Fund. Because the share
price of the Fund will fluctuate, when you sell your shares they may
be worth more or less than what you originally paid for them. The
Fund may impose a fee upon the sale of your shares or may
temporarily suspend your ability to sell shares if the Fund's
liquidity falls below required minimums because of market conditions
or other factors. 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.\909\
---------------------------------------------------------------------------
\909\ See Rule 482(b)(4)(i); Form N-1A Item 4(b)(1)(ii)(A).
Besides the amendments to the disclosure statement requirements set
forth in Rule 482(b)(4)(i) and Form N-1A Item 4(b)(1)(ii)(A), we
also are adopting non-substantive changes to the text of these rule
and form provisions. Funds may omit the last sentence regarding
sponsor support under certain circumstances, such as when a fund's
sponsor has contractually committed to provide support to the fund.
See supra note 908; Instructions to Item 4(b)(1)(ii) of Form N-1A;
Note to paragraph (b)(4), rule 482(b)(4). The proposal likewise
would have permitted this omission from the proposed disclosure
statement. See Proposing Release, supra note 25, at nn.307 and 313.
As discussed in more detail below, we are adopting amendments that
would require money market funds to disclose current and historical
instances of affiliate financial support on Form N-CR and Form N-1A,
respectively. See infra sections III.F.3, III.E.7.
Below we describe in detail the ways in which the format and
content of the required disclosure statement that we are adopting today
differ from that which we proposed, as well as the reasons for these
differences.
b. Format of the Statement
We have decided not to adopt the proposed requirement that funds
provide the statement in a bulleted format. One commenter argued that
prescribing a specific graphical format is not necessary and might be
difficult to execute in certain forms of advertising, such as social
media.\910\ We agree. We also believe that refraining from requiring
funds to provide the disclosure statement in a bulleted format, in
combination with other modifications discussed below that shorten the
disclosure statement, addresses concerns raised by commenters that the
length of the proposed disclosure statement could draw attention away
from other important information in an advertisement or sales
materials.\911\
---------------------------------------------------------------------------
\910\ See ABA Business Law Section Comment Letter.
\911\ See NYC Bar Committee Comment Letter (noting that,
particularly in inherently brief formats like advertisements, there
is a risk that mandated legends may crowd out material informational
content); ABA Business Law Section Comment Letter (arguing that the
proposed disclosure statement could take up so much of the space
available in an advertisement that it will discourage investors from
viewing other important information in the communication).
---------------------------------------------------------------------------
c. Disclosure Concerning General Risk of Investment Loss
As proposed, the required disclosure statement would have included
a bulleted statement providing: ``You could lose money by investing in
the Fund.'' We are adopting identical content in the required
disclosure statement. As discussed in the proposal, we have taken into
consideration investor preferences for clear, concise, and
understandable language in adopting the required disclosure and also
have considered whether strongly-worded disclaimer language would more
effectively convey the particular risks associated with money market
funds than more moderately-worded language would.\912\ We received one
comment on this language arguing that it is duplicative with other
language in the required disclosure statement.\913\ We have responded
to this comment by shortening and modifying the required disclosure
statement.\914\
---------------------------------------------------------------------------
\912\ See Proposing Release, supra note 25, at nn.316-317.
\913\ See Federated VIII Comment Letter.
\914\ As proposed, the required disclosure statement included
the statements ``You could lose money by investing in the Fund'' and
``Your investment in the Fund therefore may experience losses.'' As
adopted, the required disclosure statement no longer includes the
second statement, which could be construed to be repetitive with the
first.
---------------------------------------------------------------------------
d. Disclosure Concerning Fees and Gates
As proposed, the required disclosure statement would have included
bulleted statements providing: ``The Fund may impose a fee upon sale of
your shares when the Fund is under considerable stress'' and ``The Fund
may temporarily suspend your ability to sell shares of the Fund when
the Fund is under considerable stress.'' Instead of including these
bullet points in the required disclosure, we are adopting similar
content in the required disclosure statement providing: ``The Fund may
impose a fee upon the sale of your shares or may temporarily suspend
your ability to sell shares if the Fund's liquidity falls below
required
[[Page 47817]]
minimums because of market conditions or other factors.'' One
commenter, while generally supporting the proposed statement, suggested
that the statement be amended to say that the fund could impose a fee
or a gate ``in order to protect shareholders of the Fund.'' \915\ One
commenter expressed concerns about requiring the inclusion of
statements about fees and gates in advertisements or other sales
materials, arguing that the description of circumstances and conditions
under which fees and gates might be imposed is difficult to reduce to a
brief statement.\916\ No commenters explicitly supported the inclusion
of the term ``considerable stress,'' and several commenters argued that
this term was not clear, and may cause investors to believe that funds
could impose fees and gates arbitrarily or, conversely, only during
extreme market events.\917\ To address this concern, one commenter
suggested requiring a different term than ``considerable stress,''
arguing that this term overstates the prospect for imposing fees or
gates.\918\ Other commenters suggested that the disclosure state
explicitly that a fee or gate could be imposed as a result of a
reduction in the fund's liquidity.\919\ Commenters also suggested that
any disclosure regarding fees and gates could be combined into a single
statement.
---------------------------------------------------------------------------
\915\ See HSBC Comment Letter.
\916\ See NYC Bar Committee Comment Letter.
\917\ See NYC Bar Committee Comment Letter; ABA Business Law
Section Comment Letter; Dreyfus Comment Letter.
\918\ See Dreyfus Comment Letter.
\919\ See NYC Bar Committee Comment Letter; ABA Business Law
Section Comment Letter.
---------------------------------------------------------------------------
After considering the comments, we continue to believe that
disclosure about fees or gates should be included in advertisements,
sales materials, and the summary section of the prospectus. Even some
commenters that expressed concerns about including the disclosure in
advertisements acknowledged that the possible imposition of fees and
gates is information that is likely to be important to investors.\920\
As we stated in the Proposing Release, we are concerned that investors
will not be fully aware of potential restrictions on fund redemptions.
To address commenters' concerns regarding the ambiguity of the term
``considerable stress,'' we have revised the statement, as suggested by
commenters, to make clear that funds could impose a fee or gate in
response to a reduction in the fund's liquidity. The statement does not
include a reference that a fee or gate could be imposed ``to protect
investors of the fund,'' as suggested by one commenter. We believe that
including the additional suggested language could detract from the
statement's emphasis that a fee or gate could be imposed, which could
in turn diminish shareholders' awareness of potential restrictions on
fund redemptions. The language we have adopted reflects commenter
suggestions that any disclosure regarding fees or gates be combined
into a single statement. We believe that the adopted language also
responds to commenter concerns about the difficulty of briefly
describing the conditions under which fees and gates might be imposed
by providing that fees and gates could be imposed if ``the Fund's
liquidity falls below required minimums because of market conditions or
other factors.''
---------------------------------------------------------------------------
\920\ See ABA Business Law Section Comment Letter; NYC Bar
Committee Comment Letter.
---------------------------------------------------------------------------
e. Disclosure Concerning Sponsor Support
As proposed, the required disclosure statement would have included
a bulleted statement providing: ``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.'' We are adopting identical content in the required
disclosure statement. Several commenters opposed the inclusion of a
reference to sponsor support in the required disclosure statement.\921\
Some commenters argued that the disclosure would raise sponsor support
to an unwarranted level of prominence, noting that there have not been
any studies to determine whether investors actually rely on the
potential for sponsor support as a factor when determining whether to
invest in a money market fund.\922\ Commenters also were concerned that
investors will not understand the disclosure in fund advertisements,
since advertisements will not afford space or opportunity to explain to
investors who the fund's ``sponsor'' is and what ``financial support''
means.\923\
---------------------------------------------------------------------------
\921\ See Dreyfus Comment Letter; NYC Bar Committee Comment
Letter; ABA Business Law Section Comment Letter. But see CFA
Institute Comment Letter; HSBC Comment Letter (both generally
supporting the proposed disclosure statement, including the language
discussing sponsor support).
\922\ See, e.g., ABA Business Law Section Comment Letter; NYC
Bar Committee Comment Letter.
\923\ Id.
---------------------------------------------------------------------------
We continue to believe that the disclosure statement should include
a statement that the fund's sponsor has no obligation to provide
financial support. In the Proposing Release, we recognized that
particular instances of sponsor support were not particularly
transparent to investors in past years because sponsor support
generally was not immediately disclosed, and was not required to be
disclosed by the Commission.\924\ But although investors might not have
known of particular instances of sponsor support, we believe that many
investors, particularly institutional investors, have historically
understood that there was a possibility of financial support from the
money market fund's sponsor and that this possibility has affected
investors' perceptions about the level of risk in investing in money
market funds.\925\ We therefore disagree with the commenter who
suggested that investors were generally unaware of this practice
preceding and during the financial crisis.\926\ For this reason, we
believe that it is important to emphasize to investors that they should
not expect a fund sponsor to provide financial support to the fund.
---------------------------------------------------------------------------
\924\ Proposing Release, supra note 25, at section II.B.3.
\925\ See, e.g., Roundtable Transcript, supra note 63 (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
fund sponsors. So once they perceive that they are not able to get
that additional assurance, I believe that was one probably cause of
the run.'').
\926\ See NYC Bar Committee Comment Letter (arguing that the
Commission's discussion of the lack of transparency regarding
instances of sponsor support shows that the proposed risk statement
addresses a practice that investors were not aware of during the
financial crisis).
---------------------------------------------------------------------------
For similar reasons, we disagree with one commenter who argued that
requiring this disclosure is at odds with the requirement that funds
publicly disclose instances of sponsor support.\927\ As discussed
below, we are requiring funds to disclose current and historical
instances of sponsor support because we believe that such disclosure
will help investors better understand the risks of investing in the
funds.\928\ This reporting, which should help investors understand
instances when the fund has come under stress, provides historical
information about the fund. The required disclosure statement, on the
other hand, is a forward-looking risk statement that reminds current
and prospective investors that sponsors do not have an obligation to
provide sponsor support and that investors should not expect that
sponsors will provide support in the future.
---------------------------------------------------------------------------
\927\ See Dreyfus Comment Letter.
\928\ See infra notes 1007-1010, 1132 and accompanying text.
---------------------------------------------------------------------------
[[Page 47818]]
Finally, we are not persuaded that the disclosure regarding sponsor
support should not appear in advertisements because this disclosure
will not be understood by investors. We recognize that upon reading the
disclosure statement, investors might have questions regarding
financial support from sponsors, as commenters indicated, including
questions regarding who the fund's ``sponsor'' is, or what constitutes
``financial support.'' \929\ We believe, however, that funds can
address this issue through more complete disclosure elsewhere in the
fund prospectus if they believe it is necessary.
---------------------------------------------------------------------------
\929\ See ABA Business Law Section Comment Letter; NYC Bar
Committee Comment Letter.
---------------------------------------------------------------------------
f. Disclosure for Floating NAV Funds
As proposed, the required disclosure statement for floating NAV
funds would have included bulleted statements providing: ``You should
not invest in the Fund if you require your investment to maintain a
stable value'' and ``The value 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.''
Instead of including these bullet points in the required disclosure, we
are adopting similar content in the required disclosure statement
providing: ``Because the share price of the Fund will fluctuate, when
you sell your shares they may be worth more or less than what you
originally paid for them.'' While one commenter questioned whether the
proposed disclosure was necessary for investors in institutional prime
funds,\930\ we believe it is important to emphasize to investors the
potential impact of a floating NAV.\931\ In response to suggestions by
commenters,\932\ we have decided not to require that the disclosure
statement include the proposed statement that investors that require a
stable value not invest in the fund. We were persuaded by commenters
that the term ``stable value'' is often used by financial advisers when
referring to certain investment products, at least some of which do
have a variable NAV.\933\ We are also not including in the disclosure
requirements the proposed statements about the relationship between the
fund share price and the value of the fund's underlying securities and
the risk factors that can affect the value of the fund's underlying
securities. We were persuaded by one commenter who noted that
discussion of specific risk factors will be addressed in other areas of
the prospectus, including the summary prospectus.\934\ We also believe
that not including these statements addresses more general concerns
expressed by commenters regarding the length and efficacy of the
proposed disclosure statement.\935\
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\930\ See Dreyfus Comment Letter (``[W]e also question the
Commission's concern that investors will fail to understand that the
value of the [floating NAV] MMF will fluctuate. We question at what
point investors will be given the benefit of the doubt for
understanding the product in which they are invested and when such
concerns will cease to drive additional regulatory action.'')
\931\ Cf. ABA Business Law Section Comment Letter (suggesting
that ``floating NAV money market funds include in their
advertisements a statement that their principal value will fluctuate
so that an investor's shares, when redeemed may be worth more or
less than their original cost''); CFA Institute Comment Letter
(stating that ``[d]isclosures are needed to alert investors to the
potential for loss of principal and interest'').
\932\ See NYC Bar Committee Comment Letter; ABA Business Law
Section Comment Letter.
\933\ See NYC Bar Committee Comment Letter (noting that ``stable
value'' commonly refers to a ``retirement product that will use a
combination of government bonds, guaranteed return insurance
wrappers and potentially other synthetic instruments to deliver a
minimum rate of return'').
\934\ See Dreyfus Comment Letter.
\935\ See ABA Business Law Section Comment Letter; NYC Bar
Committee Comment Letter. The required disclosure statement that we
are adopting today (see supra text accompanying note 909) is about
30% shorter than the proposed bulleted disclosure statement. (We
have modified the proposed bulleted disclosure statement to
encompass the proposed language referencing fluctuating share price
as well as the ability of a fund to impose fees or gates. The
Proposing Release conceived of two separate reform approaches, each
with its own disclosure statement, while this Release combines the
approaches into a single reform package, and the disclosure
statement we are adopting therefore references both reform elements,
as appropriate.)
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2. Disclosure of Tax Consequences and Effect on Fund Operations--
Floating NAV
As discussed in the Proposing Release, the requirement that
institutional prime money market funds transition to a floating NAV
will entail certain additional tax- and operations-related disclosure,
but these disclosure requirements do not necessitate rule and form
amendments.\936\ As noted above, taxable investors in institutional
prime money market funds, like taxable investors in other types of
mutual funds, may now experience taxable gains and losses.\937\
Currently, funds are required to describe in their prospectuses the tax
consequences to shareholders of buying, holding, exchanging, and
selling the fund's shares.\938\ 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 changes resulting from the fund's use of a
floating NAV.\939\ We also expect that a fund that intends to qualify
as a retail money market fund would disclose in its prospectus that it
limits investment to accounts beneficially owned by natural
persons.\940\ The Proposing Release requested 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 shares of the fund, as well as the
effects (if any) on fund operations resulting from the transition to a
floating NAV. We received no comments directly discussing this
disclosure.
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\936\ Prospectus disclosure regarding the tax consequences of
these activities is currently required by Form N-1A. See Item 11(f)
of Form N-1A.
\937\ See supra section III.B.6.
\938\ See Item 11(f) of Form N-1A.
\939\ We expect that a floating NAV 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.
\940\ See supra note 692 and accompanying text.
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3. Disclosure of Transition to Floating NAV
Currently, 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.\941\ As discussed in the Proposing Release, we would
expect that, to meet this existing 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), it
would update its registration statement to include relevant related
disclosure, as discussed in sections III.E.1 and III.E.2 of this
Release, by means of a post-effective amendment or a prospectus
supplement. Two commenters explicitly supported that such disclosures
be made when transitioning to a floating NAV.\942\ We continue to
believe that a money market fund must update its registration statement
by means of a post-effective amendment or ``sticker''
[[Page 47819]]
to reflect relevant disclosure related to a transition to a floating
NAV.
---------------------------------------------------------------------------
\941\ See 17 CFR 230.497.
\942\ See HSBC Comment Letter; PWC Comment Letter.
---------------------------------------------------------------------------
4. Disclosure of the Effects of Fees and Gates on Redemptions
As we discussed in the proposal, pursuant to the existing
requirements in Form N-1A, funds must disclose any restrictions on fund
redemptions in their registration statements.\943\ As discussed in more
detail below, we expect that, to comply with these existing
requirements, money market funds (other than government money market
funds that are not subject to the fees and gates requirements pursuant
to rule 2a-7(c)(2)(iii) and that have not chosen to rely on the ability
to impose liquidity fees and suspend redemptions) will disclose in the
registration statement the effects that the potential imposition of
fees and/or gates, including a board's discretionary powers regarding
the imposition of fees and gates, may have on a shareholder's ability
to redeem shares of the fund. This disclosure should help investors
evaluate the costs they could incur in redeeming fund shares--one of
the goals of this rulemaking.
---------------------------------------------------------------------------
\943\ See Items 11(c)(1) and 23 of Form N-1A.
---------------------------------------------------------------------------
Commenters generally agreed that this disclosure would help
investors understand the effects of fees and gates on redemptions.\944\
One commenter specifically agreed that Items 11(c)(1) and 23 of Form N-
1A would require money market funds to fully describe the circumstances
under which liquidity fees could be charged or redemptions could be
suspended or reinstated.\945\ In addition, two commenters noted that
the prospectus should include disclosure of a board's discretionary
powers regarding the imposition of fees and gates, which would serve to
emphasize further the nature of money market funds as investments
subject to risk.\946\ The Proposing Release requested comment on the
utility of including additional disclosure about the operations and
effects of fees and redemption gates, including (i) requiring
information about the basic operations of fees and gates to be
disclosed in the summary section of the statutory prospectus (and any
summary prospectus, if used) and (ii) requiring details about the
fund's liquidation process. One commenter argued against the utility of
such additional disclosure in helping investors to understand the
effects of fees and gates on redemptions.\947\ We agree and decided
against making any changes to the rule text in this regard.
---------------------------------------------------------------------------
\944\ See, e.g., UBS Comment Letter; Chamber II Comment Letter;
Federated VIII Comment Letter.
\945\ See Federated VIII Comment Letter (suggesting that Form N-
1A also would require money market funds to describe how
shareholders would be notified thereof, as well as other
implications for shareholders, such as the tax consequences
associated with the money market fund's receipt of liquidity fees).
\946\ See UBS Comment Letter; Chamber II Comment Letter.
\947\ See Federated VIII Comment Letter (arguing that: (i)
Requiring disclosure in the summary prospectus about ``an exigent
circumstance (i.e., charging liquidity fees or suspending
redemptions) which is highly unlike[ly] to ever occur '' would be
``highly inconsistent with the Commission's goal of `providing
prospectuses that are simpler, clearer, and more useful to
investors' '' and (ii) no money market funds have relied on rule
22e-3 to suspend the redemption of shares and liquidate the fund
since the rule's adoption, and thus suggesting that disclosure about
a fund's liquidation process would not be useful to investors).
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As discussed in the Proposing Release, we expect money market funds
to explain in the prospectus the various situations in which the fund
may impose a liquidity fee or gate.\948\ For example, money market
funds would briefly explain in the prospectus that if the fund's weekly
liquid assets fall below 30% of its total assets and the fund's board
determines it is in the best interests of the fund, the fund board may
impose a liquidity fee of no more than 2% and/or temporarily suspend
redemptions for a limited period of time.\949\ We also expect money
market funds to briefly explain in the prospectus that if the fund's
weekly liquid assets fall below 10% of its total assets, the fund will
impose a liquidity fee of 1% 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
interests of the fund or determines that a lower or higher fee (not to
exceed 2%) would be in the best interests of the fund.\950\
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\948\ Proposing Release, supra note 25, at section III.B.8.
\949\ See Items 11(c)(1) and 23 of Form N-1A.
\950\ See Items 11(c)(1) and 23 of Form N-1A.
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As discussed in the Proposing Release, we 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. Prospectus disclosure regarding any restrictions
on redemptions is currently required by Item 11(c)(1) of Form N-1A. In
addition to the disclosure required by Item 11(c)(1), 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 and/or to
what extent 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 ``would be
most useful to typical or average investors in making an investment
decision.'' \951\ 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.\952\
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\951\ 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.
\952\ Id.
---------------------------------------------------------------------------
Based on this principle, we anticipate that funds generally would
consider the following disclosure to be appropriate for the prospectus,
as disclosure regarding redemption restrictions provided in response to
Item 11(c)(1) of Form N-1A: (i) Means of notifying shareholders about
the imposition and lifting of fees and/or gates (e.g., press release,
Web site announcement); (ii) timing of the imposition and lifting of
fees and gates, including (a) an explanation that if a fund's weekly
liquid assets fall below 10% of its total assets at the end of any
business day, the next business day it must impose a 1% liquidity fee
on shareholder redemptions unless the fund's board of directors
determines that doing otherwise is in the best interests of the fund,
(b) an explanation that if a fund's weekly liquid assets fall below 30%
of its total assets, it may impose fees or gates as early as the same
day, and (c) an explanation of the 10 business day limit for imposing
gates; (iii) use of fee proceeds by the fund, including any possible
return to shareholders in the form of a distribution; (iv) the tax
consequences to the fund and its shareholders of the fund's receipt of
liquidity fees; and (v) general description of the process of fund
liquidation\953\ if the fund's weekly liquid assets fall below 10%, and
the fund's board of directors determines that it would not be in the
best interests of the fund to continue operating.\954\
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\953\ See supra section III.A.4.
\954\ One commenter argued that it was unnecessary to describe
the process of fund liquidation in either the prospectus or SAI. See
Federated VIII Comment Letter. We note that we are not mandating
particular disclosures, but rather providing examples of the types
of disclosures we believe that money market funds could provide in
the prospectus or SAI. We further note that it is important for
funds to ensure that investors are fully aware of the ability of the
fund to permanently suspend redemptions and liquidate.
---------------------------------------------------------------------------
In addition, we expect that a government money market fund that is
not subject to the fees and gates
[[Page 47820]]
requirements pursuant to rule 2a-7(c)(2)(iii), but that later decides
to rely on the ability to impose liquidity fees and suspend
redemptions, would update its registration statement to reflect the
changes by means of a post-effective amendment or a prospectus
supplement pursuant to rule 497 under the Securities Act. In addition,
a government fund that later opts to rely on the ability to impose fees
and gates provided in rule 2a-7(c)(2)(iii) should consider whether to
provide any additional notice to its shareholders of that
election.\955\
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\955\ We note that 60-day notice is required by our rules for
other significant changes by funds, for example, when a fund changes
its name. See rules 35d-1(a)(2)(ii) and (a)(3)(iii).
---------------------------------------------------------------------------
5. Historical Disclosure of Liquidity Fees and Gates
We are amending Form N-1A, generally as proposed, but with certain
modifications as discussed below, to require that money market funds
provide disclosure in their SAIs about historical occasions in which
the fund has considered or imposed liquidity fees or gates.\956\ As
proposed, we would have required 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.\957\ As discussed below, we are adopting modified
thresholds for imposing fees and gates from what was proposed;
consequently, the amendments we are adopting to Form N-1A to require
historical disclosure of liquidity fees and gates have been modified
from the proposed amendments to conform to these amended threshold
levels. In addition, in a change from the proposed historical
disclosure requirements, the Form N-1A amendments we are adopting
require a fund to disclose the size of any liquidity fee imposed during
the specified look-back period. We have also determined not to adopt
the proposed requirement to disclose ``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'' for the reasons detailed below.
---------------------------------------------------------------------------
\956\ As we proposed, this historical disclosure would only
apply to such events that occurred after the compliance date of the
amendments. See Proposing Release, supra note 25, at n.983.
\957\ See Proposing Release, supra note 25, at section
III.B.8.d.
---------------------------------------------------------------------------
Specifically, we are amending Form N-1A to require that money
market funds (other than government money market funds that are not
subject to the fees and gates requirements pursuant to rule 2a-
7(c)(2)(iii)) \958\ provide disclosure in their SAIs regarding any
occasion during the last 10 years (but not for occasions that occurred
before the compliance date of these amended rules) \959\ on which (i)
the fund's weekly liquid assets have fallen below 10%, 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, or
(ii) the fund's weekly liquid assets have fallen below 30% (but not
less than 10%) and the fund's board of directors determined to impose a
liquidity fee and/or suspend the fund's redemptions.\960\ With respect
to each occasion, we are requiring funds to disclose: (i) The length of
time for which the fund's weekly liquid assets remained below 10% (or
30%, as applicable); (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) the size of any
liquidity fee imposed.\961\
---------------------------------------------------------------------------
\958\ Rule 2a-7(c)(2)(iii).
\959\ See infra section III.N.
\960\ See amended Item 16(g)(1) of Form N-1A. The disclosure
required by Item 16(g)(1) should incorporate, as appropriate, any
information that the fund is required to report to the Commission on
Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR. See
Instruction 2 to Item 16(g)(1). This represents a slight change from
the proposal, in that the required disclosure is now the same as
what would be disclosed in the initial filings of Form N-CR. We have
made this change to reduce the burdens associated with such
disclosure so that funds need only prepare this information once in
a single manner. For the reasons discussed in section III.F of this
Release, Form N-CR includes a new requirement that funds report
their level of weekly liquid assets at the time of the imposition of
fees or gates, and accordingly, we are also requiring similar
disclosure here. See Form N-CR Items E.3 and F.1.
\961\ See Instructions to amended Item 16(g)(1) of Form N-1A.
---------------------------------------------------------------------------
We proposed to require a fund to provide disclosure in its SAI
regarding any occasion during the last 10 years (but not before the
compliance date) in which the fund's weekly liquid assets had 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.\962\ As discussed previously, the final
amendments contain modified thresholds for imposing fees and gates from
what was proposed,\963\ and we are therefore modifying the disclosure
requirements to conform to these amended threshold levels.
---------------------------------------------------------------------------
\962\ See Proposing Release, supra note 25, at section
III.B.8.d.
\963\ See supra section III.A.2.
---------------------------------------------------------------------------
As proposed, the SAI disclosure requirements would not have
directly required a fund to disclose the size of any liquidity fee
imposed. We are modifying the SAI disclosure requirements to require a
fund to disclose the size of any liquidity fee it has imposed during
the specified look-back period. As discussed below in the context of
the Form N-CR disclosure requirements we are adopting, because we are
revising the default liquidity fee from the proposed 2% to 1%, and thus
we expect that there may be instances where liquidity fees are above or
below the default fee (rather than just lower as permitted under the
proposal), we are requiring that funds disclose the size of the
liquidity fee, if one is imposed.\964\
---------------------------------------------------------------------------
\964\ See infra note 1316 and accompanying text.
---------------------------------------------------------------------------
One commenter specifically supported the proposed 10-year ``look-
back'' period for the historical disclosure, noting that a 10-year
period should capture a number of different market stresses delivering
a meaningful sample.\965\ Another commenter suggested limiting SAI
disclosure to a five-year period prior to the effective date of the
registration statement incorporating the SAI disclosure, although this
commenter did not provide specific reasons why this shortened look-back
period would be appropriate.\966\ After further consideration, and
given that commenters did not provide any specific reasons for
implementing a shortened look-back period, we continue to believe that
a 10-year look-back period provides shareholders and the Commission
with a historical perspective that would be long enough to provide a
useful understanding of past events. We believe that this period would
provide a meaningful sample of stresses faced by individual funds and
in the market as a whole, and to analyze patterns with respect to fees
and gates, but would not be so long as to include circumstances that
may no longer be a relevant reflection of the fund's management or
operations.
---------------------------------------------------------------------------
\965\ See HSBC Comment Letter.
\966\ See Federated VIII Comment Letter.
---------------------------------------------------------------------------
As discussed in the Proposing Release, we continue to believe that
money market funds' current and prospective shareholders should be
informed of historical occasions in which the fund's weekly liquid
assets
[[Page 47821]]
have fallen below 10% and/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. The DERA Study analyzed the distribution of weekly
liquid assets and found that 83 prime funds per year, corresponding to
2.7% of the prime funds' weekly liquid asset observations, saw the
percentage of their total assets that were invested in weekly liquid
assets fall below 30%. The DERA Study further showed that less than one
(0.6) fund per year, corresponding to 0.01% of the prime funds' weekly
liquid asset observations, experienced a decline of total assets that
were invested in weekly liquid assets to below 10%.\967\ We believe
that funds will, in general, try to avoid the need to disclose
decreasing percentages of weekly liquid assets and/or the imposition of
a liquidity fee or gate, as required under the new amendments to Form
N-1A,\968\ by keeping the percentage of their total assets invested in
weekly liquid assets at or above 30%. Of those 83 funds that reported a
percentage of total assets invested in weekly liquid assets below 30%,
it is unclear how many, if any, would have attempted to keep the
percentage of their total assets invested in weekly liquid assets at or
above 30% to avoid having to report this information on their SAI
(assuming they were to impose, at their board's discretion, a liquidity
fee or gate).
---------------------------------------------------------------------------
\967\ See DERA Study, supra note 24, at 27.
\968\ See supra notes 960 and 961 and accompanying text.
---------------------------------------------------------------------------
The required disclosure will permit current and prospective
shareholders to assess, among other things, 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 declines in
portfolio liquidity. This disclosure also provides 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 impose market discipline on portfolio managers to
monitor and manage portfolio liquidity in a manner that lessens the
likelihood that the fund would need to implement a liquidity fee or
gate.\969\ One commenter explicitly supported the utility of these
disclosure requirements in providing investors with useful information
regarding the frequency of the money market fund's breaching of certain
liquidity thresholds, whether a fee or gate was applied, and the level
of fee imposed, stating that ``[t]his will allow investors to make
informed decisions when determining whether to invest in [money market
funds] and when comparing different [money market funds].'' \970\ No
commenter argued that disclosure about the historical fact of
occurrence of fees and gates would not be useful to investors. However,
some commenters raised concerns about the potential redundancy of the
proposed registration statement, Web site, and Form N-CR disclosure
requirements.\971\
---------------------------------------------------------------------------
\969\ See supra notes 157 and 162 and accompanying text.
\970\ HSBC Comment Letter.
\971\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------
As discussed above, we also have determined not to adopt the
proposed requirement for a fund to disclose ``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'' in its SAI (or as discussed below, on its Web site).\972\
We note that Form N-CR, as proposed, also would have required a fund
imposing a fee or gate to disclose a ``discussion of the board's
analysis'' supporting its decision, and a number of commenters objected
to this proposed requirement.\973\ In particular, commenters raised
concerns that the disclosures proposed to be required in Form N-CR and
Form N-1A would not be material to investors, would be burdensome to
disclose, would chill deliberations among board members and hinder
board confidentiality, and would encourage opportunistic
litigation.\974\ Commenters also argued that disclosure of the board's
analysis is not necessary to disclose patterns of stress in a fund and
that this disclosure is not likely to be a meaningful indication of the
board's analytical process going forward.\975\
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\972\ However, as discussed below in section III.F.5, Form N-CR
will require a fund to disclose the primary considerations or
factors taken into account by the fund's board in its decision to
impose a liquidity fee or gate.
\973\ See infra section III.F.5.
\974\ See infra notes 1289-1293 and accompanying text. Most
commenters made these arguments in reference to the proposed Form N-
CR disclosure requirement; however, several commenters also
specifically referenced the proposed identical Form N-1A disclosure
requirement. See SIFMA Comment Letter; Stradley Ronon Comment
Letter.
\975\ See SIFMA Comment Letter; Stradley Ronon Comment Letter
(both stating that requiring disclosure of the board's analysis is
not necessary to disclose patterns of stress in a fund, and that
patterns of stress will be apparent via the proposed disclosures of
historical sponsor support and liquidity shortfalls). We note that
the Proposing Release does not specifically state that disclosure of
the board's analysis supporting its decision to impose a liquidity
fee or temporarily suspend the fund's redemptions would permit
shareholders to assess patterns of stress. Rather, the Proposing
Release states that the proposed historical disclosure of liquidity
fees and gates (which disclosure would include a discussion of the
board's analysis supporting its decision to impose a liquidity fee
or gate) generally would assist shareholders in assessing patterns
of stress. See Proposing Release, supra note 25, at section
III.B.8.d. We continue to believe that historical disclosure of fees
and gates, which would include disclosures of historical liquidity
shortfalls, would assist shareholders in understanding patterns of
stress faced by the fund. See supra notes 969-970 and accompanying
text. We believe that this historical disclosure complements the
disclosure of historical instances of sponsor support in
understanding patterns of stress.
---------------------------------------------------------------------------
We discuss these commenters' concerns in detail in section III.F
below and also provide our analysis supporting our attempt to balance
these concerns with our interest in permitting the Commission and
shareholders to understand why a board imposed (or did not impose) a
liquidity fee or gate. As a result of these considerations and the
analysis discussed in section III.F below, we have adopted a Form N-CR
requirement to require disclosure of the primary considerations or
factors taken into account by the fund's board in its decision to
impose a liquidity fee or gate. However, in order to avoid unnecessary
duplication in the disclosure that will appear in a fund's SAI and on
Form N-CR, we have determined not to require parallel disclosure of
these considerations or factors in the fund's SAI. Instead, a fund will
only be required to present certain summary information about the
imposition of fees and/or gates in its SAI (as well as on the fund's
Web site \976\), and will be required to present more detailed
discussion solely on Form N-CR.\977\ To inform investors about the
inclusion of this more detailed information on Form N-CR, funds will be
instructed to include the following statement as part of their SAI
disclosure about the historical occasions in which the fund has
considered or imposed liquidity fees or gates: ``The Fund was required
to disclose additional information about this event [or ``these
events,'' as appropriate] on Form N-CR and to file this form with the
Securities and Exchange Commission. Any Form
[[Page 47822]]
N-CR filing submitted by the Fund is available on the EDGAR Database on
the Securities and Exchange Commission's Internet site at http://www.sec.gov.'' \978\ In adopting these modified SAI disclosure
requirements, we have attempted to balance concerns about potentially
duplicative disclosure \979\ with our interest in presenting the
primary information about the fund's historical imposition of fees or
gates that we believe shareholders may find useful in assessing fund
risks.
---------------------------------------------------------------------------
\976\ See infra section III.E.9.f.
\977\ See infra section III.F.5.
\978\ See instructions to amended Item 16(g)(1) of Form N-1A.
\979\ See supra note 971 and accompanying text. As discussed in
more detail in section III.F.5 below, while similar information is
required to be included on Form N-CR and on Form N-1A, we believe
each of these different disclosures to be appropriate because they
serve distinct purposes. See infra notes 1308-1309 and accompanying
text.
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6. Prospectus Fee Table
As proposed, we are 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.\980\ Commenters on this aspect of our proposal agreed that the
liquidity fee should not be included in the prospectus fee table.\981\
For example, one commenter stated that the fees and expenses table is
intended to show a typical investor the range of anticipated costs that
will be borne by the investor directly or indirectly as a shareholder,
but is not an ideal presentation for the kind of highly contingent cost
that would be represented by a liquidity fee.\982\
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\980\ See Instruction 2(b) to amended Item 3 of Form N-1A.
\981\ See, e.g., HSBC Comment Letter; NYC Bar Committee Comment
Letter; Dreyfus Comment Letter.
\982\ See NYC Bar Committee Comment Letter.
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As discussed in the Proposing Release and as adopted today, a
liquidity fee will only be imposed when a fund experiences stress, and
because we anticipate that a particular fund would impose this fee
rarely, if at all,\983\ we continue to believe that the prospectus fee
table, which is intended to help shareholders compare the costs of
investing in different mutual funds, should not include the liquidity
fee.\984\ We also note, as discussed above, that shareholders will be
adequately informed about liquidity fees through other disclosures in
funds' SAI and summary section of the statutory prospectus (and,
accordingly, in any summary prospectus, if used).\985\ If a fund
imposes a liquidity fee, shareholders will also be informed about the
imposition of this fee on the fund's Web site \986\ and possibly by
means of a prospectus supplement.\987\ A fund could also provide
complementary shareholder communications, such as a press release or
social media update.\988\ Accordingly, we are adopting the clarifying
instruction to Item 3 as proposed.
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\983\ See supra note 247 and accompanying text.
\984\ 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.
\985\ See supra section III.E.4.
\986\ See infra section III.E.9.f.
\987\ See infra text accompanying notes 1126 and 1127.
\988\ See infra text following note 1123.
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7. Historical Disclosure of Affiliate Financial Support
As discussed above in section II.B.4, voluntary support provided by
money market fund sponsors and affiliates has played a role in helping
some money market funds maintain a stable share price, and, as a
result, may have lessened investors' perception of the level of risk in
money market funds. Such discretionary sponsor support was, in fact,
not unusual during the financial crisis.\989\ Today we are adopting,
with certain modifications from the proposal to address commenter
concerns, amendments that require that money market funds disclose
current and historical instances of affiliate ``financial support.''
The final amendments define ``financial support'' in the same way it is
defined in Form N-CR,\990\ and specify that funds should incorporate
certain information that the fund is required to report on Form N-CR in
their SAI disclosure.\991\ We discuss this definition in detail,
including the modifications we have made to address commenter concerns,
in section III.F.\992\ This represents a slight change from the
proposal, in that the required disclosure is now identical to what
would be disclosed in the initial filings of Form N-CR. We have made
this change to reduce the burdens associated with such disclosure so
that funds need only prepare this information once in a single
manner.\993\
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\989\ See, e.g., DERA Study, supra note 24, at nn.23-24 and
accompanying text.
\990\ See Instruction 1 to Item 16(g)(2) of Form N-1A; Form N-CR
Part C (defining financial support as ``including any (i) capital
contribution, (ii) purchase of a security from the Fund in reliance
on Sec. 270.17a-9, (iii) purchase of any defaulted or devalued
security at par, (iv) execution of letter of credit or letter of
indemnity, (v) capital support agreement (whether or not the Fund
ultimately received support), (vi) performance guarantee, or (vii)
any other similar action reasonably intended to increase or
stabilize the value or liquidity of the Fund's portfolio; excluding,
however, any (i) routine waiver of fees or reimbursement of Fund
expenses, (ii) routine inter-fund lending (iii) routine inter-fund
purchases of Fund shares, or (iv) any action that would qualify as
financial support as defined above, that the board of directors has
otherwise determined not to be reasonably intended to increase or
stabilize the value or liquidity of the Fund's portfolio.'').
\991\ See Instruction 3 to Item 16(g)(2) of Form N-1A.
\992\ See infra section III.F.3.
\993\ See Item 16(g)(2) of Form N-1A. The disclosure required by
Item 16(g)(2) should incorporate, as appropriate, any information
that the fund is required to report to the Commission on Items C.1,
C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR. See Instruction 2 to
Item 16(g)(2).
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In the Proposing Release, we requested comment on amending rule
17a-9 (which allows for the discretionary support of money market funds
by their sponsors and other affiliates) to potentially restrict the
practice of sponsor support, but did not propose any specific changes
to the rule. While a few commenters suggested, in response to this
request for comment, that we prohibit affiliates from providing
discretionary support to maintain a money market fund's share
value,\994\ other commenters opposed making any changes to rule 17a-9,
arguing that transactions facilitated by the rule are in the best
interests of shareholders.\995\ We continue to believe, as discussed in
the Proposing Release, that permitting financial support (with adequate
disclosure) will provide fund affiliates with the flexibility to
protect shareholder interests, and we are not amending rule 17a-9 at
this time.\996\ Many commenters supported the various financial support
disclosures we are adopting today.\997\ We believe that these
disclosure requirements will provide transparency to shareholders and
the Commission about the frequency, nature, and amount of affiliate
financial support.
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\994\ See, e.g., Systemic Risk Council Comment Letter; Capital
Advisors Comment Letter; see also HSBC Comment Letter (supporting
amending rule 17a-9, arguing that transactions facilitated by the
rule can result in shareholders having unjustified expectations of
future support being provided by sponsors).
\995\ See ICI Comment Letter; Dreyfus Comment Letter; ABA
Business Law Comment Letter.
\996\ See Proposing Release, supra note 25, at text accompanying
n.607.
\997\ See, e.g., Oppenheimer Comment Letter (``We support the
SEC's proposal to require money market funds to disclose current and
historical instances of sponsor support for stable NAV funds [. .
.].''). See also, e.g., Angel Comment Letter; American Bankers Ass'n
Comment Letter; Federated VIII Comment Letter; Comment Letter of
Occupy the SEC (Sept. 16, 2013) (``Occupy the SEC Comment Letter'');
Thrivent Comment Letter.
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a. General Requirements
We are adopting, with some changes from the proposal, amendments to
Form N-1A to require a money market fund
[[Page 47823]]
to disclose in its SAI historical instances in which the fund has
received financial support from a sponsor or fund affiliate.\998\
Specifically, each money market fund will be required to disclose any
occasion during the last 10 years (but not for occasions that occurred
before the compliance date of these amended rules) on which an
affiliated person, promoter, or principal underwriter of the fund, or
an affiliated person of such person,\999\ provided any form of
financial support to the fund. For the reasons discussed in the
Proposing Release, we believe that the disclosure of historical
instances of sponsor support will allow investors, regulators,
academics, market observers and market participants, and other
interested members of the public to understand better whether a
particular fund has required financial support in the past and the
extent of sponsor support across the fund industry.\1000\ As proposed,
with respect to each such occasion, funds would have been required to
describe the nature of support, the person providing support, the
relationship between the person providing support and the fund, the
date the support provided, the amount of support,\1001\ the security
supported and its value on the date support was initiated (if
applicable), the reason for support, the term of support, and any
contractual restrictions relating to support.\1002\ We are adopting the
proposed disclosure requirements, with the exception of the
requirements for a fund to describe the reason for support, the term of
support, and any contractual restrictions relating to support.
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\998\ See Item 16(g)(2) of Form N-1A.
\999\ Rule 2a-7 currently requires a money market fund to notify
the Commission by electronic mail, directed to the Director of
Investment Management or the Director's designee, of any 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 current rule 2a-
7(c)(7)(iii)(B). As proposed, we are eliminating this requirement
today, as it would be duplicative with the proposed Form N-CR
reporting requirements discussed below. See rule 2a-7(f)(3); see
also infra note 1254. However, because the definition of ``financial
support'' as adopted today 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 definition should reflect
the scope of persons covered by current rule 2a-7(c)(7)(iii)(B). The
term ``affiliated person'' is defined in section 2(a)(3) and, in the
context of an investment company, includes, among other persons, the
investment adviser of the investment company.
\1000\ See Proposing Release, supra note 25, at text following
n.607.
\1001\ See infra section III.F.3 for Commission guidance on the
amount of support to be disclosed.
\1002\ See proposed Item 16(g)(2) of Form N-1A. See infra notes
1226-1243 and accompanying text for a discussion of actions that
would be deemed to constitute ``financial support'' and additional
discussion of what is required to be reported.
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While multiple commenters supported the proposed requirement for
money market funds to disclose historical instances of financial
support in the fund's SAI,\1003\ other commenters expressed a number of
concerns about this proposed requirement.\1004\ For example, one
commenter opposed this disclosure, stating that ``many investors would
extrapolate such disclosure as an implied guarantee of future support
by the sponsor of the fund.'' \1005\ Another commenter rejected the
notion that past sponsor support is indicative of a sponsor's
management style and further observed that disclosure of historical
support contradicts the proposed disclosure that a fund's sponsor has
no legal obligation to provide support.\1006\ While we acknowledge
these concerns, we believe it is important for investors to understand
the nature and extent that a fund's sponsor has discretionarily
supported the fund in order to allow them to fully appreciate the risks
of investing in the fund.\1007\ Although we recognize that historical
occurrences are not necessarily indicative of future events and that
support does not equate to poor fund management, we continue to expect
that these disclosures will permit investors to assess the sponsor's
past ability and willingness to provide financial support to the fund.
This disclosure also should help investors gain a better context for,
and understanding of, the fund's risks, historical performance, and
principal volatility.
---------------------------------------------------------------------------
\1003\ See supra note 997.
\1004\ See, e.g., U.S. Bancorp Comment Letter; Dreyfus Comment
Letter.
\1005\ See U.S. Bancorp Comment Letter.
\1006\ See Dreyfus Comment Letter.
\1007\ See supra notes 51-55 and accompanying discussion; see
also, e.g., Proposing Release, supra note 25, at n.607 and
accompanying text.
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A number of commenters stated that any disclosure of financial
support, including the historical disclosures, should only apply to
stable NAV funds.\1008\ We disagree. Transparency of financial support
is important for stable NAV funds, given the potential for a ``breaking
the buck'' event absent the receipt of affiliate financial support. It
is equally important, for both floating and stable NAV money market
funds, that investors have transparency about the extent to which the
fund's principal stability or liquidity profile is achieved through
financial support as opposed to portfolio management. This is
particularly the case when financial support for a floating NAV fund
could obviate the need for it to impose a liquidity fee or redemption
gate.\1009\ We therefore believe that transparency of such support will
help investors better evaluate the risks with respect to both stable
and floating NAV funds.\1010\
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\1008\ See, e.g., ICI Comment Letter; IDC Comment Letter;
Oppenheimer Comment Letter; Comment Letter of State Street Global
Advisors (Sept. 17, 2013) (``SSGA Comment Letter'').
\1009\ See generally, ABA Business Law Section (with respect to
retaining rule 17a-9, stating that ``the possibility of economic
support from an affiliated person would remain important to money
market funds that have a floating NAV because [. . .] liquidity
concerns [remain] significant to money market funds (and other funds
holding the same investments). [. . . .] In addition, retaining
[rule 17a-9] would not undercut the Commission's goal of providing
transparency of money market fund risks, particularly in light of
the Commission's companion proposals calling for disclosure of
historical instances of economic support from sponsors of money
market funds.'').
\1010\ See Proposing Release, supra note 25, at section
III.F.1.a (discussing reasons why funds should disclose historical
sponsor support).
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Some commenters also suggested we shorten the look-back period. For
example, one commenter proposed a look-back period of 3 to 5 years
(rather than 10 years, as proposed).\1011\ We believe, however, that a
look-back period of less than 10 years would be too short to achieve
our goals. As we noted in the Proposing Release,\1012\ the 10-year
look-back period will provide shareholders and the Commission with a
historical perspective that is 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 also note that, historically, episodes of
financial support have occurred on average every 5 to 10 years.\1013\
Accordingly, a shorter look-back period would result in disclosure that
not does reflect the typical historical frequency of instances of
financial support.
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\1011\ See, e.g., Dreyfus Comment Letter (stating that
``[s]imilar kinds of information (e.g., management fees and 12b-1
fees paid, officers and directors biographies, financial highlights)
generally [are] required in the registration statement only for a 3-
5 year period.''); Federated VIII Comment Letter (recommending five
years). But see Occupy the SEC Comment Letter (explicitly supporting
the proposed 10-year look-back period for disclosing events of
financial support).
\1012\ See Proposing Release, supra note 25, at discussion
following n.614.
\1013\ See Proposing Release, supra note 25, at section II.B,
Table 1.
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We proposed to limit historical disclosure of events of affiliate
financial support to instances that occur after the compliance date of
the amendments to Form N-1A.\1014\ Several commenters
[[Page 47824]]
generally supported this approach, suggesting that this disclosure
requirement should only apply to events that occur after the compliance
date of the disclosure reforms.\1015\ We continue to believe that these
disclosures should only apply to affiliate financial support events
that occur after the compliance date of the disclosure reforms, in
large part because to do otherwise would require funds and their
affiliates to incur significant costs as they reexamine a variety of
past transactions to determine whether such events fit our new
definition of affiliate financial support.
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\1014\ As we proposed, this historical disclosure would only
apply to such events that occurred after the compliance date of the
amendments. See Proposing Release, supra note 25, at text
accompanying n.983.
\1015\ See Federated VII Comment Letter; SIFMA Comment Letter.
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Finally, a few commenters suggested disclosing historical financial
support in Form N-MFP, N-CR, or N-CSR, rather than in the SAI (as
proposed).\1016\ One commenter noted that to the extent this disclosure
will serve as a reporting function for analysis by regulators, other
forms such as Form N-MFP have been developed for that particular
purpose.\1017\ Commenters also raised concerns about the potential
redundancy of the proposed registration statement, Web site, and Form
N-CR disclosure requirements.\1018\ Because these historical sponsor
support disclosures are intended to benefit investors, as well as
regulators, we believe that the SAI is the most accessible and
efficient format for such disclosure. As discussed in section III.F.3,
we note that the contemplated SAI disclosure would consolidate
historical instances of sponsor support that have occurred in the past
10 years, which would permit investors to view this information in a
user-friendly manner, without the need to review prior form filings to
piece together a fund's history of sponsor support. We also believe
that, to the extent investors may not be familiar with researching
filings on EDGAR, including this disclosure in a fund's SAI, which
investors may receive in hard copy through the U.S. Postal Service or
may access on a fund's Web site, as well as on EDGAR, may make this
information more readily available to these investors than disclosure
on other SEC forms that are solely accessible on EDGAR.
---------------------------------------------------------------------------
\1016\ See, e.g., Dreyfus Comment Letter; U.S. Bancorp Comment
Letter.
\1017\ See Dreyfus Comment Letter.
\1018\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
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As discussed above, we are not adopting the proposed requirements
that a fund include the reason for support, the term of support, and
any contractual restrictions relating to support in its required SAI
disclosure.\1019\ Instead, a fund will only be required to present
certain summary information about the receipt of financial support in
its SAI (as well as on the fund's Web site \1020\), and will be
required to present more detailed discussion solely on Form N-CR.\1021\
To inform investors about the inclusion of this more detailed
information on Form N-CR, funds will be instructed to include the
following statement as part of the historical disclosure of affiliate
financial support appearing in the fund's SAI: ``The Fund was required
to disclose additional information about this event [or ``these
events,'' as appropriate] on Form N-CR and to file this form with the
Securities and Exchange Commission. Any Form N-CR filing submitted by
the Fund is available on the EDGAR Database on the Securities and
Exchange Commission's Internet site at http://www.sec.gov.'' \1022\ In
adopting these modified SAI disclosure requirements, we have attempted
to appropriately consider concerns about potentially duplicative
disclosure \1023\ as well as our belief, as discussed above, that the
SAI is the most accessible and efficient format for investors to
receive historical disclosures about affiliate financial support, and
our interest in presenting the primary information about such financial
support that we believe shareholders may find useful in assessing fund
risks.
---------------------------------------------------------------------------
\1019\ See supra note 1002 and accompanying text.
\1020\ See infra section III.E.9.g.
\1021\ See infra section III.F.3.
\1022\ See Instructions to amended Item 16(g)(2) of Form N-1A.
\1023\ See supra note 1018 and accompanying text. As discussed
in more detail in section III.F.3 below, while similar information
is required to be included on Form N-CR and Form N-1A, we believe
each of these different disclosures to be appropriate because they
serve distinct purposes. See discussion following infra notes 1248
and 1249 and accompanying text.
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b. Historical Support of Predecessor Funds
We also are amending, generally as we proposed, the instructions to
Form N-1A 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 10-year look-back period. As discussed in
the Proposing Release, this amendment will provide additional
transparency by providing investors the full extent of historical
support provided to a fund or its predecessor. Specifically, except as
noted below, the amended instructions state that if the fund has
participated in a merger or other reorganization with another
investment company during the last 10 years, the fund must additionally
provide the required disclosure with respect to the other investment
company.\1024\
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\1024\ See Instruction 2 to Item 16(g)(2). Additionally, if a
fund's name has changed (but the corporate or trust entity remains
the same), the fund may want to consider providing the required
disclosure with respect to the entity or entities identified by the
fund's former name. See Proposing Release, supra note 25, at n.619.
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Rather than require that funds disclose financial support provided
to a predecessor fund in all cases (as proposed), we are revising the
instruction to permit a fund to exclude such disclosure where the
person or entity that previously provided financial support to the
predecessor fund is not currently an affiliated person (including the
adviser), promoter, or principal underwriter of the disclosing
fund.\1025\ A few commenters expressed concern about historical
disclosures with respect to third-party reorganizations, asserting that
past financial support would be irrelevant to shareholders where the
surviving fund had a new manager unaffiliated with the prior
manager.\1026\ These commenters noted that this disclosure requirement
could adversely affect potential merger transactions with funds that
have received sponsor support.\1027\
---------------------------------------------------------------------------
\1025\ Id. In the Proposing Release we had proposed to require
disclosure of financial support provided to a predecessor fund in
all cases. See Proposing Release, supra note 25, at n.618 and
accompanying discussion.
\1026\ See, e.g., Federated VIII Comment Letter; SIFMA Comment
Letter.
\1027\ See id.
---------------------------------------------------------------------------
We agree with these commenters that historical sponsor support
information about a predecessor fund may be less relevant when the fund
is not advised by, or otherwise affiliated with, the entity that had
previously provided financial support to the predecessor fund.
Accordingly, we are adopting an exclusion to this disclosure
requirement based on whether the current fund continues to have any
affiliation with the predecessor fund's affiliated persons (including
the predecessor fund's adviser), promoter, or principal
underwriter.\1028\ We expect this approach should mitigate commenter
concerns of adverse effects on fund mergers.
---------------------------------------------------------------------------
\1028\ See Instruction 2 to Item 16(g)(2).
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8. Economic Analysis
As discussed above, we are adopting a number of amendments to
requirements for disclosure documents that are related to both our fees
and
[[Page 47825]]
gates and floating NAV requirements, as well as other disclosure
enhancements discussed in the proposal. We believe that these
amendments improve transparency and will better inform shareholders
about the risks of investing in money market funds, which should result
in shareholders making investment decisions that better match their
investment preferences. We believe that many of these amendments will
have effects on efficiency, competition, and capital formation that are
similar to those that are outlined in the Macroeconomic Consequences
section below,\1029\ but some of the amendments introduce additional
effects.
---------------------------------------------------------------------------
\1029\ See infra section III.K.
---------------------------------------------------------------------------
Many of the new disclosure requirements are designed to make
investors aware of the more substantive amendments discussed earlier in
the Release, i.e., the ability of certain funds to impose redemption
fees and gates and the requirement that certain funds float their NAV.
Increasing investor awareness via enhanced disclosure may lead to more
efficient capital allocations because investors will possess greater
knowledge of risks and thus will be able to make better informed
investment decisions when deciding how to allocate their assets.
Increased investor awareness also may promote capital formation if
investors find a floating NAV and/or redemption fees and gates
attractive and are more willing to invest in this market. For instance,
investors may find fees and gates attractive insofar as imposing fees
and gates during a time of market stress could help protect the
interests of shareholders, or could permit a fund manager to invest the
proceeds of maturing assets in short-term securities while the gate is
down, thereby helping to protect the short-term financing
markets.\1030\ Moreover, enhanced investor awareness of fund risks may
incentivize fund managers to hold less risky portfolio securities,
which could also increase capital formation. Capital formation could be
negatively impacted if investors find a floating NAV and/or redemption
fees and gates unattractive or too complicated to understand. For
instance, an investor could find it unattractive that imposing a fee or
gate would prevent them from moving their investment into other
investment alternatives or using their assets to satisfy liquidity
needs.\1031\ Additionally, disclosing a general risk of investment loss
may negatively impact capital formation if this disclosure leads
investors to decide that money market funds pose too great of an
investment risk, and investors consequently decide not to invest in
money market funds or to move their invested assets from money market
funds. As such, capital formation could be negatively impacted if
investors move their money from these types of funds to a different
style of fund, for example, from an institutional prime fund to a
government fund and thus affecting the short-term funding market.
However, if investors move from a money market fund to a money market
fund alternative that invests in similar types of assets, then there
should not be an impact on capital formation with respect to the
overall economy, but only within the money market fund industry.
---------------------------------------------------------------------------
\1030\ See supra section III.A.1.b.ii.
\1031\ See supra section III.A.1.c.iii.
---------------------------------------------------------------------------
To the extent that the disclosure amendments increase investor
awareness of the more substantive reforms, there may be an effect on
competition because some of the disclosure requirements are specific to
the structure of the funds. As such, these funds will be competing with
each other based on, among other things, what is stated in their
advertisements, sales materials, and the summary section of their
statutory prospectus. Disclosure providing that funds with a stable NAV
seek to preserve the value of their investment at $1.00 per share, that
share prices of floating NAV funds will fluctuate, that taxable
investors in institutional prime money market funds may experience
taxable gains or losses, or that non-government funds may impose a fee
or gate may make investors more aware of different investment options,
which could increase competition between funds.
The amendments that require money market funds to disclose current
and historical information about affiliate financial support and
historical information about the implementation of redemption fees and
gates may also affect efficiency, competition, and capital formation.
As discussed in the Proposing Release, these amendments may 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,\1032\ as well
as the frequency and duration of redemption fees and gates. 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, the
disclosure of sponsor support 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. The disclosure of fees
and gates also could advantage larger funds and fund groups if the
ability to provide financial support reduces or eliminates the need to
impose fees and/or gates (the imposition of which presumably would be
perceived to be a competitive detriment). Additionally, 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, the competitive stance of certain
money market funds, or the money market fund industry generally, could
be adversely affected.
---------------------------------------------------------------------------
\1032\ See Proposing Release, supra note 25, at text following
n.629.
---------------------------------------------------------------------------
The disclosure of affiliate financial support could have additional
effects on capital formation, depending on whether 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 requirements could
enhance capital formation by promoting stability within the money
market fund industry. On the other hand, the disclosure requirements
could detract from capital formation if sponsor support were understood
to indicate fund weakness and make 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
and not put it into an alternative with similar types of assets as a
result. We did not receive comments on this aspect of our economic
analysis. Similarly, the requirement to disclose historical redemption
fees and gates could either promote or hinder capital formation.
Disclosing the prior imposition of fees or gates may negatively impact
capital formation if investors view the imposition of fees and gates
unfavorably. Conversely, the requirement to disclose will allow
investors to differentiate funds based on the extent to which funds
have imposed fees and gates in the past, which could increase capital
formation if investors perceive the absence of past fees and gates as a
sign of greater stability within the money market fund industry.
Furthermore, these required disclosures could assist the Commission in
overseeing money market funds and
[[Page 47826]]
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. The Commission cannot estimate the
quantitative benefits of the amendments to the disclosure forms because
of uncertainty about how increased transparency may affect different
investors' or groups of investors' understanding of the risks
associated with money market funds. Uncertainty regarding how the
proposed disclosure may affect different investors' behavior likewise
makes it difficult for the Commission to measure the quantitative
benefits of the proposed requirements.
As a possible alternative, we could have chosen to require
disclosure, as suggested by commenters, of the historical information
on Form N-MFP, Form N-CR, or Form N-CSR instead of through the SAI.
Because the historical disclosures are intended to benefit both
investors and regulators, we believe that the SAI is the most suitable
format for such disclosure. As discussed above, we believe that
including historical information about affiliate financial support and
the imposition of fees and gates in the fund's SAI may make this
information more readily available to investors than disclosure on
other SEC forms that are solely accessible on EDGAR. We therefore
believe that requiring this disclosure to appear in a fund's SAI could
increase informational efficiency by facilitating the provision of this
information to investors.
We believe that all money market funds will incur one-time and
ongoing annual costs to update their registration statements, as well
as their advertising and sales materials. The proposal estimated the
costs that would be incurred under the fees and gates alterative
separately from those that would be incurred under the floating NAV
alternative. Under the fees and gates alternative, the proposal
estimated that the average one-time costs for a money market fund
(except government money market funds that are not subject to the fees
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) to amend its
registration statement and to update its advertising and sales
materials would be $3,092,\1033\ and the average one-time costs for a
government fund that is not subject to the fees and gates requirements
pursuant to rule 2a-7(c)(2)(iii) would be $2,204.\1034\ The proposal
also estimated that the average annual costs for a money market fund
(except government money market funds that are not subject to the fees
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) to amend its
registration statement would be $296,\1035\ and the average annual
costs for a government fund that is not subject to the fees and gates
requirements pursuant to rule 2a-7(c)(2)(iii) would be $148.\1036\
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\1033\ This figure incorporates the costs estimated for each
fund to comply with the proposed amendments to Form N-1A relating to
the fees and gates proposal, as well as the Form N-1A requirements
relating to the fees and gates proposal that would not necessitate
form amendments ($1,480) + the costs estimated for each fund to
comply with the proposed Form N-1A sponsor support disclosure
requirements ($148) = $1,628. The estimated costs included in
section III.B.8 of the Proposing Release inadvertently omitted the
costs estimated for each fund to update the fund's advertising and
sales materials to include the required risk disclosure statement;
however, these costs ($1,464) were discussed in the Paperwork
Reduction Act Analysis section of the Proposing Release. Adding
these costs ($1,464) to the costs of complying with the new
requirements of Form N-1A ($1,628) results in total estimated costs
of $3,092. See Proposing Release, supra note 25, at nn.461, 628,
1214 and accompanying text.
\1034\ This figure incorporates the costs estimated for each
fund to comply with the proposed amendments to Form N-1A relating to
the fees and gates proposal, as well as the Form N-1A requirements
relating to the fees and gates proposal that would not necessitate
form amendments ($592) + the costs estimated for each fund to comply
with the proposed Form N-1A sponsor support disclosure requirements
($148) = $740. The estimated costs included in section III.B.8 of
the Proposing Release inadvertently omitted the costs estimated for
each fund to update the fund's advertising and sales materials to
include the required risk disclosure statement; however, these costs
($1,464) were discussed in the Paperwork Reduction Act Analysis
section of the Proposing Release. Adding these costs ($1,464) to the
costs of complying with the proposed amendments to Form N-1A ($740)
results in total estimated costs of $2,204. See Proposing Release,
supra note 25, at nn.461, 628, 1214 and accompanying text.
\1035\ This figure incorporates the costs estimated for a fund
to: (i) Review and update the disclosure in its registration
statement regarding historical occasions on which the fund has
considered or imposed liquidity fees or gates, and to inform
investors of any fees or gates currently in place by means of a
prospectus supplement ($148); and (ii) to review and update the
disclosure in its registration statement regarding historical
instances in which the fund has received financial support from a
sponsor or fund affiliate ($148). See Proposing Release, supra note
25, at nn.463, 628 and accompanying text.
\1036\ This figure reflects the costs estimated for a fund to
review and update the disclosure in its registration statement
regarding historical instances in which the fund has received
financial support from a sponsor or fund affiliate ($148). See
Proposing Release, supra note 25, at n.628 and accompanying text.
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Under the floating NAV alternative, the proposal estimated that the
average one-time costs that would be incurred for a floating NAV money
market fund to amend its registration statement and update its
advertising and sales materials would be $3,092,\1037\ and the average
one-time costs for a government or retail money market fund would be
$2,204.\1038\ The proposal also estimated that the average annual costs
for a money market fund to amend its registration statement would be
$148.\1039\
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\1037\ This figure incorporates the costs estimated for each
fund to comply with the proposed amendments to Form N-1A relating to
the floating NAV proposal, as well as the Form N-1A requirements
relating to the floating NAV proposal that would not necessitate
form amendments ($1,480) + the costs estimated for each fund to
comply with the proposed Form N-1A sponsor support disclosure
requirements ($148) = $1,628. The estimated costs included in
section III.A.8 of the Proposing Release inadvertently omitted the
costs estimated for each fund to update the fund's advertising and
sales materials to include the required risk disclosure statement;
however, these costs ($1,464) were discussed in the Paperwork
Reduction Act Analysis section of the Proposing Release. Adding
these costs ($1,464) to the costs of complying with the proposed
amendments to Form N-1A ($1,628) results in total estimated costs of
$3,092. See Proposing Release, supra note 25, at nn.330, 628, 1121-
1125 and accompanying text.
\1038\ This figure incorporates the costs estimated for each
fund to comply with the proposed amendments to Form N-1A relating to
the floating NAV proposal, as well as the Form N-1A requirements
relating to the floating NAV proposal that would not necessitate
form amendments ($592) + the costs estimated for each fund to comply
with the proposed Form N-1A sponsor support disclosure requirements
($148) = $740. The estimated costs included in section III.A.8 of
the Proposing Release inadvertently omitted the costs estimated for
each fund to update the fund's advertising and sales materials to
include the required risk disclosure statement; however, these costs
($1,464) were discussed in the Paperwork Reduction Act Analysis
section of the Proposing Release. Adding these costs ($1,464) to the
costs of complying with the proposed amendments to Form N-1A
($1,628) results in total estimated costs of $2,204. See Proposing
Release, supra note 25, at nn.330, 628, 1121-1125 and accompanying
text.
\1039\ This figure reflects the costs estimated for a fund to
review and update the disclosure in its registration statement
regarding historical instances in which the fund has received
financial support from a sponsor or fund affiliate ($148). See
Proposing Release, supra note 25, at n.628 and accompanying text.
---------------------------------------------------------------------------
We requested comment on the estimates of the operational costs
associated with the amended disclosure requirements. Certain commenters
generally noted that complying with all of the new disclosure
requirements, including the disclosure requirements involving the
fund's advertisements and sales materials and its registration
statement, would involve some additional costs.\1040\ Several
commenters provided dollar estimates
[[Page 47827]]
of the initial costs to implement a fees and gates or floating NAV
regime and noted that these estimates would include the costs of
related disclosure, but these commenters did not specifically break out
the disclosure-related costs in their estimates.\1041\ One commenter
stated that the costs to update a fund's registration statement to
reflect the new fees and gates and floating NAV requirements would be
``minimal when compared to other costs.'' \1042\ Another commenter
stated that it did not consider the disclosure requirements burdensome
and noted that it did not believe the disclosure requirements would
impose unnecessary costs.\1043\ We have considered the comments we
received on the new disclosure requirements, and we have determined not
to change the assumptions we used in our cost estimates in response to
these comments, as the comments provided no specific suggestions or
critiques regarding our methods for estimating these costs. However,
our current estimates reflect the fact that the amendments we are
adopting today combine the floating NAV and fees and gates proposal
alternatives into one unified approach, and also incorporate updated
industry data.
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\1040\ See, e.g., Fin. Svcs. Roundtable Comment Letter (noting
that the proposed disclosure requirements generally would produce
``significant cost to the fund and ultimately to the fund's
investors''); SSGA Comment Letter (urging the Commission to consider
the ``substantial administrative, operational, and expense burdens''
of the proposed disclosure-related amendments); Chapin Davis Comment
Letter (noting that the disclosure- and reporting-related amendments
will result in increased costs in the form of fund staff salaries,
or consultant, accountant, and lawyer hourly rates, that will
ultimately be borne in large part by investors and portfolio
issuers).
\1041\ See, e.g., Chamber I Comment Letter; Fidelity Comment
Letter.
\1042\ See State Street Comment Letter, at Appendix A.
\1043\ See HSBC Comment Letter.
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We anticipate that money market funds will incur costs to (i) amend
the fund's advertising and sales materials (including the fund's Web
site) to include the required risk disclosure statement; (ii) amend the
fund's registration statement to include the required risk disclosure
statement, disclosure of the tax consequences and effects on fund
operations of a floating NAV (as applicable), and the effects of fees
and gates on redemptions (as applicable); (iii) amend the fund's
registration statement to disclose post-compliance-period historical
occasions on which the fund has considered or imposed liquidity fees or
gates; and (iv) amend the fund's registration statement to disclose
post-compliance-period historical instances in which the fund has
received financial support from a sponsor or fund affiliate. These
costs will include initial, one-time costs, as well as ongoing costs.
Each money market fund in a fund complex might not incur these costs
individually.
We estimate that the average one-time costs for a money market fund
(except government money market funds that are not subject to the fees
and gates requirements pursuant to rule 2a-7(c)(2)(iii), and floating
NAV money market funds) to comply with these disclosure requirements
would be $3,059 (plus printing costs).\1044\ We estimate that the
average one-time costs for a government money market fund that is not
subject to the fees and gates requirements pursuant to rule 2a-
7(c)(2)(iii) to comply with these disclosure requirements would be
$2,102 (plus printing costs).\1045\ Finally, we estimate that the
average one-time costs for floating NAV money market funds to comply
with these disclosure requirements would be $4,016 (plus printing
costs).\1046\
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\1044\ This figure incorporates the costs we estimated for each
fund to update its registration statement to include the required
disclosure statement, the required disclosure about the effects that
fees and gates may have on shareholder redemptions, disclosure about
historical occasions on which the fund has considered or imposed
liquidity fees or gates, and disclosure about financial support
received by the fund ($1,595) + the costs we estimated for each fund
to update the fund's advertising and sales materials to include the
required risk disclosure statement ($1,464) = $3,059. The costs
associated with these activities are all paperwork-related costs and
are discussed in more detail infra at sections IV.F and IV.G.
\1045\ This figure incorporates the costs we estimated for each
fund to update its registration statement to include the required
disclosure statement and disclosure about financial support received
by the fund ($638) + the costs we estimated for each fund to update
the fund's advertising and sales materials to include the required
risk disclosure statement ($1,464) = $2,102. The costs associated
with these activities are all paperwork-related costs and are
discussed in more detail infra at sections IV.F and IV.G.
\1046\ This figure incorporates the costs we estimated for each
fund to update its registration statement to include the required
disclosure statement, the required disclosure about the effects that
fees and gates may have on shareholder redemptions, disclosure about
historical occasions on which the fund has considered or imposed
liquidity fees or gates, the required tax- and operations-related
disclosure about a floating NAV, and disclosure about financial
support received by the fund ($2,552) + the costs we estimated for
each fund to update the fund's advertising and sales materials to
include the required risk disclosure statement ($1,464) = $4,016.
The costs associated with these activities are all paperwork-related
costs and are discussed in more detail infra at sections IV.F and
IV.G.
---------------------------------------------------------------------------
Ongoing compliance costs include the costs for money market funds
periodically to: (i) Review and update the fund's registration
statement disclosure regarding historical occasions on which the fund
has considered or imposed liquidity fees or gates (as applicable); (ii)
review and update the fund's registration statement disclosure
regarding historical instances in which the fund has received financial
support from a sponsor or fund affiliate; and (iii) inform investors of
any fees or gates currently in place (as applicable) or the transition
to a floating NAV (as applicable) by means of a prospectus supplement.
Because the required registration statement disclosure overlaps with
the information that a fund must disclose on Parts C, E, F, and G of
Form N-CR, 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.F. We estimate that a fund
(besides a government money market fund that is not subject to the fees
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) will incur
average annual costs of $319 to comply with these disclosure
requirements.\1047\ We also estimate that a government money market
fund that is not subject to the fees and gates requirements pursuant to
rule 2a-7(c)(2)(iii) will incur average annual costs of $160 to comply
with these disclosure requirements.\1048\
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\1047\ This figure incorporates the costs we estimated for each
fund to review and update its registration statement disclosure
regarding historical occasions on which the fund has considered or
imposed liquidity fees or gates, and to inform investors of any fees
or gates currently in place (as appropriate) or the transition to a
floating NAV (as appropriate) by means of a prospectus supplement
($159.5) + the costs we estimated for each fund to review and update
its registration statement disclosure regarding historical instances
in which the fund has received financial support from a sponsor or
fund affiliate ($159.5) = $319. The costs associated with these
activities are all paperwork-related costs and are discussed in more
detail infra at section IV.G.
\1048\ This figure incorporates the costs we estimated for each
fund to review and update its registration statement disclosure
regarding historical instances in which the fund has received
financial support from a sponsor or fund affiliate (approximately
$160). The costs associated with these activities are all paperwork-
related costs and are discussed in more detail infra at section
IV.G.
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9. Web site Disclosure
a. Daily Disclosure of Daily and Weekly Liquid Assets
We are adopting, as proposed, amendments to rule 2a-7 that 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 of the end of each business day during the
preceding six months.\1049\ The amendments we are adopting would
require, as proposed, 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 for the
previous six
[[Page 47828]]
months,\1050\ and would require the fund to update this historical
information each business day, as of the end of the preceding business
day. Several commenters supported the disclosure on a fund's Web site
of the fund's daily liquid assets and weekly liquid assets.\1051\
Commenters supporting such disclosure noted that daily disclosure of
this information would promote transparency and help investors better
understand money market fund risks.\1052\ A few commenters stated that
providing this information could help investors evaluate whether a fund
is positioned to meet redemptions or could approach a threshold where a
fee or gate could be imposed.\1053\ A number of commenters suggested
that daily disclosure likely would impose external market discipline on
portfolio managers and encourage careful management of daily and weekly
assets.\1054\ Finally, several commenters indicated that many money
market funds are already disclosing such information on either a daily
or a weekly basis, a fact we noted in the Proposing Release.\1055\
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\1049\ See rule 2a-7(a)(4). As proposed, 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.
\1050\ For purposes of the required Web site disclosure of daily
and weekly liquid assets, the six-month look-back period for
disclosure would encompass fund data that occurs prior to the
compliance date. Accordingly, if a fund were to update its Web site
on the compliance date to include the required schedule, chart,
graph, or other depiction showing historical data for the previous
six months, the depiction would show data from six months prior to
the compliance date. See infra note 2201.
\1051\ See, e.g., Boston Federal Reserve Comment Letter;
Oppenheimer Comment Letter; Fidelity Comment Letter.
\1052\ See, e.g., Oppenheimer Comment Letter; Blackrock II
Comment Letter; Fidelity Comment Letter.
\1053\ See, e.g., U.S. Bancorp Comment Letter; Goldman Sachs
Comment Letter.
\1054\ See, e.g., ICI Comment Letter; Dreyfus Comment Letter;
American Bankers Ass'n Comment Letter.
\1055\ See, e.g., U.S. Bancorp Comment Letter; Blackrock II
Comment Letter; J.P. Morgan Comment Letter.
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Other commenters, however, opposed certain aspects of the proposed
amendment. Two commenters opposed daily disclosure of this information
and thought the information could be provided on a weekly basis.\1056\
We disagree. In times of market stress, money market funds may face
rapid, heavy redemptions, which could quickly affect their
liquidity.\1057\ Having daily information in times of market stress can
reduce uncertainty, providing investors assurance that a money market
fund has sufficient liquidity to withstand the potential for heavy
redemptions. One commenter opposed the six-month look-back because it
would require a restructuring of fund Web sites that are already
disclosing this data.\1058\ We recognize, as discussed below, that the
amendments will impose costs on funds. We believe, however, that it is
important for funds to provide historical information for the prior six
months, and updating such information daily will help investors place
current information in context and thus have a more complete picture of
current events.
---------------------------------------------------------------------------
\1056\ See Schwab Comment Letter; Federated VIII Comment Letter.
\1057\ See generally DERA Study, supra note 24, at section 3.
\1058\ See UBS Comment Letter.
---------------------------------------------------------------------------
One commenter argued that daily disclosure of this information
would not be meaningful to investors,\1059\ while another commenter
expressed concern that daily disclosure, in combination with
discretionary fees and gates, could cause reactionary
redemptions.\1060\ We recognize and have considered the risk that daily
disclosure of weekly liquid assets and daily liquid assets could
trigger heavy redemptions in some situations, particularly the risk of
pre-emptive redemptions in anticipation of a potential fee or gate.
However, as discussed in detail above, the board's discretion to impose
a fee or a gate, among other things, mitigates the concern that
investors will be able to accurately predict such an event which in
turn would lead them to pre-emptively withdraw their assets from the
fund.\1061\ In addition, as discussed above, other aspects of today's
amendments further mitigate the risks of pre-emptive runs. We believe
that daily disclosure of weekly liquid assets and daily liquid assets
ultimately benefits investors and could both increase stability and
decrease risk in the financial markets.\1062\ As mentioned above, while
there is a potential for heavy redemptions in response to a decrease in
liquidity, the increased transparency could reduce run risk in cases
where it shows investors that a fund has sufficient liquidity to
withstand market stress events. We also agree with commenters and
believe that daily disclosure will increase market discipline, which
could ultimately deter situations that could lead to heavy
redemptions.\1063\ Also, as noted elsewhere in this Release, we believe
that the reforms we are adopting concerning fees and gates are a tool
for handling heavy redemptions once they occur. Finally, we note that
several funds have already voluntarily begun disclosing liquidity
information on their Web sites.\1064\
---------------------------------------------------------------------------
\1059\ See Schwab Comment Letter.
\1060\ See Federated VIII Comment Letter; see also supra section
III.A.1.c.i.
\1061\ See supra note 171 and accompanying text.
\1062\ Although not a principal basis for our decision, we note
that certain literature suggests that suspensions of withdrawals can
prevent bank runs. See, e.g., Diamond, Douglas W., Spring 2007,
``Banks and Liquidity Creation: A Simple Exposition of the Diamond-
Dybvig Model,'' Economic Quarterly, Volume 93, Number 2, 189-200.
\1063\ See supra note 1054.
\1064\ See, e.g., BlackRock II Comment Letter; Boston Federal
Reserve Comment Letter.
---------------------------------------------------------------------------
A few commenters also believed that the proposed disclosures should
apply only to stable NAV funds.\1065\ We disagree with these
commenters. We believe that the benefits we discuss throughout this
section regarding disclosure apply regardless of whether a fund has a
stable or floating NAV. As we have noted in several instances, a
floating NAV may reduce but does not eliminate the risk of heavy
redemptions if the fund comes under stress. Liquidity information can
help investors understand a fund's ability to withstand heavy
redemptions. Additionally, this information is relevant to investors to
understand the potential for either a floating NAV fund or a stable NAV
fund to impose a fee or a gate. We also believe that it is important
for all money market funds, both floating NAV funds and stable NAV
funds, to disclose liquidity information so that investors will easily
be able to compare this data point, which could be seen as a risk
metric, across funds when making investment decisions among types of
money market funds (e.g., comparing an institutional prime money market
fund to a government money market fund), as well as between money
market funds of the same type (e.g., comparing two government money
market funds).
---------------------------------------------------------------------------
\1065\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI
Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------
We continue to believe that daily Web site disclosure of a fund's
daily liquid assets and weekly liquid assets will increase transparency
and enhance investors' understanding of money market fund risks. This
disclosure will help investors understand how funds are managed, as
well as help them monitor, in near real-time, a fund's ability to
satisfy redemptions in various market conditions, including episodes of
market turbulence. We also agree with commenters and believe that this
disclosure will encourage market discipline on fund managers.\1066\ In
particular, we believe that this disclosure will encourage fund
managers to manage the fund's liquidity in a manner that makes it less
likely that the fund crosses a threshold where a fee or gate could be
imposed, and also discourage month-end ``window dressing'' (in this
context, the practice
[[Page 47829]]
of periodically increasing the daily liquid assets and/or weekly liquid
assets in a fund's portfolio, such that the fund's month-end reporting
will reflect certain liquidity levels, and then decreasing the fund's
investment in such assets shortly after the fund's month-end reporting
calculations have been made).
---------------------------------------------------------------------------
\1066\ See supra note 1054.
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b. Daily Disclosure of Net Shareholder Flows
We are also adopting, as proposed, amendments to rule 2a-7 that
require money market funds to disclose prominently on their Web sites
the fund's daily net inflows or outflows, as of the end of the previous
business day, during the preceding six months.\1067\ As proposed, the
amendments we are adopting would require a fund to maintain a schedule,
chart, graph, or other depiction on its Web site showing historical
information about its net inflows or outflows for the previous six
months,\1068\ and would require the fund to update this historical
information each business day, as of the end of the preceding business
day. One commenter expressed support for daily disclosure of a fund's
net inflows and outflows, though it opposed the requirement to report
and continually update historical information.\1069\ Several commenters
objected to Web site disclosure of net shareholder flows, noting that
money market funds often have large inflows and outflows as a normal
course of business, and these flows are often anticipated.\1070\ A
number of commenters suggested that shareholders could misinterpret
large inflows and outflows as a sign of stress even if the flows are
anticipated and the fund's liquidity is adequate to handle them.\1071\
Two commenters also expressed concern that a large net inflow or
outflow could signal to the market that the money market fund would
need to buy or sell securities in the market, potentially facilitating
front running.\1072\
---------------------------------------------------------------------------
\1067\ See rule 2a-7(h)(10)(ii); see also supra note 1049.
\1068\ For purposes of the required Web site disclosure of net
fund inflows or outflows, the six-month look-back period for
disclosure would encompass fund data that occurs prior to the
compliance date. See supra note 1050.
\1069\ See UBS Comment Letter.
\1070\ See Federated VIII Comment Letter; Vanguard Comment
Letter; U.S. Bancorp Comment Letter; Legg Mason & Western Asset
Comment Letter; IDC Comment Letter.
\1071\ See U.S. Bancorp Comment Letter; Blackrock II Comment
Letter; Dreyfus Comment Letter.
\1072\ See ICI Comment Letter; Legg Mason & Western Asset
Comment Letter.
---------------------------------------------------------------------------
We continue to believe that daily disclosure of net inflows or
outflows will provide beneficial information to shareholders, and thus
we are adopting this requirement as proposed. In our view, information
on shareholder redemptions can help provide important context to data
regarding the funds' liquidity, as a fund that is experiencing
increased outflow volatility will require greater liquidity. We
understand, as commenters pointed out, that many funds can experience
periodic and expected large net inflows or outflows on a regular basis.
We believe that disclosure of this information over a rolling six-month
period, however, will mitigate the risk that investors will
misinterpret this information. Information about the historical context
of fund inflows and outflows, which funds can include on their Web
sites, should help investors distinguish between periodic large
outflows that can occur in the normal course from periods of increased
volatility in shareholder flow. Finally, we are not persuaded by
commenters who suggested that information regarding net shareholder
flows will promote front-running because we believe that front-running
concerns are not especially significant for money market funds on
account of the specific characteristics of these funds and their
holdings.\1073\
---------------------------------------------------------------------------
\1073\ See, e.g., Investment Company Institute, Report of the
Money Market Working Group, at 93 (Mar. 17, 2009), available
athttp://www.ici.org/pdf/ppr_09_mmwg.pdf (``Because of the
specific characteristics of money market funds and their holdings .
. . the frontrunning concerns are far less significant for this type
of fund. For example, money market funds' holdings are by definition
very short-term in nature and therefore would not lend themselves to
frontrunning by those who may want to profit by trading in a money
market fund's particular holdings. Rule 2a-7 also restricts the
universe of Eligible Securities to such an extent that front
running, to the extent it exists at all, tends to be immaterial to
money market fund performance.'').
---------------------------------------------------------------------------
c. Daily Disclosure of Current NAV
We are adopting, as proposed, 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 (calculated based on current
market factors), 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 \1074\ (the fund's ``current NAV'')
as of the end of the previous business day during the preceding six
months.\1075\ The amendments 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 six
months,\1076\ and would require the fund to update this historical
information each business day as of the end of the preceding business
day.\1077\ These amendments complement the current requirement for a
money market fund to disclose its shadow price monthly on Form N-MFP
(broken out weekly).\1078\ Disclosing the NAV per share to the fourth
decimal would conform to the precision of NAV reporting that funds will
be required to report on Form N-MFP and to what many funds are
currently voluntarily disclosing.\1079\
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\1074\ E.g., $10,000 or $100.00 per share.
\1075\ See rule 2a-7(h)(10)(iii).
\1076\ For purposes of the required Web site disclosure of the
fund's current NAV per share, the six-month look-back period for
disclosure would encompass fund data that occurs prior to the
compliance date. See supra note 1050.
\1077\ See supra note 1049.
\1078\ See infra section III.G.1.b.
\1079\ See infra note 1087 and accompanying text.
---------------------------------------------------------------------------
Several commenters supported the proposed disclosure requirement of
funds' current NAV per share. These commenters suggested that daily
disclosure of the current NAV per share would increase transparency and
investor understanding of money market funds.\1080\ One commenter noted
that the disclosure could impose discipline on portfolio managers,
preventing, for example, month-end ``window dressing.'' \1081\ Finally,
as we noted in the Proposing Release, several commenters indicated that
many money market funds are already disclosing such information on
either a daily or a weekly basis.\1082\
---------------------------------------------------------------------------
\1080\ See, e.g., MFDF Comment Letter; Blackrock II Comment
Letter.
\1081\ See J.P. Morgan Comment Letter.
\1082\ See, e.g., U.S. Bancorp Comment Letter; Blackrock II
Comment Letter; J.P. Morgan Comment Letter. But see Federated VIII
Comment Letter (noting that it has not received many ``hits'' on its
Web site after it began voluntarily posting information about the
current market-based NAV per share of its funds, suggesting that
allowing market forces to determine when such disclosure is valuable
to investors is preferable to a ``one size fits all'' regulation).
---------------------------------------------------------------------------
Some commenters opposed certain aspects or questioned the
usefulness of the proposed disclosure requirement. One commenter
believed that frequent publication of a fund's current NAV per share
would increase the risk of heavy redemptions for stable NAV funds
during a period of market stress, noting the incentive for investors to
redeem if they see the shadow price fall.\1083\ We recognize and have
considered the risk that daily disclosure of the current NAV per share
could encourage heavy redemptions when it declines. We believe,
however, that daily disclosure will not lead to significant redemptions
and could, as we describe below, both
[[Page 47830]]
increase stability and decrease risk in the financial markets.\1084\ In
particular, we believe that greater transparency regarding the current
and historical NAV per share could help investors better assess the
effects of market events on a fund's NAV and understand the context of
a fund's principal stability during particular market stresses. For
example, if an investor believes the values of one or more securities
held by a fund are impaired, but does not see that impairment reflected
in the NAV because it is only required to be disclosed once a month,
they may sell their shares in the funds even though there is no actual
impairment. Lack of transparency was one of the reasons cited in the
DERA Study as a possible explanation for the large redemption activity
during the financial crisis.\1085\ As one commenter noted, such
disclosure could allay concerns about how a money market fund might be
affected by the occurrence of negative market events.\1086\ We also
believe that daily disclosure will increase market discipline, which
could ultimately deter heavy redemptions. Also, as noted elsewhere in
this Release, we believe that the reforms we are adopting concerning
fees and gates are a tool for handling heavy redemptions when they
occur. Finally, we note that many funds have voluntarily begun
disclosing information about their current market-based NAV per share
on their Web sites, and such disclosures have not led to significant
redemptions.\1087\
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\1083\ See HSBC Comment Letter.
\1084\ For a discussion of how disclosure of a fund's daily
liquid assets and weekly liquid assets could similarly increase
stability and decrease risk in the financial markets, see supra
notes 1062-1064 and accompanying text.
\1085\ See DERA Study, supra note 24.
\1086\ See Goldman Sachs Comment Letter.
\1087\ 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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As with the proposed requirement regarding daily disclosure of
liquidity levels, several commenters supported daily disclosure of a
fund's current NAV per share only for stable NAV funds.\1088\ We
disagree with commenters who suggested that daily Web site disclosure
of the current NAV per share would only be useful for shareholders of
stable NAV funds. We believe that the benefits we discuss above
regarding disclosure apply regardless of whether a fund has a stable or
floating NAV. For example, we believe that it is important for all
money market funds, both floating NAV funds and stable NAV funds, to
disclose NAV information so that investors will easily be able to
compare this data point, which could be seen as a risk metric, across
funds when making investment decisions among types of money market
funds (e.g., comparing an institutional prime money market fund to a
government money market fund), as well as between money market funds of
the same type (e.g., comparing two institutional prime money market
funds). The disclosure of the current NAV per share will enhance
investors' understanding of money market funds and their inherent risks
and allow investors to invest according to their risk preferences. This
information will make changes in a money market fund's market-based NAV
a regularly observable occurrence, which could promote investor
confidence and generally provide investors with a greater understanding
of the money market funds in which they invest.\1089\ We note that this
disclosure could make floating NAV money market funds appear to be
volatile compared to alternatives like ultra-short bond funds, which
are registered mutual funds that transact at three decimal places (and
disclosure of these alternative funds' NAV per share, consequently,
would likewise show three and not four decimal places).\1090\ It is
possible that investors might be incentivized to move their money to
these alternatives because they appear more stable than money market
funds.\1091\
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\1088\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI
Comment Letter; IDC Comment Letter.
\1089\ See J.P. Morgan Comment Letter; BlackRock II Comment
Letter.
\1090\ But see supra note 521 and accompanying text (discussing
staff analysis showing that, historically, over a twelve-month
period, 100% of ultra-short bond funds have fluctuated in price
(using 10 basis point rounding), compared with 53% of money market
funds that have fluctuated in price (using basis point rounding)).
\1091\ See infra section III.K, for an in-depth discussion about
the macroeconomic consequences of the amendments, including the
extent to which the requirements for institutional prime funds to
transact at prices rounded to the fourth decimal place (and also,
like all money market funds, disclose their current NAV to the
fourth decimal place each day) could cause investors to reallocate
their investments to alternatives outside the money market fund
industry.
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The Commission continues to believe that requiring each fund to
disclose daily its current NAV per share and also to provide six months
of historical information about its current NAV per share will increase
money market funds' transparency and permit investors to better
understand money market funds' risks. This information will permit
shareholders to reference funds' current NAV per share in near real
time to assess the effect of market events on funds' portfolios, and
will also provide investors the ability to discern trends through the
provision of the six months of historical data.\1092\ While some
historical data regarding the current NAV per share will be available
through monthly N-MFP filings,\1093\ we believe that requiring funds to
place this data on the fund's Web site will allow investors to consider
this information in a more convenient and accessible format. In
addition to increasing investors' understanding of money market funds'
risks, we believe that this disclosure will encourage market discipline
on fund managers, and particularly discourage month-end ``window
dressing.''
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\1092\ One commenter opposed the disclosure of six months of
historical information about a fund's current NAV per share because
it would require a restructuring of fund Web sites that are already
disclosing data. See UBS Comment Letter. We estimate the costs of
modifications to fund Web sites in the Economic Analysis section
infra.
\1093\ See infra note 1179 and accompanying text (discussing our
expectation that money market funds will be able generally to 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).
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d. Daily Calculation of Current NAV per Share for Stable Value Money
Market Funds
We are adopting, generally as proposed, amendments to rule 2a-7
that would require stable value money market funds to calculate the
fund's current NAV per share (which the fund must calculate based on
current market factors before applying the amortized cost or penny-
rounding method, if used), 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 per
share) as of the end of each business day.\1094\ Rule 2a-7 currently
requires
[[Page 47831]]
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.\1095\ 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, and thus we are adopting amendments to rule 2a-7 that
would require this disclosure.\1096\ Because we are requiring money
market funds to disclose their current NAV daily on the fund Web site,
we correspondingly are amending rule 2a-7 to require funds to make this
calculation as of the end of each business day, rather than at the
board's discretion. We received no comments on this calculation
requirement separate from comments on the related current NAV
disclosure requirement. As discussed above, 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.\1097\
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\1094\ See rule 2a-7(h)(10)(iii); see also text accompanying
supra note 1074 for definition of ``current NAV.'' Under rule 2a-7
as amended, a floating NAV money market fund is required, like any
mutual fund not regulated under rule 2a-7, to price its securities
at the current NAV by valuing its 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 rule 2a-7(c)(1); section 2(a)(41)(B); rules 2a-4 and 22c-1; see
also supra note 5 and accompanying text. In addition, under rule 2a-
7 as amended, a floating NAV money market fund is required to
compute its price per share for purposes of distribution,
redemption, and repurchase by rounding the fund's current NAV per
share to a minimum of the fourth decimal place in the case of a fund
with a $1.0000 share price or an equivalent or more precise level of
accuracy for money market funds with a different share price (e.g.,
$10.000 per share, or $100.00 per share). See rule 2a-7(c)(1)(ii).
Therefore, we did not propose amendments to rule 2a-7 that would
specifically require floating NAV money market funds to calculate
their current NAV per share daily, because these funds already would
be required to calculate their current NAV in order to price and
sell their securities each day. As proposed, rule 2a-7 as amended
would have permitted stable value funds to compute their current
price per share, for purposes of distribution, redemption, and
repurchase, by use of the penny-rounding method but not the
amortized cost method. See Proposing Release, supra note 25, at
n.170. Therefore, the proposed daily current NAV calculation
requirement would have specified that stable value funds calculate
their current NAV per share based on current market factors before
applying the penny rounding method. As adopted, rule 2a-7 permits
stable value funds to compute their current price per share, for
purposes of distribution, redemption, and repurchase, by use of the
amortized cost method and/or the penny rounding method. See rule 2a-
7(c)(1)(i). Therefore, the daily calculation requirement we are
adopting, as discussed in this section III.E.9.d, specifies that
stable value funds calculate their current NAV per share based on
current market factors before applying the amortized cost or penny-
rounding method. See rule 2a-7(c)(1)(i).
\1095\ Current rule 2a-7(c)(1). As adopted today, Items A.20 and
B.5 of Form N-MFP will require money market funds to provide NAV
data as of the close of business on each Friday during the month
reported.
\1096\ See supra section III.E.9.c.
\1097\ See supra note 1082 and accompanying text. 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
note 1179 and accompanying text.
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e. 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. We are adopting 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 required to be
reported on Form N-MFP pursuant to amendments to Form N-MFP, with
changes to conform to modifications we are making to Form N-MFP from
the proposal. We believe that these amendments will benefit money
market fund investors by providing additional, and more precise,
information about portfolio holdings, which should allow investors to
better evaluate the current risks of the fund's portfolio investments.
Specifically, in a change from the proposal, we are adopting
amendments to the categories of portfolio investments reported on Form
N-MFP, and are therefore also adopting conforming amendments to the
categories of portfolio investments currently required to be reported
on a money market fund's Web site.\1098\ We are adopting, as proposed,
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 adopting, as proposed, conforming amendments to the current
Web site disclosure requirements regarding portfolio securities'
maturity dates.\1099\ 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 (because of the current 60-day
delay before Form N-MFP information becomes publicly available).
Because we are removing this 60-day delay, we are also requiring funds
to 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.\1100\ One commenter supported the proposed
amendments to harmonize portfolio information on Form N-MFP and
information that funds disclose on their Web sites.\1101\
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\1098\ See rule 2a-7(h)(10)(i)(B); Form N-MFP, Item C.6.
\1099\ See rule 2a-7(h)(10)(i)(B); Form N-MFP, Item C.12.
\1100\ See rule 2a-7(h)(10)(i)(B).
\1101\ See ICI Comment Letter.
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The information that money market funds currently are required to
disclose about the fund's portfolio holdings on the fund's Web site
includes, with respect to each security held by the money market fund,
the security's amortized cost value.\1102\ As part of the reforms to
rule 2a-7, we proposed to eliminate the use of the amortized cost
valuation method for stable value money market funds, and to correspond
with that elimination, we also proposed to remove references to
amortized cost from Form N-MFP.\1103\ To harmonize the Web site
disclosure of funds' portfolio holdings with these changes to Form N-
MFP, we additionally proposed amendments to the current requirement for
funds to disclose the amortized cost value of each portfolio security;
instead, funds would be required to disclose the ``value'' of each
portfolio security.\1104\ As discussed previously in section III.B.5,
the final amendments will permit the continued use of the amortized
cost valuation method for stable value money market funds, and
therefore to conform the changes to Form N-MFP to the final amendments
to rule 2a-7, we are not adopting certain proposed Form N-MFP
amendments that would have removed references to the amortized cost of
securities in certain existing items.\1105\ However, as proposed, we
are amending Items 13 and 41 of Form N-MFP by replacing amortized cost
with ``value'' as defined in section 2(a)(41) of the Act (generally the
market-based value but can also be the amortized cost value, as
appropriate),\1106\ and therefore we are also adopting, as proposed,
the requirement for funds to disclose the ``value'' (and not
specifically the amortized cost value) of each portfolio security on
the fund's Web site. Because the new information that a fund will be
required to present on its Web site overlaps with the information that
a fund will 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 on its Web site will largely be incurred
[[Page 47832]]
when the fund files Form N-MFP, as discussed below in section
III.G.\1107\
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\1102\ See current rule 2a-7(c)(12)(ii)(H).
\1103\ See Proposing Release, supra note 25, at section III.H.
\1104\ See id.
\1105\ See infra section III.G.1.a.
\1106\ See infra note 1446 and accompanying text.
\1107\ This disclosure may largely duplicate the Form N-MFP
filing, but merely providing a link to the EDGAR N-MFP filing of
this data would not suffice to meet this requirement. We understand
that investors have, in past years, become accustomed to obtaining
money market fund information on funds' Web sites (see infra note
1123 and accompanying text), and providing the disclosure directly
on a fund's Web site would permit these investors to view this
information in conjunction with other required Web site disclosure
about the fund's liquidity and current net asset value (see rule 2a-
7(h)(10)(ii) and (iii)) without the need to independently locate and
consolidate the information provided by this disclosure.
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f. Disclosure of the Imposition of Liquidity Fees and Gates
We are adopting, largely as proposed, an amendment to rule 2a-7
that requires a fund to post prominently on its Web site certain
information that the fund is required to report to the Commission on
Form N-CR \1108\ regarding the imposition of liquidity fees, temporary
suspension of fund redemptions, and the removal of liquidity fees and/
or resumption of fund redemptions.\1109\ The amendment requires 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,\1110\ 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.\1111\ This amendment
requires a fund only to present certain summary information about the
imposition of fees and gates on its Web site,\1112\ whereas the fund
will be required to present more detailed discussion solely on Form N-
CR.\1113\ The Web site disclosure requirements we are adopting
regarding the imposition of fees and gates are similar to the proposed
requirements in that they, like the proposed requirements, require a
fund to post on its Web site only that information about the imposition
of fees and gates that the fund is required to disclose in an initial
report on Form N-CR.\1114\ In addition, the amendments to rule 2a-7
that we are adopting also require a fund to include the following
statement as part of its Web site disclosure: ``The Fund was required
to disclose additional information about this event [or ``these
events,'' as appropriate] on Form N-CR and to file this form with the
Securities and Exchange Commission. Any Form N-CR filing submitted by
the Fund is available on the EDGAR Database on the Securities and
Exchange Commission's Internet site at http://www.sec.gov.'' \1115\
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\1108\ See infra section III.F.
\1109\ See rule 2a-7(h)(10)(v); Form N-CR Parts E, F, and G; see
also infra section III.F (discussing 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 is 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 Form N-CR Parts E and F. A link to the EDGAR N-CR filing would
not suffice to meet this requirement. We understand that investors
have, in past years, become accustomed to obtaining money market
fund information on funds' Web sites (see infra note 1123 and
accompanying text), and providing the disclosure directly on a
fund's Web site would permit these investors to view this
information in conjunction with other required Web site disclosure
about the fund's liquidity and current net asset value (see rule 2a-
7(h)(10)(ii) and (iii)) without the need to independently locate and
consolidate the information provided by this disclosure.
\1110\ 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
(generally, the imposition or lifting of liquidity fees or gates)
within one business day after the occurrence of any such event. A
fund need not post on its Web site the additional information
required in the follow-up Form N-CR filing 4 business days after the
event, if such a filing is required. For additional discussion of
the filing requirements provided in Parts E, F, and G of Form N-CR,
see infra section III.F.5.
\1111\ See rule 2a-7(h)(10)(v).
\1112\ A fund also will be required to present summary
information about the historical imposition of fees and/or gates in
the fund's SAI. See supra section III.E.5.
\1113\ See infra section III.F.5.
\1114\ As discussed below, we have made changes to the proposed
requirements of Form N-CR, and the information that a fund will be
required to file on Parts E, F, and G of Form N-CR is therefore
different than that which was proposed. See infra section III.F.5.
The information a fund is required to post on its Web site mirrors
certain of the information that the fund is required to disclose on
Form N-CR. To the extent Form N-CR disclosure requirements that we
are adopting have been modified from the proposed requirements, the
Web site disclosure requirements have also been modified.
\1115\ See rule 2a-7(h)(10)(v).
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One commenter stated that it supported the proposed requirement
that money market funds should post on their Web sites certain of the
information required by Form N-CR, noting that although Form N-CR is
publicly available upon filing with the SEC, investors will more
readily find and make use of this information if posted on a particular
funds' Web site.\1116\ Another commenter, however, argued that the
proposed Web site disclosure (and proposed Form N-CR) filings are
redundant and that it would be challenging to comply with a one-day
time frame, and also argued that the registration statement and Web
site disclosure to investors should take priority over the Form N-CR
filing.\1117\ One commenter also supported a requirement for a money
market fund to notify shareholders individually in order to allow a
money market fund to apply a fee or gate.\1118\
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\1116\ See CFA Institute Comment Letter.
\1117\ See Dreyfus Comment Letter; see also infra notes 1308 and
1309 and accompanying text.
\1118\ See HSBC Comment Letter. We are not imposing such an
individual shareholder notification requirement because we believe
the costs of such notification may be extremely high, the
notification process might take significant time, and shareholders
should be able to get effective notice on a fund's Web site.
---------------------------------------------------------------------------
As discussed below, we continue to believe that certain information
required to be disclosed on Form N-CR must be filed with the Commission
within one business day and that this information should also be posted
on the fund's Web site within the same time-frame to help ensure that
the Commission, investors generally, shareholders in each particular
fund, and other market observers are all provided with these critical
alerts as quickly as possible.\1119\ Because we believe that these
different parties all have a significant interest in receiving this
information very quickly, we do not agree with the commenter who argued
that Web site and registration disclosure should take priority over the
Form N-CR filing.\1120\ We believe that it is important for a money
market fund that may impose fees and gates to inform existing and
prospective shareholders on its Web site when: (i) The fund's weekly
liquid assets fall below 10% of its total assets; (ii) the fund's
weekly liquid assets fall below 30% of its total assets and the board
of directors imposes a liquidity fee pursuant to rule 2a-7; (iii) the
fund's board of directors temporarily suspends the fund's redemptions
pursuant to rule 2a-7; or (iv) a liquidity fee has been removed or fund
redemptions have been resumed. This information is particularly
meaningful 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.
We also note, as discussed in more detail in the Paperwork Reduction
Act analysis section below,\1121\ that we believe 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,
and therefore we do not believe that the one-day time-frame for
updating the disclosure on the fund's Web site should be overly
burdensome.
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\1119\ See infra section III.F.7.
\1120\ See id.; see also text following this note 1120
(discussing Web site disclosure of fees and gates); infra notes
1124-1127 (discussing prospectus supplements informing money market
fund investors of the imposition of a fee or gate).
\1121\ See infra section IV.A.6.d.
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We maintain our belief that Web site disclosure provides important
[[Page 47833]]
transparency to shareholders regarding occasions on which a particular
fund's weekly liquid assets have dropped below certain thresholds, or a
fund has imposed or removed a liquidity fee or gate, because many
investors currently obtain important fund information on the fund's Web
site.\1122\ We understand that investors have become accustomed to
obtaining money market fund information on funds' Web sites, and
therefore we believe that Web site disclosure provides significant
informational accessibility to shareholders and the format and timing
of this disclosure serves a different purpose than the Form N-CR filing
requirement.\1123\ While we believe that it is important to have a
uniform, central place for investors to access the required disclosure,
we note that nothing in these amendments 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.
---------------------------------------------------------------------------
\1122\ 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.
\1123\ See, e.g., 2010 Adopting Release, supra note 16 (adopting
amendments to rule 2a-7 requiring money market funds to disclose
information about their portfolio holdings each month on their Web
sites); Comment Letter of the Securities Industry and Financial
Markets Association (Jan. 14, 2013) (available in File No. FSOC-
2012-0003) (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 1454 (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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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 would incorporate the same
information.\1124\ Although a fund may inform prospective investors of
any redemption fee or gate currently in place by means of a prospectus
supplement,\1125\ the prospectus supplement would not inform
prospective and current shareholders of any fees or gates that were
imposed, and then were removed, during the previous 12 months.
---------------------------------------------------------------------------
\1124\ See supra notes 960-961 and accompanying text.
\1125\ See infra notes 1126-1127 and accompanying text.
---------------------------------------------------------------------------
In addition, 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. In order to meet this requirement, and as
discussed in the Proposing Release,\1126\ a money market fund that
imposes a redemption fee or gate should consider informing prospective
investors of any fees or gates currently in place by means of a
prospectus supplement.\1127\
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\1126\ See Proposing Release, supra note 25, at section
III.B.8.c.
\1127\ We expect that this supplement would include revisions to
the disclosure in the registration statement concerning restrictions
on fund redemptions. See supra section III.E.4. The costs of filing
such a supplement are discussed in section III.E.8, supra.
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g. Disclosure of Sponsor Support
We are also amending rule 2a-7 to require that a fund 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.\1128\ The amendments that
we are adopting reflect certain modifications from the proposal to
address commenter concerns. Specifically, the proposal would have
required a fund to post 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. As
discussed in more detail below, we are adopting amendments to rule 2a-7
that would require a fund to post on its Web site only a subset of this
information.\1129\ In addition, the amendments would require a fund to
include the following statement as part of its Web site disclosure:
``The Fund was required to disclose additional information about this
event [or ``these events,'' as appropriate] on Form N-CR and to file
this form with the Securities and Exchange Commission. Any Form N-CR
filing submitted by the Fund is available on the EDGAR Database on the
Securities and Exchange Commission's Internet site at http://www.sec.gov.'' \1130\ A fund would be required 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.\1131\
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\1128\ See rule 2a-7(h)(10)(v); Form N-CR Part C; see also infra
section III.F.3 (discussing the Form N-CR requirements).
\1129\ See rule 2a-7(h)(10)(v).
\1130\ See id.
\1131\ See id.
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For the reasons discussed in the Proposing Release and below, 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.\1132\ In particular, we believe 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. While commenters also raised
concerns about the potential redundancy of the proposed registration
statement, Web site, and Form N-CR disclosure requirements,\1133\ we
believe that Web site disclosure provides significant informational
accessibility to shareholders and that format and timing of this
disclosure serves a different purpose than the Form N-CR filing
requirement.\1134\
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\1132\ See Proposing Release, supra note 25, at text in
paragraph prior to note 620; see also infra section III.F.3.
\1133\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
\1134\ See supra notes 1122 and 1123.
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However, in response to commenter concerns about potentially
duplicative disclosure requirements, we have modified the proposed
disclosure requirements and are adopting amendments to rule 2a-7 that
would require a fund to post on its Web site only a subset of the
information that the fund is required to file on Form N-CR. A fund will
only be required to present certain summary information about the
receipt of financial support on its Web site (as well as in the fund's
SAI \1135\), and will be required to present more detailed discussion
solely on Form N-CR.\1136\ Specifically, a fund will be required to
disclose on its Web site only that information that the fund is
required to file on Form N-CR within one business day after the
occurrence of any one or more of the events specified in Part C of Form
N-CR (``Provision of Financial Support to Fund'').\1137\ A fund thus
will not be required, as proposed, to disclose the reason for support,
term of support, and any contractual restrictions relating to support
on its Web site, although a fund will be required to disclose this
information on
[[Page 47834]]
Form N-CR.\1138\ We believe that the disclosure requirements we are
adopting appropriately consider commenters' concerns about duplicative
disclosure as well as our interest in requiring funds to disclose the
primary information about affiliate financial support that we believe
shareholders may find useful in assessing fund risks and determining
whether to purchase fund shares. We also address general commenter
concerns \1139\ about the possible duplicative effects of the
concurrent Web site and Form N-CR disclosures in section III.F.3 below,
where we discuss how Form N-CR and Web site disclosure serve different
purposes.\1140\
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\1135\ See supra section III.E.7.
\1136\ See infra section III.F.3 (Concerns of Potential
Redundancy).
\1137\ See rule 2a-7(h)(10)(v).
\1138\ See id.; Form N-CR Part C.
\1139\ See, e.g., Dreyfus Comment Letter.
\1140\ See infra section III.F.3 (Concerns over Potential
Redundancy).
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As proposed, we are requiring the Web site disclosure 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.\1141\ As we stated in the
Proposing Release, 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 would incorporate the same
information.\1142\ We received no comments on this requirement, and we
are adopting it as proposed.
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\1141\ See rule 2a-7(h)(10)(v).
\1142\ See supra notes 1126-1127 and accompanying text. Of
course, in the 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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h. Economic Analysis
As discussed above, and in our proposal, we are adopting a number
of amendments to rule 2a-7 to amend a number of requirements that money
market funds post certain information to funds' Web sites. These
amendments require disclosure of information about money market funds'
liquidity levels, shareholder flows, market-based NAV per share
(rounded to four decimal places), and the use of affiliate financial
support.\1143\ The qualitative benefits and costs of these requirements
are discussed above. These amendments should improve transparency and
better inform shareholders about the risks of investing in money market
funds, which should result in shareholders making investment decisions
that better match their investment preferences. We believe that this
will have effects on efficiency, competition, and capital formation
that are similar to those that are outlined in the Macroeconomic
Consequences section below.\1144\
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\1143\ We believe that the effects on efficiency, competition,
and capital formation related to the amendments to conform the
portfolio holdings Web site disclosure to our amendments to Form N-
MFP will be the same as those described in the section discussing
our amendments to Form N-MFP. See infra section III.G. We also note
that the economic effects related to disclosure of information
related to the imposition of fees and/or gates and sponsor support
reported on Form N-CR will be similar to economic effects we discuss
relating to new Form N-CR. See infra section III.F.8.
\1144\ See infra section III.K.2.
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We believe that the requirements could increase informational
efficiency by providing additional information about money market
funds' liquidity, shareholder flows, market-based NAV per share,
imposition of fees and/or gates, and use of affiliate financial
support, to investors and the Commission. This in turn could assist
investors in analyzing the risks associated with certain funds. In
particular, the daily disclosure of daily and weekly liquid assets,
along with the daily disclosure of NAV to four decimal places, should
better enable investors to understand the risks of a specific fund,
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 result of the
disclosure requirements, this could adversely affect the competitive
stance of certain money market funds, or the money market fund industry
generally.
Certain parts of the disclosure amendments may have other specific
effects on competition. To the extent some money market funds do not
currently and voluntarily calculate and disclose daily market-based NAV
per share data (rounded to the fourth decimal place), our amended
disclosure requirements may promote competition by helping to level the
associated costs incurred by all money market funds and neutralize any
competitive advantage associated with determining not to calculate and
disclose daily current per-share NAV. We also note that our amendment
to require disclosure of affiliate sponsor support may adversely affect
competition if investors move their assets to larger fund complexes on
the theory that they may be more likely than smaller entities to
provide financial support to their funds.
The requirements to disclose certain information about money market
funds' liquidity, shareholder flows, market-based NAV per share,
imposition of fees and/or gates, and use of affiliate financial support
also could have effects on capital formation. The required disclosures
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 requirements could detract from
capital formation by decreasing market stability if investors redeem
more quickly during times of stress as a result of the disclosure
requirements, and one commenter noted this increased risk as a
potential cost to the fund.\1145\ 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.
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\1145\ See State Street Comment Letter, at Appendix A. The
commenter did not provide a quantitative estimate of such risk.
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The requirement to disclose the fund's current NAV to four decimal
places should not have any effect on capital flows because funds will
also transact at four decimal places. When compared to alternatives
like ultra-short bond funds, which disclose and transact at three
decimal places, money market prices may appear more volatile on a day-
to-day basis if the greater precision in NAV disclosure leads to a
greater frequency of fluctuations in NAV.\1146\ This could incentivize
investors to switch to these alternatives. However, over longer
horizons like a month or a year these alternatives are likely to have
more volatile NAVs than money market funds. The disclosure of daily and
weekly liquid assets may increase the volatility of capital flows for
money market funds, as it may create an incentive for investors to
redeem shares when liquid assets fall or reach the threshold at which
the board may impose a redemption fee or gate. Disclosing levels of
liquid assets could lead to pre-emptive redemptions if daily
[[Page 47835]]
or weekly liquid assets drop to a level at which investors anticipate
that there is a greater likelihood of the fund imposing a redemption
fee or gate. However, as discussed in detail above, the board's
discretion to impose a fee or a gate mitigates the concern that
investors will be able to accurately forecast such an event, leading
them to pre-emptively withdraw their assets from the fund. We discuss
this concern in more detail in section III.A.
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\1146\ But see supra note 521 and accompanying text (discussing
staff analysis showing that, historically, over a twelve-month
period, 100% of ultra-short bond funds have fluctuated in price
(using 10 basis point rounding), compared with 53% of money market
funds that have fluctuated in price (using basis point rounding)).
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A possible alternative suggested by commenters was to only have Web
site disclosure apply to stable NAV funds.\1147\ Allowing floating NAV
funds not to disclose information on their Web site would lower the
costs for these funds. Nevertheless, we rejected this alternative
because we believe that the benefits we discuss above regarding
disclosure apply regardless of whether a fund has a stable or floating
NAV. Both types of funds, for example, could impose a fee or a gate so
this information is valuable to both types of investors and, if only
offered to one, could affect competition. For example, if a stable NAV
investor has more information than a floating NAV investor about a
possible fee or gate, then it is reasonable to assume that a stable NAV
investor would have more confidence in his or her investment. The added
disclosure for stable NAV funds could also increase market discipline
in these funds, leading to investors' increased willingness to
participate in this market and increase capital formation in these
funds.
---------------------------------------------------------------------------
\1147\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI
Comment Letter; IDC Comment Letter.
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Another alternative would have been to require weekly instead of
daily Web site disclosure of the daily and weekly liquid assets and net
shareholder flow.\1148\ Being required to disclose this information
weekly instead of daily would lower the costs on funds because they
would not have to report daily. However, we rejected this alternative
because, as discussed above, in times of market stress, money market
funds may face rapid, heavy redemptions, which could quickly affect
their liquidity. These stresses could happen over a period of a day. As
such, if investors have confidence that they will have the necessary
information to make an informed decision quickly in a time of stress,
then this may lead to additional capital for funds. Likewise, we also
believe that daily disclosure instead of weekly could lead to more
market discipline among funds, resulting in investors' increased
willingness to participate in this market, which could also lead to
additional capital for funds.
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\1148\ See Schwab Comment Letter; Federated VIII Comment Letter.
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i. Costs of Disclosure of Daily and Weekly Liquid Assets and Net
Shareholder Flows
Costs associated with the requirement for a fund to disclose
information about its daily liquid assets, weekly liquid assets, and
net shareholder flows on the fund's Web site 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 and flow 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. Funds also
would incur ongoing costs to update the depiction of daily liquid
assets and weekly liquid assets and net shareholder flows each business
day.\1149\ The Proposing Release estimated 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, as well as
the fund's net inflows or outflows, would be $20,150.\1150\ The
Proposing Release also estimated that the average ongoing annual costs
that each fund would incur to update the required disclosure would be
$9,184.\1151\
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\1149\ See State Street Comment Letter.
\1150\ See Proposing Release, supra note 25, at n.642.
\1151\ See Proposing Release, supra note 25, at n.643.
---------------------------------------------------------------------------
In the Proposing Release, we stated that we believed funds should
incur no additional costs in obtaining the percentage of daily liquid
assets and weekly liquid assets, as funds are currently required to
make such calculation under rule 2a-7. One commenter disagreed, noting
that there would be costs because of additional controls associated
with public disclosure, but did not provide a quantitative estimate of
such costs.\1152\ Two commenters generally believed that weekly
disclosure of the data, as opposed to daily disclosure, would
substantially reduce costs to funds, but they did not provide a
quantitative estimate of the difference between the cost of daily and
weekly disclosure.\1153\ Additionally, one commenter objected to
including historical information regarding weekly and daily liquid
assets and net shareholder flows on a fund's Web site because of the
expense involved in restructuring fund Web sites and maintaining such
information, but did not provide a quantitative estimate of such
expenses.\1154\ One commenter also noted the potential cost of the risk
of shareholders making redemption decisions in reliance on the
disclosed information.\1155\ The commenter, however, did not provide a
quantitative estimate for this risk.\1156\
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\1152\ See State Street Comment Letter, at Appendix A.
\1153\ See Federated VIII Comment Letter; Schwab Comment Letter.
\1154\ See UBS Comment Letter.
\1155\ Id.
\1156\ See supra section III.E.8 for a discussion of the reasons
that the Commission cannot measure the quantitative benefits of
these proposed requirements at this time.
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We agree that the costs for certain money market funds to upgrade
internal systems and software, and/or engage third-party service
providers if a money market fund does not have existing relevant
systems, could be higher than those average one-time costs estimated in
the Proposing Release. However, because the estimated one-time costs
were based on the mid-point of a range of estimated costs, the higher
costs that may be incurred by certain industry participants have
already been factored into our estimates.\1157\ While requiring weekly
disclosure instead of daily disclosure could reduce costs for funds, we
continue to believe that daily disclosure would convey important
information to shareholders that weekly disclosure may not.\1158\ We
also believe that the benefits of increased transparency that would
result from the disclosure requirements at hand outweigh the potential
costs of reactionary redemptions resulting from the disclosure.\1159\
The Commission agrees that money market funds may incur additional
costs associated with the enhanced controls required to publicly
disseminate daily and weekly liquid asset data, which costs were not
estimated in the Proposing Release. The Commission has incorporated
these additional costs into its new estimates of ongoing annual costs.
---------------------------------------------------------------------------
\1157\ See Proposing Release, supra note 25, at n.1044.
\1158\ See supra notes 1056-1057 and accompanying text.
\1159\ See supra notes 1060-1063 and accompanying text.
---------------------------------------------------------------------------
Based on these considerations, as well as updated industry data, we
now 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, as well as the fund's net inflows or
outflows, would be $20,280.\1160\ We
[[Page 47836]]
also estimate that the average ongoing annual costs that each fund
would incur to update the required disclosure would be $10,274.\1161\
Our estimate of average ongoing annual costs incorporates the costs
associated with the enhanced controls required to publicly disseminate
daily and weekly liquid asset data.\1162\
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\1160\ We estimate 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
and net shareholder flows), as well as project development,
implementation, and testing. The costs associated with these
activities are all paperwork-related costs and are discussed in more
detail below. See infra section IV.A.6.b.
\1161\ See id.
\1162\ See id.
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ii. Costs of Disclosure of Fund's Current NAV Per Share
Costs associated with the requirement for a fund to disclose
information about its daily current NAV on the fund's Web site 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 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. Funds also would incur ongoing costs to update the depiction of
the fund's current NAV each business day. Because floating NAV money
market funds will 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 disclosure requirements. Stable
price money market funds, which will be required to calculate their
current NAV per share daily pursuant to amendments to rule 2a-7,
likewise should incur no additional costs in obtaining this data for
purposes of the disclosure requirements. The Proposing Release
estimated that the average one-time costs for each money market fund to
design and present the fund's current NAV each business day would be
$20,150.\1163\ The Commission also estimated that the average ongoing
annual costs that each fund would incur to update the required
disclosure would be $9,184.\1164\
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\1163\ See Proposing Release, supra note 25, at n.664.
\1164\ See id., at n.665.
---------------------------------------------------------------------------
Certain commenters generally noted that complying with the new Web
site disclosure requirements would add costs for funds, including costs
to upgrade internal systems and software relevant to the Web site
disclosure requirements, as well as costs to engage third-party service
providers for those money market fund managers that do not have
existing relevant systems.\1165\ One commenter noted that these costs
could potentially be ``significant to [a money market fund] and higher
than those estimated in the Proposal.'' \1166\ However, another
commenter stated that it agrees that those money market funds that
presently publicize their current NAV per share daily on the fund's Web
site will incur few additional costs to comply with the proposed
disclosure requirements, and also that it agrees with the Commission's
estimates for the ongoing costs of providing a depiction of the fund's
current NAV each business day.\1167\
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\1165\ See, e.g., UBS Comment Letter (``The SEC also proposed
additional information regarding the posting of: (i) The categories
of a money fund's portfolio securities; (ii) maturity date
information for each of the fund's portfolio securities; and (iii)
market-based values of the fund's portfolio securities at the same
time as this information becomes publicly available on Form N-MFP.
We believe this information is too detailed to be useful to most
investors and would be cost prohibitive to provide. Complying with
these new Web site disclosure requirements would add notable costs
for each money fund that UBS Global AM advises.''); Chamber II
Comment Letter (``With respect to the Web site disclosure
requirements, internal systems and software would need to be
upgraded or, for those MMF managers that do not have existing
systems, third-party service providers would need to be engaged. The
costs (which ultimately would be borne by investors through higher
fees or lower yields) could potentially be significant to an MMF and
higher than those estimated in the Proposal.''); Dreyfus Comment
Letter (noting that ``several of the new Form reporting and Web site
and registration statement disclosure requirements . . . come with .
. . material cost to funds and their sponsors''); see also Fin.
Svcs. Roundtable Comment Letter (noting that the disclosure
requirements would produce ``significant cost to the fund and
ultimately to the fund's investors''); SSGA Comment Letter (urging
the Commission to consider the ``substantial administrative,
operational, and expense burdens'' of the proposed disclosure-
related amendments); Chapin Davis Comment Letter (noting that the
disclosure- and reporting-related amendments will result in
increased costs in the form of fund staff salaries, or consultant,
accountant, and lawyer hourly rates, that will ultimately be borne
in large part by investors and portfolio issuers).
\1166\ See Chamber II Comment Letter.
\1167\ See State Street Comment Letter, at Appendix A; see also
HSBC Comment Letter (stating that the proposed disclosure
requirements should not produce any ``meaningful cost'').
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We agree that the costs for certain money market funds to upgrade
internal systems and software, and/or engage third-party service
providers if a money market fund does not have existing relevant
systems, could be higher than those average one-time costs estimated in
the Proposing Release. However, because the estimated one-time costs
were based on the mid-point of a range of estimated costs, the higher
costs that may be incurred by certain industry participants have
already been factored into our estimates.\1168\ Based on these
considerations, as well as updated industry data, we now estimate that
the average one-time costs for each money market fund to design and
present the fund's daily current NAV would be $20,280.\1169\ We also
estimate that the average ongoing annual costs that each fund would
incur to update the required disclosure would be $9,024.\1170\
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\1168\ See Proposing Release, supra note 25, at n.1056.
\1169\ We estimate 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. The costs
associated with these activities are all paperwork-related costs and
are discussed in more detail below. See infra section IV.A.6.c.
\1170\ See id.
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iii. Costs of Daily Calculation of Current NAV per Share
The primary costs associated with the requirement for a fund to
calculate its current NAV per share each day are the costs for funds to
determine the current values of their portfolio securities each
day.\1171\ We estimate that 25% of active money market funds, or 140
funds, will incur new costs to comply with this requirement,\1172\
because the 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.\1173\ The Proposing Release estimated 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.\1174\ One commenter stated that it agrees with the
Commission's estimates for the ongoing costs of providing a depiction
of the fund's current NAV each business day.\1175\ However, most
comments on the proposed current NAV disclosure requirement did not
discuss the Commission's estimates of the costs a fund would incur to
calculate its current NAV per share daily, separate from their
discussion of the general costs
[[Page 47837]]
associated with the proposed NAV Web site disclosure requirement.\1176\
After considering these comments, our current methods of estimating the
costs associated with the NAV calculation requirement, described in
more detail below, are the same estimation methods we used in the
Proposing Release.
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\1171\ Additionally, funds may incur some costs associated with
adding the current values of the fund's portfolio securities and
dividing this sum by the number of fund shares outstanding; however,
we expect these costs to be minimal.
\1172\ The Commission estimates that there are currently 559
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, 2014. 559 money market funds x 25% =
approximately 140 money market funds.
\1173\ 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.
\1174\ See Proposing Release, supra note 25, at n.692.
\1175\ See State Street Comment Letter, at Appendix A.
\1176\ See supra notes 1165-1167.
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All money market funds are presently required to disclose their
market-based NAV per share monthly on Form N-MFP, and the frequency of
this disclosure will increase to weekly.\1177\ 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.\1178\ We expect, based on conversations with industry
representatives, that money market funds that do not presently
calculate the current values of their portfolio securities each day
generally would 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.\1179\ 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 such estimate would 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.\1180\ Assuming, as discussed above, that 140 money market
funds do not presently determine and publish their current NAV per
share daily, the average additional annual cost that these 140 funds
will collectively incur would range from $855,540 to $3,422,160.\1181\
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.
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\1177\ See Form N-MFP Item A.21 and B.5 (requiring money market
funds to provide NAV data as of the close of business on each Friday
during the month reported).
\1178\ See infra section IV.C.3.
\1179\ One commenter agreed with this expectation. See State
Street Comment Letter, at Appendix A.
\1180\ 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 x 97) to $97.00 ($1.00 x 97). The
additional annual costs would therefore range from $6,111 (252
business days in a year x $24.25) to $24,444 (252 business days in a
year x $97.00).
\1181\ This estimate is based on the following calculations: low
range of $6,111 x 140 funds = $855,540; high range of $24,444 x 140
funds = $3,422,160. See supra note 1180. This figure likely
overestimates the costs that stable price funds would incur if the
floating NAV proposal were adopted. This is because fewer than 559
active money market funds would be stable price funds required to
calculate their current NAV per share daily, and thus the estimate
of 140 funds (25% x 559 active funds) that would be required to
comply with this requirement is likely over-inclusive.
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iv. Costs of Harmonization of Rule 2a-7 and Form N-MFP Portfolio
Holdings Disclosure Requirements
Because the new portfolio holdings information that a fund is
required to present on its Web site overlaps with the information that
a fund would be required to disclose on Form N-MFP, we believe that the
costs a fund will incur to draft and finalize the disclosure that will
appear on its Web site will largely be incurred when the fund files
Form N-MFP, as discussed below in section III.G. The Proposing Release
estimated that, in addition, a fund would incur annual costs of $2,484
associated with updating its Web site to include the required monthly
disclosure.\1182\
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\1182\ See Proposing Release, supra note 25, at n.672.
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As discussed above, certain commenters generally noted that
complying with the new Web site disclosure requirements would add costs
for funds, including costs to upgrade internal systems and software
relevant to the Web site disclosure requirements, as well as costs to
engage third-party service providers for those money market fund
managers that do not have existing relevant systems.\1183\ One
commenter, however, noted that the portfolio holdings disclosure
requirements ``should not cause a significant cost increase . . . as
long as the information is made available from relevant accounting
systems,''\1184\ and another commenter stated that the proposed
disclosure requirements generally should not produce any meaningful
costs.\1185\ Another commenter urged the Commission to harmonize new
disclosure requirements so that funds would face lower administrative
burdens, and investors would bear correspondingly fewer costs.\1186\ As
described above, the portfolio holdings disclosure requirements we are
adopting have changed slightly from those that we proposed, in order to
conform to modifications we are making to the proposed Form N-MFP
disclosure requirements. However, we believe that these revisions do
not produce additional burdens for funds and thus do not affect
previous cost estimates. Because the 2010 money market fund reforms
already require money market funds to post monthly portfolio
information on their Web sites,\1187\ funds should not need to upgrade
their systems and software to comply with the new portfolio holdings
information disclosure requirements. The Commission therefore does not
believe that comments about the costs required to upgrade relevant
systems and software should affect its estimates of the costs
associated with the portfolio holdings disclosure requirements. Based
on these considerations, as well as updated industry data, we now
estimate that each fund would incur annual costs of $2,724 in updating
its Web site to include the required monthly disclosure.\1188\
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\1183\ See supra note 1165.
\1184\ See State Street Comment Letter, at Appendix A.
\1185\ See HSBC Comment Letter.
\1186\ See Fin. Svcs. Roundtable Comment Letter.
\1187\ See 2010 Adopting Release, supra note 17, at section
II.E.1.
\1188\ We estimate that these costs would be attributable to
project assessment (associated with designing and presenting the
required portfolio holdings information), as well as project
development, implementation, and testing. The costs associated with
these activities are all paperwork-related costs and are discussed
in more detail below. See infra section IV.A.6.a.
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v. Costs of Disclosure Regarding Financial Support Received by the
Fund, the Imposition and Removal of Liquidity Fees, and the Suspension
and Resumption of Fund Redemptions
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, or when
the fund imposes or removes liquidity fees or suspends or resumes fund
redemptions, we anticipate that the costs a fund will incur to draft
and finalize the disclosure that will appear on its Web site will
largely be incurred when the fund files Form N-CR, as discussed below
in section III.F. The Proposing Release estimated that, in addition, a
fund
[[Page 47838]]
would incur costs of $207 each time that it updates its Web site to
include the required disclosure.\1189\
---------------------------------------------------------------------------
\1189\ See Proposing Release, supra note 25, at nn.464, 629.
---------------------------------------------------------------------------
While certain commenters generally noted, as discussed above, that
complying with the new Web site disclosure requirements would add costs
for funds,\1190\ one commenter stated that the costs of disclosing
liquidity fees and gates and instances of financial support on the
fund's Web site would be minimal when compared to other costs,\1191\
and another commenter stated that the proposed disclosure requirements
should not produce any meaningful costs.\1192\ As described above, we
have modified the required time frame for disclosing information about
financial support received by a fund on the fund's Web site. However,
this modification does not produce additional burdens for funds and
thus does not affect previous cost estimates. Taking this into
consideration, as well as the fact that we received no comments
providing specific suggestions or critiques about our methods of
estimating the burdens associated with the Form N-CR-linked Web site
disclosure requirements, the Commission has not modified the estimated
costs associated with these requirements, although it has modified its
cost estimates based on updated industry data. We now estimate that a
fund would incur costs of $227 each time that it updates its Web site
to include the required disclosure.\1193\
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\1190\ See supra note 1165.
\1191\ See State Street Comment Letter, at Appendix A.
\1192\ See HSBC Comment Letter.
\1193\ The costs associated with these activities are all
paperwork-related costs and are discussed in more detail below. See
infra section IV.A.6.d.
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F. Form N-CR
1. Introduction
Today we are adopting, largely as we proposed, a new requirement
that money market funds file a current report with us when certain
significant events occur.\1194\ New Form N-CR will require disclosure
of certain specified events. Generally, a money market fund will be
required to file Form N-CR if a portfolio security defaults, an
affiliate provides financial support to the fund, the fund experiences
a significant decline in its shadow price, or when liquidity fees or
redemption gates are imposed and when they are lifted.\1195\ In most
cases, a money market fund will be required to submit a brief summary
filing on Form N-CR within one business day of the occurrence of the
event, and a follow-up filing within four business days that includes a
more complete description and information.\1196\
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\1194\ As we proposed, this requirement will be implemented
through our adoption of new rule 30b1-8, which requires money market
funds to file a report on new Form N-CR in certain circumstances.
See rule 30b1-8; Form N-CR.
\1195\ See Form N-CR Parts B-H. More specifically, adopted
largely as proposed, these events include instances of portfolio
security default (Form N-CR Part B), financial support (Form N-CR
Part C), a decline in a stable NAV fund's current NAV per share
(Form N-CR Part D), a decline in weekly liquid assets below 10% of
total fund assets (Form N-CR Part E), whether a fund has imposed or
removed a liquidity fee or gate (Form N-CR Parts E, F and G), or any
such other information a fund, at is option, may choose to disclose
(Form N-CR Part H). In addition, as proposed, Form N-CR Part A will
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 Form N-CR Part A. As
proposed the name, email address, and telephone number of the person
authorized to receive information and respond to questions about the
filing will not be disclosed publicly on EDGAR.
\1196\ A report on Form N-CR will be made public on the
Commission's Electronic Data Gathering, Analysis, and Retrieval
system (``EDGAR'') immediately upon filing.
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We proposed requiring reporting on Form N-CR under both the
floating NAV and fees and gates reform alternatives, but the Form
differed in certain respects depending on the alternative.\1197\ Today
we are adopting a combination of the alternatives, and therefore final
Form N-CR is a combined single form.\1198\
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\1197\ For example, under the liquidity fees and gates
alternative, we proposed Form N-CR to include additional disclosures
specifically related to liquidity fees and gates, which we did not
propose to under the floating NAV alternative. See Proposing
Release, supra note 25, at section III.G.2; proposed (Fees & Gates)
Form N-CR Parts E, F and G. In addition to other changes we are
making today to the form, the final version of Form N-CR includes
these additional Parts. See Form N-CR Parts E, F and G. We are also
reconciling the introduction of Part D, which was worded differently
under each of the respective main alternatives. See proposed (FNAV)
Form N-CR Part D; proposed (Fees & Gates) Form N-CR Part D; see
also, infra note 1263.
\1198\ Id.
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As we stated in the Proposing Release,\1199\ the information
provided on Form N-CR will enable the Commission to enhance its
oversight of money market funds and its ability to respond to market
events. The Commission will be able to use the information provided on
Form N-CR in its regulatory, disclosure review, inspection, and
policymaking roles. Requiring funds to report these events on Form N-CR
will provide important transparency to fund shareholders, and also will
provide information more uniformly and efficiently to the Commission.
It will also provide investors and other market observers with better
and more timely disclosure of potentially important events.
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\1199\ See Proposing Release at paragraph containing n.697.
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Commenters generally supported new Form N-CR.\1200\ For example,
one commenter noted that Form N-CR would generally ``[alert] the SEC to
issues the funds may be having'' and ``[provide] the public with
current information that investors need.''\1201\ On the other hand,
some commenters also voiced objections, suggesting that the form may be
burdensome or redundant, and also offered specific improvements.\1202\
As discussed in more detail below, we are making various changes to
Form N-CR to address some of these concerns. However, while we
appreciate commenters' concerns about possible redundancies of Form N-
CR in light of the concurrent Web site or SAI disclosures, we believe
each of these different disclosures to be appropriate because they
serve distinct purposes.\1203\
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\1200\ See, e.g., CFA Institute Comment Letter; American Bankers
Ass'n Comment Letter; Vanguard Comment Letter; Schwab Comment
Letter; ICI Comment Letter.
\1201\ See CFA Institute Comment Letter.
\1202\ See, e.g., Dreyfus Comment Letter; Fidelity Comment
Letter; ICI Comment Letter; Federated VIII Comment Letter; SIFMA
Comment Letter.
\1203\ See discussion following infra notes 1248 and 1249 and
accompanying text.
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2. Part B: Defaults and Events of Insolvency
Part B of Form N-CR is being adopted largely as proposed.\1204\ We
are
[[Page 47839]]
adopting, as proposed, the requirement that a money market fund report
to us if the issuer or guarantor of a security that makes up more than
one half of one percent of a fund's total assets defaults or becomes
insolvent.\1205\ Such a report will, also as proposed, include the
nature and financial effect of the default or event of insolvency, as
well as the security or securities affected.\1206\ As we noted in the
Proposing Release, the Commission believes that the factors specified
in the required disclosure are necessary to understand the nature and
extent of a default, as well as the potential effect of a default on
the fund's operations and its portfolio as a whole.\1207\
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\1204\ See proposed (FNAV) Form N-CR Part B; proposed (Fees &
Gates) Form N-CR Part B. In the Proposing Release, we proposed Form
N-CR to 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.
Among the other changes discussed in this section, in the final
amendments we are also adding the clause ``or has taken'' to the
``brief description of actions fund plans to take, or has taken, in
response to the default(s) or event(s) of insolvency'' as required
by Item B.5 of Form N-CR. See Form N-CR Item B.5. We are clarifying
that filers should not omit in Item B.5 any actions that they may
have already taken in response to a default or event of insolvency
prior to their filing of Form N-CR. In particular, if a fund were
able to complete all actions in response to a default before the
deadline of the follow-up filing, it could have otherwise
effectively omitted its entire response to the default from being
disclosed in Item B.5. We believe such an omission would
significantly diminish the informational utility of Form N-CR to the
Commission and investors in understanding how a fund has responded
to a default.
\1205\ See Form N-CR Part B (requiring filing 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).
\1206\ Form N-CR Part B, adopted largely as proposed, will
require a fund to disclose the following information: (i) The
security or securities affected, including the name of the issuer,
the title of the issue (including coupon or yield, if applicable)
and at least two identifiers, if available; (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, or
has taken, in response to such event. As proposed, 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 asset-backed 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. See Instruction to 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
current rule 2a-7(c)(7)(iv).
\1207\ See Proposing Release, supra note 25, at text following
n.703.
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As stated above, we proposed to require disclosure of the security
or securities affected by the default.\1208\ In a change from the
proposal, to help us better identify defaulted portfolio securities,
the final form now requires funds to report the name of the issuer, the
title of the issue and at least two identifiers, if available (e.g.,
CUSIP, ISIN, CIK, Legal Entity Identifier (``LEI'')) when they file a
report under part B of the form.\1209\ This requirement is similar to
what we proposed and are adopting with respect to Items C.1 to C.5 of
Form N-MFP.\1210\ In particular, better identification of the
particular fund portfolio security or securities subject to a default
or event of insolvency at the time of notice to the Commission will
facilitate the staff's monitoring and analysis efforts, as well as
inform any action that may be required in response to the risks posed
by such an event. Fund shareholders and potential investors will
similarly benefit from the clear identification of defaulted fund
portfolio securities when evaluating their investments.\1211\
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\1208\ Proposed (FNAV) Form N-CR Item B.1; Proposed (Fees &
Gates) Form N-CR Item B.1.
\1209\ See Form N-CR Item B.1. These requirements are similar to
Form N-MFP Items C.1 to C.5 but are reported on a more timely basis
on Form N-CR. Much like under Form N-MFP, we note that the
requirement to include multiple identifiers is only required if such
identifiers are actually available.
\1210\ See Proposing Release, supra note 25, at nn.754-757 and
accompanying text; see supra section III.G.
\1211\ Although current rule 2a-7(c)(7)(iii)(A) requires money
market funds to report defaults or events of insolvency to the
Commission by email, as proposed, we are eliminating this now
duplicative requirement.
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One commenter expressed concern that publicly identifying a single
security that has defaulted could be problematic if other contextual
information about the quality of the fund's other holding is not
immediately available.\1212\ We note that the Form N-CR report will
provide the value as well as the relative size of any defaulted
security compared to the rest of a fund's portfolio, providing some
context for the default. In addition, as further described in section
III.F.6 below, we are also adopting a new Part H of Form N-CR that will
permit money market funds, in their discretion, to discuss any other
events or information that they may consider material or relevant,
which should allow for additional context if necessary.
---------------------------------------------------------------------------
\1212\ See Dreyfus Comment Letter.
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3. Part C: Financial Support
We are also adopting a requirement that money market funds report
instances of financial support by sponsors or other affiliates on Part
C of Form N-CR \1213\ with several changes from the proposal.\1214\ We
have modified the definition of financial support from the proposal in
response to comments, as discussed below. This revised definition will
affect when Part C needs to be filed. When filed, the Part C report
will, as proposed, require disclosure of the nature, amount, and terms
of the support, as well as the relationship between the person
providing the support and the fund \1215\
[[Page 47840]]
except that, in a change from the proposal, the report will also
require certain identifying information about securities that are the
subject of any financial support.\1216\
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\1213\ See Form N-CR Part C. 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. See current rule 2a-
7(c)(7)(iii)(B). As proposed, we are eliminating this requirement,
as it would duplicate the Form N-CR reporting requirements discussed
in this section. As we stated in the text following note 711 of the
Proposing Release, the Form N-CR reporting requirement will permit
the 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 will also assist investors in
understanding the extent to which money market funds receive
financial support from their sponsors or other affiliates.
\1214\ See proposed (FNAV) Form N-CR Part C; proposed (Fees &
Gates) Form N-CR Part C. In particular, in the Proposing Release we
proposed the term ``financial support'' to 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 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. See Proposing
Release, supra note 25, at nn.705-712 and accompanying discussion.
We also proposed Form N-CR to 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
market-based 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, we
proposed that the money market fund would be required to provide the
purchase price of the security, as well as certain other
information. See Instruction to proposed (FNAV) Form N-CR Part C;
Instruction to proposed (Fees & Gates) Form N-CR Part C.
\1215\ See id. Form N-CR Items C.1 through C.10 will require,
with changes from the proposal, 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) the date the support was provided; (v) the amount of support,
including the amount of impairment and the overall amount of
securities supported; (vi) the security supported, including the
name of the issuer, the title of the issue (including coupon or
yield, if applicable) and at least two identifiers, if available;
(vii) the market-based value of the security supported on the date
support was initiated, if applicable; (viii) a brief description of
the reason for the support; (ix) the term of support; and (x) a
brief description of any contractual restrictions relating to
support. We have also rearranged proposed Item C.4 (description of
the reason for the support) to be new Item C.8 in order to better
streamline the disclosures required to be filed within one business
day (Items C.1 through C.7) versus four business days (Items C.8
through C.10). See infra section III.F.7.
\1216\ See Form N-CR Item C.6 (now requiring, for any security
supported, disclosure of the name of the issuer, the title of the
issue (including coupon or yield, if applicable) and at least two
identifiers, if available. We are including the new securities
identification requirements for the same reasons we are including it
in Part B, as discussed above.
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As we noted in the Proposing Release, we believe that requiring
disclosure of financial support from a fund sponsor or affiliate will
provide important, near real-time transparency to shareholders and the
Commission, and will therefore help shareholders better understand the
ongoing risks associated with an investment in the fund.\1217\ The
information provided in the required disclosure is necessary for
investors to understand the nature and extent of the sponsor's
discretionary support of the fund and will also assist Commission staff
in analyzing the economic effects of such financial support.\1218\
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\1217\ See Proposing Release, supra note 25, at n.705 and
accompanying text. See also, e.g., Schwab Comment Letter (noting
that the ``[p]roposed disclosures around instances of sponsor
support would provide investors with useful context for analyzing
the stability of the fund''). In addition, as we discussed at n.712
in the Proposing Release, money market funds' receipt of financial
support from sponsors and other affiliates has not historically been
prominently disclosed to investors, which has resulted in a lack of
clarity among investors about which money market funds have received
such financial support.
\1218\ See Proposing Release, supra note 25, at text following
n.708. Another commenter also suggested that disclosure of financial
support on Form N-CR may have the effect of reducing the likelihood
that funds will need such support in the future. See American
Bankers Ass'n Comment Letter (``[k]nowing that any form of sponsor
support would be required to be disclosed within 24 hours, fund
managers would likely do everything they could to avoid the need for
sponsor support.'').
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a. Definition of Financial Support
Although a number of commenters generally supported the proposed
financial support disclosure,\1219\ many of these supporters and other
commenters also argued that the proposed definition of ``financial
support'' was ambiguous and could trigger unnecessary filings.\1220\
Many commenters suggested that the catchall provision of the proposed
definition, which would require reporting of ``any other similar action
to increase the value of the Fund's portfolio or otherwise support the
Fund during times of stress,'' was too broad.\1221\ Some commenters
stated that the proposed definition would trigger reports on Form N-CR
of routine transactions that occur in the ordinary course of business,
which do not indicate stress on the fund.\1222\ For example, a few
commenters suggested that the proposed definition would result in Form
N-CR filings with respect to ordinary fee waivers and expense
reimbursements, inter-fund lending, purchases of fund shares,
reimbursements made by the sponsor in error, and certain other routine
fund transactions.\1223\ Because many of the above actions likely would
not indicate stress on a fund, commenters noted that reporting these
actions would not enhance investors' ability to fully appreciate the
risks of investing in a fund, potentially lead to further investor
confusion and possibly even cause ``disclosure fatigue'' among
investors.\1224\ We also were asked to clarify what constitutes
financial support in order to standardize disclosures by different
funds.\1225\
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\1219\ See, e.g., Oppenheimer Comment Letter (``. . . we support
the SEC's proposal to require money market funds to disclose current
and historical instances of sponsor support for stable NAV funds [.
. .].''); Schwab Comment Letter; T. Rowe Price Comment Letter;
American Bankers Ass'n Comment Letter; Federated VIII Comment
Letter.
\1220\ See, e.g., Schwab Comment Letter (noting that the
``[p]roposed disclosures around instances of sponsor support would
provide investors with useful context for analyzing the stability of
the fund, though we would note that not all instances of sponsor
support are indicative of a fund under even mild stress, let alone
nearing the point of breaking the buck.''); ICI Comment Letter (``We
are concerned that the definition of `financial support' for
purposes of the required disclosures is overly broad and would
include the reporting of routine fund matters.''); Federated II
Comment Letter; Deutsche Comment Letter; UBS Comment Letter.
\1221\ See, e.g., Dreyfus Comment Letter, Deutsche Comment
Letter, ICI Comment Letter, Fidelity Comment Letter; UBS Comment
Letter.
\1222\ See, e.g., Dechert Comment Letter (stating that the
``definition of `financial support' is over-inclusive and would
capture certain actions taken in the ordinary course of business
that would not signal any financial distress on the part of the
money fund.''); SIFMA Comment Letter, ICI Comment Letter, Federated
II Comment Letter, Vanguard Comment Letter.
\1223\ See, e.g., PWC Comment Letter (``. . . an expense waiver
is more often than not a means to limit a fund's expense ratio, and
not to avoid the NAV falling below $1.00 per share.''); BlackRock II
Comment Letter (``[a]ffiliates and fund sponsors often use a fund as
a cash management vehicle and routinely purchase fund shares. These
purchases in no way indicate a fund is under stress.''); Fidelity
Comment Letter (noting that ``a `(iv) purchase of fund shares' may
be interpreted to include a sponsor's investment of seed money to
launch a new fund and investment by affiliated funds or transfer
agents on behalf of either funds using MMFs as an overnight cash
sweep or central funds investing pursuant to the terms of an
exemptive order.'' and that other routine items might include
``expense caps, inter-fund lending, loans and overdrafts due to
settlement timing issues, and credits that service providers of a
MMF may give as a result of cash held at the service provider'').
See also, e.g., Vanguard Comment Letter, Federated VIII Comment
Letter, SIFMA Comment Letter, Deutsche Comment Letter, ICI Comment
Letter.
\1224\ See, e.g., Federated VIII Comment Letter; Fidelity
Comment Letter; ICI Comment Letter; SIFMA Comment Letter; Chamber II
Comment Letter.
\1225\ See SIFMA Comment Letter (stating that clarifying the
definition of financial support is ``necessary to standardize
disclosures across the industry.''). With respect to the ``catch-
all'' provision of the definition, see discussion infra and cf.,
e.g., Dreyfus Comment Letter. Certain of our final changes to the
definition of ``financial support'' are intended to address concerns
about inconsistent disclosures by different funds. See, e.g., infra
notes 1226 and 1232 and the respective accompanying discussions.
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We appreciate these commenters' concerns, and are today amending
the final definition of ``financial support'' to minimize unnecessary
filings of Form N-CR and reduce inconsistencies among different filers.
In response to these comments, we are, among other things, modifying
the rule text to specify that certain routine actions, and actions not
reasonably intended to increase or stabilize the value or liquidity of
the fund's portfolio, do not need to be reported as financial support
on Form N-CR, as discussed below.\1226\ The revised definition should
help avoid Form N-CR filings that do not represent actions that the
Commission, shareholders, and other market observers would consider
significant enough in evaluating or monitoring for financial support.
Each item of financial support in the definition is the same as was
proposed, except we have deleted ``purchase of fund shares'' from the
definition, we have refined the ``catch-all provision,'' and we have
added several exclusions, all discussed below.
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\1226\ In addition, in the Proposing Release, we explained that
the instructions specified that the term financial support included,
but was not limited to certain examples of financial support. See
Proposing Release, supra note 25, at n.617 and accompanying text.
Similarly, in the proposed Form N-CR, we had included the phrase
``for example'' before the definition of financial support,
suggesting that this definition was a non-exhaustive list of actions
that constitute financial support. See proposed (FNAV) Form N-CR
Part C; proposed (Fees & Gates) Form N-CR Part C. In the final
amendments, we are eliminating these qualifications in order to
reduce any ambiguity over what else might constitute sponsor
support. We also clarify that the final definition encompasses the
entire universe of what does (and does not) constitute financial
support for purposes of Form N-CR. We believe these clarifications,
in addition to our other changes to the definition of ``financial
support,'' will provide for more standardized disclosures across the
industry.
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As we are adopting it today, the term ``financial support'' is
defined to include (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) execution of letter of
credit or
[[Page 47841]]
letter of indemnity, (v) capital support agreement (whether or not the
fund ultimately received support), (vi) performance guarantee, (vii) or
any other similar action reasonably intended to increase or stabilize
the value or liquidity of the fund's portfolio; excluding, however, any
(i) routine waiver of fees or reimbursement of fund expenses, (ii)
routine inter-fund lending, (iii) routine inter-fund purchases of fund
shares, or (iv) any action that would qualify as financial support as
defined above, that the board of directors has otherwise determined not
to be reasonably intended to increase or stabilize the value or
liquidity of the fund's portfolio.\1227\
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\1227\ See Form N-CR Part C. This definition is the same as the
one we are adopting today for purposes of the Web site disclosure of
sponsor support. See supra section III.F.3. See also, supra note
1214 for a description of the proposed definition in the Proposing
Release.
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As some commenters suggested,\1228\ we are refining the ``catch-
all'' provision of the financial support definition.\1229\ In the
Proposing Release, we had proposed to require disclosure of ``any other
similar action to increase the value of the fund's portfolio or
otherwise support the fund during times of stress.'' \1230\ Under the
final definition, we are changing this provision to read: ``any other
similar action reasonably intended to increase or stabilize the value
or liquidity of the Fund's portfolio.'' \1231\ In particular, we have
eliminated the phrases ``otherwise support'' and ``during times of
stress'' contained in the proposed definition to address more general
concerns that the ``catch-all'' provision was too vague and could be
subject to different interpretations by different funds.\1232\ We also
eliminated the phrase ``during times of stress'' because sponsors may
also provide support pre-emptively, before a fund is experiencing any
actual stress. Instead, we believe this new intentionality standard
\1233\ should serve to reduce the chance that a fund would need to
report an action on Form N-CR that does not represent true financial
support that the Commission or investors would likely be concerned
with. By focusing on the primary intended effects of sponsor support--
increasing or stabilizing the value or liquidity of a fund's portfolio
\1234\--we believe the revised ``catch-all'' provision will better
capture actions that the Commission, shareholders, and other market
observers would consider significant in evaluating or monitoring for
financial support.\1235\ Actions that would likely fall within this
``catch-all'' provision include, for example, the purchase of a
defaulted or devalued security at a price above fair value, or
exchanges of securities with longer maturities for ones with shorter
maturities.
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\1228\ See, e.g., Dreyfus Comment Letter (``we recommend that
`or otherwise support the fund during times of market stress' be
eliminated from subparagraph (viii), or revised to be made more
specific as to actual financial support provided. As proposed, this
broad `catch-all' provision re-opens the door for debate about what
constitutes `instances of sponsor support.' ''); ICI Comment Letter.
\1229\ See Form N-CR Part C.
\1230\ See Proposing Release, supra note 25, at n.617 and
accompanying text; proposed (FNAV) Form N-CR Part C; proposed (Fees
& Gates) Form N-CR Part C.
\1231\ See Form N-CR Part C.
\1232\ See Dreyfus Comment Letter. See generally, e.g., SIFMA
Comment Letter (with respect to definition of financial support
generally, stating that clarifications are ``necessary to
standardize disclosures across the industry.''). But cf., ICI
Comment Letter (proposing a modified ``catch-all'' provision that
would retain the phrase ``during periods of stress.'').
\1233\ See Form N-CR Part C. As noted above, if increasing or
stabilizing the value or liquidity of the Fund's portfolio is an
intended effect of an action, even if not the primary purpose, then
it would need to be reported on Form N-CR.
\1234\ To that end, we have also added ``or stabilize'' and ``or
liquidity'' to what we had originally proposed as the catch-all
provision. See supra note 1231 and accompanying text. We are doing
so because we believe that increasing the value of a fund may not be
the only primary intended effect of financial support. Rather, we
believe that stabilizing the value of a fund (e.g., where a sponsor
provides support to counter foreseeable adverse market effects that
may otherwise depress the fund's value), as well as increasing or
stabilizing the fund's liquidity (e.g., where a sponsor might
exchange securities with longer maturities for ones of equal value
but with shorter maturities) may also be intended effects of
financial support.
\1235\ We also considered whether to make this ``catch-all''
provision (or the definition of financial support generally) subject
to a specific threshold or general materiality qualification. See,
e.g., T. Rowe Price Comment Letter (stating that ``if the sponsor is
investing in its own fund in order to support the NAV, we agree that
the SEC could consider requiring disclosure [on Form N-CR] if a
money market fund's NAV has dropped below a certain threshold and
the sponsor's investment in the fund materially changes the market-
based NAV.''); Cf., e.g., ICI Comment Letter (among other things,
proposing to qualify purchases of fund shares by adding ``to support
the fund during periods of stress (e.g., when the fund's NAV
deviates by more than \1/4\ of 1 percent)'' behind it). However, we
are not including a specific threshold (e.g., a specific drop in the
fund's NAV or liquidity) at this time (to the ``catch-all''
provision or any other part of the definitions) because not all
types of sponsor support (e.g., a capital support agreement or
performance guarantee) may result in an immediate change in a fund's
NAV or liquidity. The utility of the reporting might also be
diminished with such a threshold if sponsors provided support pre-
emptively, before the specified threshold is met.
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We have also added exclusions to the definition in a change from
the proposal. The revised definition of financial support explicitly
excludes routine waivers of fees or reimbursement of fund expenses,
routine inter-fund lending, and routine inter-fund purchases of fund
shares.\1236\ We agree with commenters that the actions we are
excluding from the final definition are not generally indicative of
stress at a fund.\1237\ Correspondingly, we have also deleted purchases
of fund shares as one of the items that had been explicitly included in
the proposed definition.\1238\ We note that these actions must be
``routine'' meaning that any such actions are excluded only to the
extent they are not reasonably intended to increase or stabilize the
value or liquidity of the fund's portfolio.\1239\
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\1236\ Cf., e.g., ICI Comment Letter (proposing to add
``nonroutine'' before ``purchase of fund shares'' to ``make it clear
that routine affiliate purchases normally should not be deemed
``financial support.'').
\1237\ See generally, commenters' concerns at supra note 1223
and accompanying discussion.
\1238\ See clause (iv) of the proposed definition, supra note
1227.
\1239\ If increasing or stabilizing the value or liquidity of
the Fund's portfolio is an intended effect of an action, even if not
the primary purpose, then it would need to be reported on Form N-CR.
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The final definition of financial support also includes a new
intentionality exclusion that may be invoked by boards.\1240\ Under
this new exclusion, a particular action need not be reported as
financial support under Part C of Form N-CR if the board of directors
of the fund finds that the action was not ``reasonably intended to
increase or stabilize the value or liquidity of the Fund's portfolio.''
We are adding this exclusion as a way to address certain remaining
concerns by commenters about the reporting of actions that might
otherwise still technically fall within the definition of financial
support, but are not intended as such.\1241\ During times of fund or
market stress, however, we believe that boards likely would find it
difficult to determine that a particular action that is otherwise
captured by the definition of financial support should be excluded
under this intentionality exception. We recognize that an action may be
made for a number of reasons, but note that if an intent of the action
is to increase or stabilize the value or liquidity of the Fund's
portfolio, even if that is not the primary or sole purpose of the
action, then it must be reported on the
[[Page 47842]]
Form.\1242\ As is the case with any board determination, boards would
typically record in the board minutes the bases of any such
determinations by the board.\1243\
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\1240\ See Form N-CR Part C.
\1241\ See, e.g., Fidelity Comment Letter (``For example, `(i)
any capital contribution' could be interpreted to include a
reimbursement of error, as a MMF adviser or sponsor may reimburse a
MMF for an error that occurred whether part of investment
operations, investment activity or other services provided by a
service provider to the funds.'') In such a case, a fund's board
might be able to determine that such reimbursement was not
``reasonably intended to increase or stabilize the value or
liquidity of the Fund's portfolio'' and thus would not report the
action on Form N-CR.
\1242\ For example, a sponsor might purchase a security from a
fund (or take another similar action) to eliminate potential future
risk associated with that security, and may engage in such an action
primarily out of concern for their reputation or other reasons.
Nonetheless, if any intent of the action, even if it is not the
primary intent, is to increase or stabilize the value or liquidity
of the fund's portfolio (in the present or future), then such an
action would be reportable on Form N-CR. Similarly, one commenter
suggested that we exclude certain capital contributions provided by
the sponsor of an acquired fund in the case of a merger or
reorganization from the definition of financial support for purposes
of Form N-CR. See Federated VIII Comment Letter. We have not done so
because in some cases such a contribution might be reasonably
intended to increase or stabilize the value or liquidity of the
fund's portfolio, even if the primary intent was to facilitate the
merger or reorganization. In particular, such a contribution may
qualify as a ``capital contribution'' for purposes of clause (i) of
the proposed definition of financial support. Given that the capital
contribution in the commenter's example was intended to cover ``any
net losses previously realized by the acquired fund'' or ``if the
shadow price of the acquired fund differs materially from the
acquiring fund's shadow price,'' the recipient fund's board would
likely find it difficult to conclude that such a capital
contribution was not reasonably intended to increase or stabilize
the value or liquidity of the fund's portfolio. Id.
\1243\ See supra note 709.
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b. Amount of Support
In the Proposing Release, we proposed that filers disclose, among
other things, the ``amount of support'' in Part C of Form N-CR.\1244\
One commenter asked the Commission to clarify the ``amount'' of
financial support that they must report under Part C of the form to
avoid misleading disclosures and to facilitate comparability in
disclosures across the industry.\1245\ For example, in the case of a
purchase of a security from the fund, this commenter believed that it
may be misleading to report the size of the position purchased as the
``amount'' supported and rather thought the amount of support should be
the increase in the fund's NAV that results from the purchase. This
commenter also asked that the Commission clarify that SEC staff
interpretations relating to reporting the valuation of capital support
agreements on Form N-MFP would be applicable for these purposes.\1246\
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\1244\ See proposed (FNAV) Form N-CR Item C.6; proposed (Fees &
Gates) Form N-CR Item C.6.
\1245\ See SIFMA Comment Letter.
\1246\ This commenter was discussing Staff Responses to
Questions about Rule 30b1-7 and Form N-MFP updated July 29, 2011,
available at http://www.sec.gov/divisions/investment/guidance/formn-mfpqa.htm.
---------------------------------------------------------------------------
Below we are providing guidance to clarify what amounts should be
reported specifically with respect to share purchases on Part C of Form
N-CR. With respect to share purchases in particular, we disagree with
the commenter that when financial support is provided through the
purchase of a fund portfolio security, the size of the security
position purchased is not relevant in considering the amount of
support. When a distressed or potentially distressed security is
purchased out of a fund's portfolio, support can be provided in two
ways. First, if it is purchased at amortized cost and the security's
market-based value is below amortized cost, one measure of the amount
of support is the amount of the security's impairment below amortized
cost. However, the purchase of the security position from the fund also
removes this entire risk exposure from the fund and protects the fund
from subsequent further price declines in the security. Accordingly, we
believe that the size of the position purchased from the fund is also
relevant when considering the ``amount'' of financial support.
Therefore, in such a case filers should report under Part C of Form N-
CR the following two separate items with respect to the ``amount'' of
financial support: (i) The amount of the impairment below amortized
cost in the security purchased and (ii) the amortized cost value of the
securities purchased.
In the case of a capital support agreement, historically such
agreements have supported a particular security position while others,
as noted by a commenter, may support the market-based NAV per share of
the fund as a whole.\1247\ Where a capital support agreement is
supporting a particular security position, we would consider the amount
of reportable financial support on Form N-CR similar to that described
above relating to purchases of portfolio securities. That is, the
``amount'' of financial support is the amount of security impairment
effectively removed through the capital support agreement as well as
the amortized cost value of the overall position supported (assuming
the entire position is subject to the capital support agreement). For a
capital support agreement that supports the fund as a whole, the amount
of reportable financial support is the amount of impairment to the
fund's NAV per share effectively removed through the capital support
agreement with a notation describing that the capital support agreement
supports the value of the fund as a whole (or the extent of the fund's
value that is supported, if less than the full amortized cost value).
---------------------------------------------------------------------------
\1247\ See SIFMA Comment Letter.
---------------------------------------------------------------------------
This guidance differs somewhat from the staff guidance relating to
capital support agreement disclosures on Form N-MFP because the context
differs. Form N-MFP already requires reporting on the overall size of
the security position reported (and information about the size of the
fund), so the additional capital support agreement reporting focuses on
valuing the impairment effectively removed through the capital support
agreement. Our guidance regarding ``amount'' of financial support
reportable on Form N-CR for capital support agreements thus provides
similar information to that which could be collectively determined by
reviewing various Form N-MFP line items.
c. Concerns Over Potential Redundancy
One commenter argued that the financial support disclosure in Form
N-CR is redundant in light of the corresponding financial support
disclosures in the SAI, raising concerns about the additional
preparation costs and burdens on fund personnel.\1248\ More generally,
commenters were also concerned about the redundancy of various other
Parts of Form N-CR, Form N-CR as a whole, and even the various proposed
disclosures in the aggregate.\1249\ While we appreciate these concerns
and have considered the costs and burdens of Form N-CR,\1250\ we note
that each of the Form N-CR and the corresponding Web site and SAI
disclosure requirements serves a distinct purpose.\1251\ Therefore,
although we acknowledge there will be some textual overlap between
these different formats, we believe there are strong public policy
reasons for requiring the various different disclosures. We also note
that we have required other such parallel reporting for similar
reasons.\1252\
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\1248\ See Dreyfus Comment Letter.
\1249\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter;
Federated II Comment Letter; Fin. Svcs. Roundtable Comment Letter.
\1250\ We consider and estimate the various costs and burdens of
Form N-CR in more detail in infra section III.F.8 as well as in
infra section IV.D.2.a.
\1251\ We note that there are also certain overlapping
disclosures with respect to Form N-MFP, which we generally discuss
in supra section III.G.
\1252\ For example, money market funds are currently required to
disclose much of the portfolio holdings information they disclose on
Form N-MFP on the fund's Web site as well. See current rule 2a-
7(c)(12)(ii); current rule 30b1-7; Form N-MFP, General Instruction
A.
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Most significantly, Form N-CR will alert Commission staff,
shareholders and other market observers about any reportable events on
Form N-CR
[[Page 47843]]
(including any financial support) on a near real-time basis.\1253\ In
particular, Form N-CR will enable the Commission and other market
observers to better monitor the entire fund industry, as they will be
able to locate on EDGAR all Form N-CR reports specific to any
particular time frame without having to search through the SAIs of all
the funds in the industry. We expect financial news services to be
among the market observers who will benefit from Form N-CR, which in
turn could then also alert investors about these important developments
more expeditiously.\1254\ Although any corresponding SAI disclosures
will also be available on EDGAR, because SAI filings contain many other
disclosures (including those unrelated to financial support or the
other reportable events on Form N-CR), it could take significant
amounts of time for the Commission and other market observers (such as
the aforementioned financial news services) to continually review all
SAI filings for any relevant alerts.\1255\ Similarly, we believe it
would be significantly more time-consuming, if not impractical, if the
Commission and other market observers had to continually check each
fund's Web site for any relevant updates.\1256\ We therefore believe
that the corresponding Web site and SAI disclosures alone would not
accomplish the primary goal of Form N-CR in alerting the Commission,
investors and other market observers about important events in a timely
and meaningful manner. Moreover, we note that certain Parts of Form N-
CR as amended today will require more extensive disclosures than either
the corresponding Web site or SAI disclosures,\1257\ which further
minimizes the degree to which there would have been any functionally
overlapping disclosures. Finally, Form N-CR filings will also provide a
permanent historical record of any financial support provided to the
entire money market fund industry, which will be accessible on EDGAR.
---------------------------------------------------------------------------
\1253\ With respect to the need of the Commission staff,
shareholders and other market observers to receive the alerts on
Form N-CR on a near real-time basis, cf. infra notes 1329-1333 and
the accompanying text for a discussion on the importance of the one
and four business day deadlines of Form N-CR.
\1254\ As noted in supra notes 1211 and 1213, with respect to
any portfolio defaults or fund share purchases under rule 17a-9, we
are eliminating the corresponding email notifications to the
Director of Investment Management or the Director's designee under
current rules 2a-7(c)(7)(iii)(A) and (B). Among other reasons, we
are replacing them with Form N-CR is because these email
notifications are currently not publicly available to investors and
other market observers.
\1255\ Even where a fund updates its registration statement with
equal promptness as Form N-CR, as noted by the commenter cited
below, it would still likely take the Commission and other market
observers extensive effort and time to continually review all SAI
filings for any relevant alerts. See Dreyfus Comment Letter (stating
that ``[w]hile the Commission may feel that Form N-CR will provide
the information on a more real-time basis, we expect registration
statements also will have to be updated with equal promptness with
these disclosures (via Rule 497 filings with the Commission).''). In
addition, as discussed below, we note that certain Parts of Form N-
CR as amended today will require more extensive disclosures than
either the corresponding Web site or SAI disclosures.
\1256\ Such Web site monitoring could be particularly burdensome
because the presentation of this information would likely be
different on each fund's Web site.
\1257\ For example, with respect to disclosure of any financial
support, funds will be required to disclose on their Web sites and
in their SAIs only that information that the fund is required to
report to the Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and
C.7 of Form N-CR. See supra notes 993 and 1137-1138 and accompanying
text. We also note that Parts E, F, and G of Form N-CR as amended
today will require more extensive disclosures than the rule 2a-7 and
Form N-1A provisions requiring funds to disclose certain information
about the imposition of fees or gates on the fund's Web site and in
the fund's SAI. See supra notes 960 and 1112 and accompanying text.
---------------------------------------------------------------------------
On the other hand, we believe that the consolidated discussion in
the SAI will be the most accessible format for disclosing historical
instances of sponsor support in the past 10 years, as it would be a
significant burden on the Commission, investors and other market
observers if they had to review various prior Form N-CR filings to
piece together a specific fund's history of sponsor support,\1258\ even
in light of the additional costs and burdens faced by funds in
providing these SAI disclosures.\1259\ We also believe that, to the
extent investors may not be familiar with researching filings on EDGAR,
including these disclosures in a fund's SAI (which investors may
receive in hard copy through the U.S. Postal Service or may access on a
fund's Web site, as well as accessing on EDGAR) may make this
information more readily available to these investors than disclosure
on other SEC forms that are solely accessible on EDGAR.
---------------------------------------------------------------------------
\1258\ Given that funds will be required to disclose historical
instances of sponsor support for the past 10 years, the
corresponding filings on Form N-CR will provide a permanent record
for any instances of financial support that occurred more than 10
years ago in a single place.
\1259\ We generally consider and estimate the costs and burdens
of the SAI disclosures in infra sections III.F.8 and IV.G.
---------------------------------------------------------------------------
Similarly, the Web site disclosures are intended to be more
accessible than Form N-CR for individual investors interested in
information about particular funds, in particular to the extent such
investors may not be familiar with researching filings on EDGAR.\1260\
Given that individual investors are typically most interested in
information about their own (or potential) investments and do not
necessarily monitor the entire fund industry, visiting the Web sites of
a few particular funds would likely not become overly time-consuming or
burdensome for these investors.\1261\
---------------------------------------------------------------------------
\1260\ See CFA Institute Comment Letter (``We particularly
endorse the proposed requirement that money market funds would have
to post on their Web sites much of the information required in Form
N-CR. While Form N-CR information is publicly available upon SEC
filing, investors will more readily find and make use of this
information if posted on a particular fund's Web site.'')
\1261\ We also generally consider and estimate the costs and
burdens of the related Web site disclosures in infra section III.F.8
as well as in infra section IV.A.6.
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4. Part D: Declines in Shadow Price
Part D of Form N-CR will, as proposed, require funds that transact
at a stable price to file a report when the fund's current NAV per
share deviates downward from its intended stable price (generally,
$1.00) by more than \1/4\ of 1 percent (i.e., generally below
$0.9975).\1262\ Today we are adopting Part D of Form N-CR largely as
proposed.\1263\ As we discussed in the
[[Page 47844]]
Proposing Release,\1264\ this requirement will 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 will help
increase money market funds' transparency and permit investors to
better understand money market funds' risks.\1265\ To better understand
the cause of such a decline in the fund's shadow price, we are also
requiring, largely as proposed, funds to provide the principal reason
or reasons\1266\ for the reduction, which would involve identifying the
particular securities or events that prompted the decline.\1267\ In a
change from the proposal, we are also requiring the disclosure of the
same identifying information included in other parts of the Form.\1268\
In particular, the final amendments to Item D.3 also now require funds
to report the name of the issuer, the title of the issue and at least
two identifiers, if available.\1269\ In particular, better
identification of the particular fund portfolio security or securities
that may have prompted a shadow price decline will facilitate the
staff's monitoring and analysis efforts, which we expect to help us
better understand the nature and extent of the shadow price decline,
the potential effect on the fund, potential contagion risk across funds
more broadly, as well as inform any action that may be required in
response to the risks posed by such an event. Fund shareholders and
potential investors will similarly benefit from the clear
identification of a fund portfolio security or securities that may have
prompted a shadow price decline when evaluating their
investments.\1270\
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\1262\ Form N-CR Part D. As stated in the introduction to Part
D, with some changes from the proposal, the disclosure requirement
under Part D is triggered ``[if] a retail money market fund's or a
government money market fund's current net asset value per share
deviates downward from its intended stable price per share by more
than \1/4\ of 1 percent [. . .].'' In turn, for each day the fund's
current NAV is below this threshold, Part D will require, with some
changes from the proposal, a fund to disclose the following
information: (i) The date or dates on which such downward deviation
exceeded \1/4\ of 1 percent; (ii) the extent of deviation between
the fund's current NAV per share and its intended stable price; and
(iii) the principal reason or reasons 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.
\1263\ See proposed (FNAV) Form N-CR Part D; proposed (Fees &
Gates) Form N-CR Part D. Under either main alternative, in the
Proposing Release we proposed Form N-CR to require an applicable
fund, if its current NAV (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, 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 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.
See Proposed (FNAV) Form N-CR Part D; Proposed (Fees & Gates) Form
N-CR Part D. In addition to the other change discussed in this
section, we are making various conforming and clarifying changes in
the final amendments to Part D. In the introduction to Part D, in a
conforming change to the other amendments we are adopting today, we
are now referring to retail and government money market funds
instead of just to ``Fund'' as proposed under the floating NAV
alternative or to funds ``subject to the exemption provisions of
rule 2a-7(c)(2) or rule 2a-7(c)(3)'' as proposed under the liquidity
fees and gates alternative). We are also pluralizing the ``principal
reason'' in Item D.3 to principal reason or reasons,'' as there may
be several successive or concurrent causes that resulted in a
reduction in the shadow NAV. Furthermore, as another conforming
change, we are inserting the word ``downward'' before ``deviation''
in Item D.1 to remove any doubt that only downward deviations need
to be reported, consistent with the introduction of Part D (which
already includes a reference to ``downward'').
\1264\ See Proposing Release, supra note 25, at text
accompanying n.714.
\1265\ See generally, supra section III.B.8.a (discussing the
potential benefits and costs of the requirement for a money market
fund to disclose its current NAV on its Web site).
\1266\ In a change from the Proposing Release, we are
pluralizing the ``principal reason'' in Item D.3, as there may be
several successive or concurrent causes that resulted in a reduction
in the shadow NAV.
\1267\ Form N-CR Item D.3. This item would not require
additional analysis or explanation of the principal reason or
reasons for the deviation, beyond identifying the particular
securities or events that prompted the deviation.
\1268\ See Form N-CR Item D.3 (requiring, for any such security,
disclosure of the name of the issuer, the title of the issue
(including coupon or yield, if applicable) and at least two
identifiers, if available); see Form N-CR Item B.1.
\1269\ These changes are similar to what we proposed and are
adopting with respect to Items C.1 to C.5 of Form N-MFP. See
Proposing Release, supra note 25, at nn.754-757 and accompanying
text; see supra section III.G.2.f. As under Form N-MFP and with
respect to Item B.1, we note that the requirement to include
multiple identifiers is only required if such identifiers are
actually available.
\1270\ With respect to our corresponding changes to Parts B and
C of Form N-CR, see also, supra notes 1209 and 1216 and the
accompanying discussions.
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Some commenters expressed concerns about the reporting of shadow
price declines on Form N-CR. For example, commenters argued that it
would be redundant and unduly burdensome in light of funds' concurrent
Web site disclosure of the shadow price.\1271\ However, as already
discussed with respect to the various concurrent disclosures of
financial support in section III.F.3 above, while we are sensitive to
commenters' concerns about duplication, we believe it appropriate given
the different audiences and uses for such information.\1272\
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\1271\ See Federated VIII Comment Letter (stating that ``so long
[a]s the current shadow price is publicly available, Federated does
not view such a deviation as a material event that necessitates a
separate reporting.''); Dreyfus Comment Letter.
\1272\ See discussion following supra notes 1248 and 1249 and
accompanying text.
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With respect to the particular deviation threshold of \1/4\ of 1
percent that we are adopting today as proposed, one commenter
considered this level of deviation to be arbitrary, ``as there are no
other implications under Rule 2a-7 for the money market fund if it has
a 25 basis point deviation.'' \1273\ However, as noted in the Proposing
Release,\1274\ we continue to 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). We note that we previously have similarly determined that a
\1/4\ of one percent decline in the shadow price from its intended
stable price is an appropriate threshold requiring money market funds
to report to us.\1275\ Moreover, if a Form N-CR filing were not
triggered until a higher threshold such as after a fall in the NAV that
would require the re-pricing of fund shares (such as 0.5%),\1276\ the
disclosures would come too late to meaningfully allow the Commission
and others to effectively monitor and respond to indicators of stress.
We also believe a threshold of \1/4\ of 1 percent strikes an
appropriate balance with respect to the frequency of filings, because
during periods of normal market activity we would expect relatively few
Form N-CR filings for this part of the form.\1277\ In fact, our staff
has analyzed Form N-MFP data from November 2010 to February 2014 and
found that only one fund had a \1/4\ of 1 percent deviation from the
stable $1.00 per share NAV, suggesting the burden to funds would be
minimal during normal market activity. We note that funds may also
provide additional context about the circumstances leading to the
shadow price decline in Part H of Form N-CR, discussed below.
---------------------------------------------------------------------------
\1273\ See Federated VIII Comment Letter.
\1274\ See Proposing Release, supra note 25, at n.715 and
accompanying text.
\1275\ See 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 NAV declines below 99.75% of its stable NAV).
\1276\ See Federated VIII Comment Letter (proposing a deviation
of 0.5% as the reporting trigger).
\1277\ Cf., e.g., State Street Comment Letter at Appendix A
(``During the September 2008 failure of Lehman Brothers Holdings, a
large number of money market funds had a \1/4\ of 1% or greater
deviation between the amortized-cost NAV and the market NAV. During
times of market stress similar to the 2008 crisis, our expectation
is that the percentages would be similar. However, during times of
normal market activity, our expectation is that [a \1/4\ of 1%] or
greater deviation between stable NAV and market NAV would be
infrequent.'')
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Another commenter suggested that disclosure of a deviation in the
NAV might result in an increase in pre-emptive run risk, as
shareholders could come to use these filings as a trigger for
redemptions.\1278\ Although we cannot predict individual shareholder
actions with certainty, as discussed previously, we believe that the
transparency provided by this information is important to the ability
of money market fund shareholders to understand and assess the risks of
their investments. Furthermore, while we acknowledge the possibility of
pre-emptive redemptions, some of the other reforms we are adopting
today (such as liquidity fees and redemption gates) will provide some
fund managers additional tools for managing such redemptions, if they
were to occur. We also note that some of our responses in section
III.A.1.c.i to concerns over pre-emptive run risk related to the
liquidity fees and gates requirement would similarly apply to run risk
concerns over the disclosure of a deviation in the NAV in Part D of
Form N-CR.\1279\ More generally, we
[[Page 47845]]
expect that Form N-CR could decrease, rather than increase, redemption
risk by heightening self-discipline at funds.\1280\
---------------------------------------------------------------------------
\1278\ See Federated VIII Comment Letter.
\1279\ For example, as discussed in further detail in section
III.A.1.c.i, we expect that the additional discretion we are
granting fund boards to impose a fee or gate at any time after the
fund's weekly liquid assets have fallen below the 30% required
minimum should substantially mitigate the risk of pre-emptive
redemptions. As discussed in supra note 171 and the accompanying
text, board discretion concerning when to impose a fee or gate may
reduce shareholder incentive to pre-emptively redeem shares, because
shareholders will be less able to accurately predict specifically
when, and under what circumstances, fees and gates will be imposed.
See Wells Fargo Comment Letter; see also Proposing Release, supra
note 25, at n.362. For similar reasons, we believe that it is less
likely that investors would use these filings under Part D of Form
N-CR as a trigger for redemptions in the first place.
\1280\ See American Bankers Ass'n Comment Letter (noting that
certain disclosures including Form N-CR ``would exert a discipline
on fund advisers to manage assets so conservatively as to avoid
raising concerns among investors about the credit quality of fund
investments that could lead to heavy redemptions.''). See also,
infra note 1346-1350 and the accompanying text for our additional
discussion of concerns over widespread redemption risk as a result
of Form N-CR.
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5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees and
Gates
Today we are adopting a requirement that a money market fund file a
report on Form N-CR when a fund imposes or lifts a liquidity fee or
redemption gate, or if a fund does not impose a liquidity fee despite
passing certain liquidity thresholds.\1281\ As discussed in more detail
below, we are making some changes from what we proposed.\1282\ This
report, as adopted, will require a description of the primary
considerations the board took into account in taking the action
(modified from the proposal and discussed below), as well as certain
additional basic information, such as the date when the fee or gate was
imposed or lifted, the fund's liquidity levels, and the size of the
fee.\1283\ Except for the change to the requirement to describe the
primary considerations the board took into account in taking the
action, the other changes to Parts E, F and G generally derive from the
amendments to the liquidity fees and gates requirements that are being
adopted today and are designed to conform these Parts of Form N-CR to
those operative requirements. These changes are discussed below.\1284\
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\1281\ See Form N-CR Parts E, F, and G.
\1282\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G.
In particular, in the Proposing Release, if, at the end of a
business day, a fund (except any government money market fund that
has chosen to rely on the proposed (Fees & Gates) rule 2a-7
exemption) has invested less than 15% of its total assets in weekly
liquid assets, we proposed to require the fund to disclose the
following information: (i) The initial 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
interests of the fund. Proposed Part E further included instructions
that a fund must file a report on Form N-CR responding to items (i)
and (ii) above 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, and that a fund must amend its
initial report on Form N-CR to respond to items (iii) and (iv) above
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. See proposed (Fees & Gates) Form N-CR Part E.
Similarly, a fund (except any government money market fund that
has chosen to rely on the proposed (Fees & Gates) rule 2a-7
exemption) that has invested less than 15% of its total assets in
weekly liquid assets (as provided in proposed (Fees & Gates) rule
2a-7(c)(2)) suspends the fund's redemptions pursuant to rule 2a-
7(c)(2)(ii), we proposed that the fund disclose the following
information: (i) The initial 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 Part F further
included instructions providing that a fund must file a report on
Form N-CR responding to items (i) and (ii) above on the first
business day after the initial date on which the fund suspends
redemptions, and that a fund must amend its initial report on Form
N-CR to respond to items (iii) and (iv) by the fourth business day
after the initial date on which the fund suspends redemptions. See
proposed (Fees & Gates) Form N-CR Part F.
Finally, if a fund (except any government money market fund
that has chosen to rely on the proposed (Fees & Gates) rule 2a-7
exemption) that has imposed a liquidity fee and/or suspended the
fund's redemptions pursuant to proposed (Fees & Gates) rule 2a-
7(c)(2) determines to remove such fee and/or resume fund
redemptions, we proposed to require funds to disclose, as
applicable, the date on which the fund removed the liquidity fee
and/or resumed fund redemptions. See proposed (Fees & Gates) Form N-
CR Part G.
\1283\ See Form N-CR Parts E, F, and G. We note that a fund
would file a new Part E filing of Form N-CR if it were to change the
size of its liquidity fee after its initial imposition. Observers
will also be able to determine the duration of any gate by comparing
initial filings of Part F (suspension of redemptions) with filings
of Part G (lifting of such suspensions).
\1284\ Also see infra note 1313 for a discussion of our related
conforming changes and clarification to Form N-CR.
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As we noted in the Proposing Release, we believe that the items
required to be disclosed are necessary for investors and us better to
understand the circumstances leading to the imposition or removal of a
liquidity fee or redemption gate, or the decision not to impose one
despite a reduction in liquidity.\1285\ We believe such a better
understanding will in turn enhance the Commission's oversight of the
fund and regulation of money market funds generally,\1286\ and could
inform investors' decisions to purchase shares of the fund or remain
invested in the fund.\1287\
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\1285\ See Proposing Release, supra note 25, at text following
n.719.
\1286\ For example, by knowing the reason(s) for why a board
imposed a liquidity fee or gate, we expect to be able to better
understand the potential cause(s) that led to a fund experiencing
stress, which could inform our determination as to whether further
regulatory or other action on our part is warranted.
\1287\ Government money market funds which are not subject to
our fees and gates requirements and which have not opted to apply
them are exempt from the reporting requirements of parts E, F, and G
of Form N-CR.
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a. Board Disclosures
A number of commenters objected to the proposed requirement that
funds provide a ``short discussion of the board of director's analysis
supporting its decision'' \1288\ whether or not to impose liquidity
fees or when imposing redemption gates.\1289\ Many of these commenters
raised concerns that the disclosures might chill deliberations among
board members, hinder board confidentiality and encourage opportunistic
litigation.\1290\ More generally, commenters also challenged the
materiality or usefulness of the board disclosures to investors.\1291\
For example, one commenter stated that although ``whether the fund is
imposing a liquidity fee or suspending redemptions'' would be material,
the board's underlying analysis would not be.\1292\ Some commenters
also expressed concern that such disclosure would set a precedent for
board disclosures in other contexts.\1293\
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\1288\ See proposed (Fees & Gates) Form N-CR Item E.4 and Item
F.4.
\1289\ See, e.g., Dreyfus Comment Letter; Legg Mason & Western
Asset Comment Letter; MFDF Comment Letter; NYC Bar Committee Comment
Letter; SIFMA Comment Letter.
\1290\ See, e.g., Dreyfus Comment Letter (noting that ``[t]his
analysis will implicate significant amounts of confidential
information, including the identity of shareholders and future
expectations about investment flows.''); NYC Bar Committee Comment
Letter (noting that this ``disclosure would subsequently be reviewed
with the benefit of hindsight and could be used against the board
and the fund in the sort of opportunistic litigation that follows
any financial crisis.''); Legg Mason & Western Asset Comment Letter;
MFDF Comment Letter; Stradley Ronon Comment Letter. In addition, one
commenter stated that ``[o]utside of the advisory contract approval
process, for which there is a statutory basis under Section 15(c) of
the 1940 Act, the Commission has respected the confidentiality of
board deliberations and findings that are recorded in board
minutes.'' See Dreyfus Comment Letter.
\1291\ See, e.g., Legg Mason & Western Asset Comment Letter; NYC
Bar Committee Comment Letter; Stradley Ronon Comment Letter; SIFMA
Comment Letter.
\1292\ See Legg Mason & Western Asset Comment Letter.
\1293\ See, e.g., SIFMA Comment Letter (stating that ``a
requirement to disclose the board's analysis that is otherwise
memorialized in fund minutes is unique, outside of advisory contract
approval. We oppose setting a precedent that could imply that board
analysis must be publicly disclosed for each important decision made
for a fund.''); MFDF Comment Letter; Dreyfus Comment Letter.
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[[Page 47846]]
We appreciate these concerns, but we believe that the imposition of
a fee or gate is likely to be a very significant event for a money
market fund \1294\ and information about why it was imposed may prove
pivotal to shareholders, many of whom may be evaluating their
investment decision in the money market fund at that time.\1295\
Accordingly, as discussed in the Proposing Release, we continue to
believe that shareholders have a strong interest in understanding why a
board determined to impose (or not to impose) a liquidity fee or
gate.\1296\ For example, this information may enable investors to
better understand the events that are affecting and potentially causing
stress to the fund.\1297\ This information may also permit investors to
confirm that the board is, as our rule requires, acting in the best
interests of the fund.\1298\ And given that under our final rules a
board can impose a fee or gate as soon as the fund's weekly liquid
assets fall below the 30% regulatory minimum (and thus different boards
may impose fees or gates at different times), investors' interest in
understanding the board's reasoning is likely to be even more
important.\1299\ For these reasons, we believe this disclosure will
convey material information to those investors who are considering
whether to redeem their shares in response to a fee or gate.
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\1294\ Our conclusion that the imposition of a fee or gate may
often be a significant event for a money market fund is supported by
the view of many commenters that the imposition of a fee or gate
could have significant implications for a fund that takes this step
and that investors may engage in heavy redemptions after a fee is
imposed or a gate is lifted. See, e.g., supra notes 189 and 190 and
accompanying text.
\1295\ We note that disclosure of board reasoning is not
uncommon in context where shareholders may be evaluating their
investment decision, such as when a fund engages in a merger or
acquisition. In those circumstances, a fund board usually provides a
recommendation to shareholders and the reasons for their
recommendation. C.f., e.g., Independent Directors Council, Board
Consideration of Fund Mergers, (June 2006), available at http://www.idc.org/pdf/ppr_idc_fund_mergers.pdf (``Directors typically
explain the reasons for their decision to recommend that
shareholders approve a merger in the fund's proxy statement.''). We
note that mergers and acquisitions can also be the subject of
litigation and nevertheless board disclosure of their primary
reasons for their recommendation is commonplace.
\1296\ See Proposing Release, supra note 25, at section III.G.2.
\1297\ Cf., e.g., MFDF Comment Letter (acknowledging that
``[d]epending on the situation, fund investors may well have an
interest in better understanding the circumstances that led to the
imposition of redemption fees or gates.'').
\1298\ See, e.g., ABA Business Law Section Comment Letter (with
respect to the liquidity fees and gates proposal, stating that the
``Commission would assign the money market fund's board of directors
substantial new responsibilities over `life and death' decisions in
the event of a run on the fund.'').
\1299\ See supra section III.A.1.b.iii.
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With respect to concerns that the board disclosures set a precedent
implying that the reasoning underlying every other important decision
taken by the board should be similarly disclosed,\1300\ we disagree. As
discussed in section II.A, ready access to liquidity is one of the
hallmarks that has made money market funds popular cash management
vehicles for both retail and institutional investors. Because liquidity
fees and redemption gates could affect this core feature by potentially
limiting the redeemability of money market fund shares under certain
conditions,\1301\ we believe the decision whether to impose those
measures is sufficiently different in kind from most other significant
decisions a board could make that the disclosures required by the rule
would not be a precedent for broadly requiring the disclosure of
boards' rationales in other contexts.
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\1300\ See discussion of SIFMA Comment Letter at supra note
1293.
\1301\ See supra section III.A.1.b.iii. See also supra notes
196-199 and the accompanying text for a discussion of commenters'
concerns of the potentially detrimental effects of a liquidity fee
or gate.
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In addition, we have amended this disclosure requirement to address
some of the commenters' concerns, while still eliciting useful
information for the Commission and investors. More specifically, we are
revising Form N-CR to require disclosure of a brief discussion of the
``primary considerations or factors taken in account by the board of
directors in its decision'' to impose or not impose a liquidity fee or
gate.\1302\ One commenter suggested we make a similar change, requiring
disclosure of ``a list of material factors considered by the board in
making its determination.'' \1303\ Rather than just a list of material
factors, however, we believe it important that funds provide a more
substantive, but brief, discussion of the primary considerations or
factors taken in account by the board, so that our staff and investors
better understand why the board determined they were important. This
report would not need to include every factor considered by the board,
only the most important or primary ones that shaped the determination
of the board's action. This should help alleviate commenters' concerns
that funds would need to provide lists of all possible factors or
dissect a board's internal deliberations. Instead, we would expect only
a description of the primary considerations or factors leading to the
action taken by the board, and a brief discussion of each.
---------------------------------------------------------------------------
\1302\ See Form N-CR Part E.6 and Part F.4.
\1303\ See NYC Bar Committee Comment Letter.
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That said, we caution that in preparing these board disclosures,
funds should avoid ``boilerplate'' summaries of all possible factors in
addition to or in lieu of a more substantive narrative.\1304\ Instead,
filers generally should provide information that is tailored to their
fund's particular situation and the context in which their board's
decision was made. In preparing these filings, funds should consider
discussing present circumstances as well as any potential future risks
and contingencies to the extent the board took them into account. We
also note that we provided a non-exhaustive list of possible factors
that a board may have considered in imposing a liquidity fee or gate in
section III.A.2.b above.\1305\
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\1304\ Cf., e.g., SIFMA Comment Letter (stating that the
discussion of the board's analysis ``will likely be tailored to
preempt shareholder plaintiffs' counsel who might target boards for
liability in connection with their decisions.'' which ``. . . may
encourage lengthy, but not necessarily useful, disclosure.'').
\1305\ See supra section III.A.2.b.
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Another commenter argued that the board disclosures themselves
might incite widespread redemptions, particularly where the board
considered but chose not to impose a liquidity fee.\1306\ As discussed
in section III.A.1.c above, we acknowledge the possibility that the
prospect of a liquidity fee or gate may cause pre-emptive redemptions,
but we believe that several aspects of our final reforms both make pre-
emptive runs less likely and substantially mitigate their broader
effects if they occur. In addition, we believe disclosure of a board's
reasoning is particularly important in times of stress in order to
mitigate against investor flight to transparency that might otherwise
occur.\1307\
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\1306\ See Federated V Comment Letter. But cf., e.g., American
Bankers Ass'n Comment Letter (arguing that the disclosures of Form
N-CR more generally will decrease redemption risk by heightening
self-discipline at funds).
\1307\ Moreover, with respect to a fund whose weekly liquid
assets have dropped below 10%, we might be concerned that such a
fund may imminently become unable to meet redemptions. Such a
relative lack of liquidity at one fund could also be an indicator of
larger effects that might spread to other funds. Either scenario may
raise concerns that further action by the Commission is warranted.
However, if the particular fund's board waived the liquidity fee,
the related disclosure thereof (e.g., because the drop in liquidity
is temporary and only related to the particular fund) could inform
our determination that no further action by the Commission would be
required.
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Finally, we received comments discussing concerns about potentially
[[Page 47847]]
duplicative disclosures, in particular the possible redundancy of the
board disclosures on a fund's Web site as well as Form N-CR.\1308\
However, as already discussed with respect to the various concurrent
disclosures of financial support in section III.F.3 above, while we are
sensitive to commenters' concerns about duplication, we believe it
appropriate given the different audiences and uses for such
information.\1309\
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\1308\ See Dreyfus Comment Letter. See also, generally, SIFMA
Comment Letter (noting that the ``fund's actions and the triggering
event for the Form N-CR filing may require prospectus disclosure or
notification to the Commission under other rule provisions, so that
in many cases the Form N-CR filing will be duplicative of existing
disclosure and notice requirements.'').
\1309\ See discussion following supra notes 1248 and 1249 and
accompanying text.
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b. Conforming and Related Changes
As discussed earlier, the final amendments lower the weekly liquid
asset threshold for triggering the default liquidity fee from 15% to
10% of total assets, and accordingly, we are making corresponding
changes that would require reporting under Form N-CR at the lower
weekly liquid asset threshold.\1310\ In addition, in a change from the
proposal, the final amendments permit money market fund boards to
institute a liquidity fee or impose a gate at any time once weekly
liquid assets fall below 30% if they find that doing so is in the best
interests of the fund.\1311\ We are therefore amending Form N-CR to
reflect these changes.\1312\ We are making certain additional changes
to Form N-CR for clarity and to be consistent with our final amendments
to the liquidity fees and gates requirement.\1313\ Accordingly, under
the revised reporting standard, Parts E and/or F of Form N-CR must be
filed: (i) When a fund, at the end of a business day, has invested less
than 10% of its portfolio in weekly liquid assets and is required to
impose a liquidity fee (unless the board determines otherwise), or (ii)
when a fund voluntarily imposes a liquidity fee or redemption gate any
time it has invested less than 30% of its portfolio in weekly liquid
assets.\1314\
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\1310\ See supra section III.A.2.a.ii; see also, Form N-CR Part
E, (where applicable, now referencing 10% instead of 15% of weekly
liquid assets).
\1311\ See supra section III.A.2.
\1312\ See Form N-CR Parts E and F.
\1313\ In particular, for clarity, in the introduction to Part E
we now define any affected fund as ``a fund (except a government
money market fund that is relying on the exemption in rule 2a-
7(c)(2)(iii))'' as opposed to ``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'' as proposed. See proposed (Fees & Gates) Form N-CR Part
E, Introduction. Similarly, for clarity and because of fund's
additional flexibility under our final amendments to the liquidity
fees and gates requirement, in the introduction to Part F we now
simply refer to ``fund'' as opposed to ``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)).''
In addition, we received no comments on Part G of Form N-CR
(requiring reporting when a liquidity fee or redemption gate is
removed) and are adopting it unchanged from the proposal. See Form
N-CR Part G. However, in the Proposing Release, the introduction to
Part G contained a parenthesis specifying that certain exempt funds
are not subject to Part G. See proposed (FNAV) Form N-CR Part G;
proposed (Fees & Gates) Form N-CR Part G. Because we no longer
consider this parenthesis to be necessary, we have deleted it in the
final amendments to enhance the clarity of the instructions of Part
G.
\1314\ See Form N-CR Part E, clauses (i) and (ii) of the
Introduction (generally triggering disclosure under Part E of Form
N-CR if a non-exempt fund (i) at the end of a business day, has
invested less than 10% of its total assets in weekly liquid assets,
or (ii) has invested less than 30% of its total assets in weekly
liquid assets and imposes a liquidity fee pursuant to rule 2a-7(c).
Correspondingly, we are also adding ``if applicable'' to Item E.1
(requiring disclosure of the initial date on which the fund invested
less than 10% of its total assets in weekly liquid assets, if
applicable), and amending Item E.5 (requiring a brief description of
the facts and circumstances leading to the fund's investing in the
amount of weekly liquid assets reported in Item E.3). See Form N-CR
Items E.1, E.3 and E.5.
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In addition, revised Form N-CR includes a new requirement that
funds report their level of weekly liquid assets at the time of the
imposition of fees or gates.\1315\ We believe this new requirement will
allow the Commission and investors to better track and understand
funds' liquidity levels when boards impose a fee or gate using their
discretion, which we expect will enhance the Commission's and
investors' ability to evaluate the extent to which a fund is
experiencing stress as well as the context in which the board made its
decision. Similarly, because we are revising the default liquidity fee
from the proposed 2% to 1%, and thus we expect that there may be
instances where liquidity fees are above or below the default fee
(rather than just lower as permitted under the proposal), we are
requiring that funds disclose the size of the liquidity fee, if one is
imposed.\1316\ In particular, we expect the particular size of the
liquidity fee to be highly relevant to an investor determining whether
to redeem fund shares, as it has a direct impact on the particular
costs that such a shareholder would have to bear for redeeming fund
shares. These changes are closely tailored to our final amendments to
the liquidity fees and gate requirement, which we expect will enhance
the quality and usefulness of Form N-CR to the Commission and
investors.
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\1315\ Form N-CR Items E.3 and F.1. In the Proposing Release we
did not explicitly require funds to disclose their size of weekly
liquid assets at the time of the imposition of fees or gates, given
that as proposed funds could only impose a fee or gate once they
crossed the 15% weekly liquid asset threshold. Proposed (Fees &
Gates) Form N-CR Parts E and F. Item F.1 as originally proposed
required disclosure of the initial date on which the fund invested
less than 15% in weekly liquid assets. See proposed (Fees and Gates)
Form N-CR Item F.1. Today we are not requiring an analogous
disclosure of the initial date on which the fund invested less than
10% in weekly liquid assets, because this threshold does not have
any impact on the imposition of a gate and, in any event, would be
disclosed in Item E.1.
\1316\ See Form N-CR Item E.4.
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6. Part H: Optional Disclosure
We are also adopting a new Part H in Form N-CR which allows money
market funds the option to discuss any other events or information that
they may wish to disclose. We intend new Part H to clarify and expand
the scope and range of formats of any additional information that a
fund may wish to provide. In particular, we are adopting Part H to
address commenter concerns that the information provided in the other
parts of Form N-CR may become outdated or lack context.\1317\ We
believe that this new optional disclosure could address some of these
concerns.
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\1317\ For example, one commenter cautioned ``in a rapidly
changing environment, the reasons for which the board acted may well
change within a period of four days or significant amounts of
additional information may be available to the fund and its board.
In this context, a filing requirement focused on a prior decision
risks inadvertently misleading fund investors and others about the
state of the fund's operations.'' See MFDF Comment Letter.
---------------------------------------------------------------------------
This optional disclosure is intended to provide money market funds
with additional flexibility to discuss any other information not
required by Form N-CR, or to supplement and clarify other required
disclosures.\1318\ This optional disclosure does not impose on money
market funds any affirmative obligation. Rather, this is solely
intended as a discretionary forum where funds, if they so choose, can
disclose any other information they deem helpful or relevant. In
addition, although we expect that funds would typically file Part H
along with a filing under another part of Form N-CR, we are not
imposing any particular deadline for these filings, and thus a fund may
file an optional disclosure on Part H of Form N-CR at any time.
---------------------------------------------------------------------------
\1318\ See Form N-CR Item H.1, Instructions.
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7. Timing of Form N-CR
We are requiring initial filings of Form N-CR to be submitted
within one business day of the triggering event, and in some cases,
requiring a follow-up
[[Page 47848]]
amendment with additional detail to be submitted four days after the
event with some modifications from the proposal. A number of commenters
requested additional time for Form N-CR filings, expressing concern
over the timing requirements for specific items of Form N-CR,\1319\ as
well as objecting to the timing requirements more generally.\1320\ For
example, one commenter recommended that the filing deadline for the
initial filing be extended from one to three business days and the
follow-up filing from four to seven business days.\1321\ Commenters
argued that providing additional time would permit funds to ensure that
filings are prepared accurately and thoughtfully \1322\ while also
better enabling fund personnel to prioritize other exigent matters
during times of crisis.\1323\ They also argued that it may not be
feasible or may be extremely costly for a fund in times of crisis to
formulate within one business day the actions it may take in response
to an event of default and prepare a corresponding description, as
required under the proposal.\1324\ We are not changing the filing
deadlines of Form N-CR. The Commission and shareholders have a
significant interest in knowing about the events reported on Form N-CR
as soon as possible, to be able to effectively monitor events and to
respond as necessary. We believe the longer reporting periods or
entirely alternative reporting format (such as periodic reports, which
might not be filed until significantly later) as proposed by commenters
would frustrate the intent of Form N-CR in alerting the Commission,
investors and other market observers about such important events in a
timely and meaningful manner.
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\1319\ See, e.g., Fidelity Comment Letter, Schwab Comment
Letter.
\1320\ Commenters proposed a range of alternative deadlines.
See, e.g., SSGA Comment Letter (generally extend time frame),
Dechert Comment Letter (extend one-day filing deadline from 5:30pm
to 10pm on the next business day), Schwab Comment Letter (four
business days for filings related to a default or insolvency under
Part B of Form N-CR), Dreyfus Comment Letter (2-3 day time frame),
Stradley Ronon Comment Letter (seven business days for certain
items), SIFMA Comment Letter (three and seven business days
respectively for the initial and follow-up filings), IDC Comment
Letter (two weeks for the second filing). Others proposed moving
parts of Form N-CR to other annual or periodic reports altogether.
See, e.g., MFDF Comment Letter (move the discussion of the
circumstances that led to a fee or gate to a new annual management
discussion of fund performance.), NYC Bar Committee Comment Letter
(proposing to revise and move the discussion of the board's analysis
to the report to shareholders covering the relevant period).
\1321\ SIFMA Comment Letter.
\1322\ See, e.g., SIFMA Comment Letter; IDC Comment Letter, SSGA
Comment Letter, Stradley Ronon Comment Letter, MFDF Comment Letter.
\1323\ See SIFMA Comment Letter. See also, e.g., Dreyfus Comment
Letter.
\1324\ See, e.g., Schwab Comment Letter (noting that ``[s]ome of
the requested information can be provided in one business day, such
as the securities affected, the date or dates on which the default
or event of insolvency occurred, the value of the affected
securities, and the percentage of the fund's total assets
represented by the affected security. But we believe it is
unreasonable to require a fund's board to determine in a single day
what actions it should take in response to the event.''). Commenters
also noted that it may be extremely costly to provide some of the
reported information in a single business day. See, e.g., Fidelity
Comment Letter (stating that ``[i]t would be difficult for MMFs to
produce validated data ready for public dissemination within one
business day . . . . Further, providing data within a short
timeframe would come at an estimated cost of $300,000-$500,000 [. .
.].'').
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We appreciate commenters' concerns, however, and to help ease the
filing burden we are revising Form N-CR to move certain disclosures in
Items B, C and D that may take longer to prepare from the initial
filing due within a single day to the follow-up filing due in four
business days.\1325\ In particular, the items moved to the follow-up
filing are the description of actions the fund plans to take, or has
taken, in response to a default (Item B.5), the explanation for the
reasons and terms of any financial support provided (Item C.8), the
term of any financial support provided (Item C.9), the brief
description of any contractual restrictions relating to any financial
support (Item C.10), and the principal reason or reasons for a decline
in a fund's shadow price (Item D.3).\1326\ We appreciate commenters'
concerns that disclosures such as these may take additional time to
prepare.\1327\ We believe these specific disclosure items may be more
labor intensive and take longer to prepare because they generally
solicit qualitative and analytical information, whereas the other items
in Parts B through D generally focus more on initially alerting the
Commission and shareholders about a particular event and other key
quantitative data.\1328\
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\1325\ In particular, filers are required to respond to Items
B.5, C.8, C.9, C.10, and D.3 in an amendment to the initial report
within four business days. All other Items in Parts B, C, and D must
be disclosed in the initial report within one business day. We have
made corresponding changes to the instructions to the form. See Form
N-CR Part B, C, D, Instructions. In addition, we have rearranged
what used to be proposed Item C.4 in the Proposing Release to be new
Item C.8 in order to better streamline the disclosures required to
be filed within one business day (Items C.1 through C.7) versus four
business days (Items C.8 through C.10). See Proposing Release,
proposed (Fees & Gates) Form N-CR Item C.4, Form N-CR Item C.8.
\1326\ See Fidelity Comment Letter (suggesting ``that the SEC
simplify the filing requirements for the first business day
following the event to focus on shareholder notification of the
event and key quantitative data,'' while ``providing the remaining
qualitative information (proposed Form N-CR Item B.5, C.4, C.9,
C.10, D.3, E.3, E.4, F.3, F.4) on the second filing.''
\1327\ See supra note 1324.
\1328\ Cf. Fidelity Comment Letter.
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Reducing the number of items included in the initial filing and
moving the more time consuming and complicated disclosures to a second
filing is designed to help address commenters' concerns about the one-
day deadline of the initial filing,\1329\ while still ensuring that the
Commission, shareholders and other market observers are provided with
these critical alerts as quickly as possible. We expect the information
filed on the initial report will be sufficient to alert the Commission,
investors and other interested parties about certain significant
events. While important, we also believe that the Items we are moving
to the follow-up filing of Form N-CR may be of less immediate concern
to the Commission and shareholders.
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\1329\ See, e.g., SIFMA Comment Letter, SSGA Comment Letter,
Dreyfus Comment Letter.
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We are not, however, generally changing the one-day deadline of the
initial filing,\1330\ nor are we extending the four-day deadline for
the follow-up filing of Form N-CR.\1331\ We are concerned that
extending the initial filing deadline beyond one business day could
substantially diminish the informational utility of Form N-CR. The
Commission and shareholders have a significant interest in knowing
about the events reported on Form N-CR as soon as possible, to
effectively monitor events and respond as necessary. We need this
information to be reported promptly to effectively monitor money market
funds that have come under stress and respond as necessary. A longer
reporting period would frustrate the intent of Form N-CR in alerting
the Commission, investors and other market observers about such
important events in a timely and meaningful manner.\1332\
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\1330\ We have, however, revised the instructions on timing of
the one-day deadline of the initial filing in each of Parts B
through F to conform them to the wording used in the instruction on
timing generally in General Instruction A. See Form N-CR Part B, C,
D, E, F, Instructions.
\1331\ We proposed to allow the discussion of the boards'
analysis related to imposing fees or gates be included in the
follow-up filing, and we are adopting that requirement as proposed,
as modified by the amendments to the board reporting discussed
above. See supra section III.F.5 (Board Disclosures); Form N-CR Item
E.5, E.6, F.3, F.4.
\1332\ For example, if funds were permitted three business days
to prepare an initial filing, a fund that experienced a portfolio
security default on a Friday would not be required to make an
initial filing under Part B of Form N-CR until just before the close
of business the following Wednesday. Depending on the circumstances,
such a delay could prevent investors from taking into account this
disclosure when making an investment decision until the next morning
on Thursday (such as with respect to potential investors evaluating
whether to purchase fund shares). Similarly, such a long delay would
hinder our ability to effectively monitor money market funds that
have come under stress and respond as necessary (in particular in
light of our elimination of rule 2a-7(c)(7)(iii)(A), which currently
requires money market funds to report defaults or events of
insolvency to the Commission by email. See supra note 1211).
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[[Page 47849]]
We also remain unpersuaded that the benefits of extending the
follow-up filing beyond four business days is justified in light of the
corresponding reduction in the utility of the information reported on
Form N-CR to the Commission, shareholders and other market observers.
Extending the follow-up filing deadline could lead to a prolonged lack
of material information about the triggering event. Such a delay could
hinder investors' ability to evaluate their investments and undermine
investor confidence.\1333\ Furthermore, it could frustrate the
Commission's ability to effectively monitor and take any appropriate
response with respect to money market funds that have come under
stress.\1334\
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\1333\ For example, a prolonged lack of material information may
undermine investors' expectations that they are making investment
decisions in a transparent market, which may lead to increased
market volatility in affected money market funds as a result of the
relative lack of accurate and timely information.
\1334\ For example, the Commission has a strong interest in
knowing why a fund imposed a fee or gate. Depending on whether the
reasons for such a gate were unique to the particular fund or
related to broader market events, further action on the part of the
Commission may be required to protect other investors and markets.
Accordingly, given that the Commission generally needs this
information as quickly as possible, we do not think the marginal
benefits to funds of extending the deadline beyond what we believe
to be reasonably required to prepare a follow-up filing is
justified.
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Because we expect that the information required to be provided in
follow-up reports on Form N-CR should be readily accessible, we
continue to believe four business days should be a sufficient amount of
time for funds to prepare the report, even in light of the likely
competing priorities on fund personnel during times of stress. We also
recognize that some of the preparatory burdens faced by fund personnel
could (and likely will) \1335\ be shifted to legal counsel to the
extent a fund chooses to engage legal counsel to assist in the drafting
of a Form N-CR filing. Accordingly, we are adopting a deadline of one
business day for an initial report and four business days for a follow-
up report under Form N-CR.\1336\
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\1335\ See infra discussion containing note 1376.
\1336\ See Form N-CR General Instruction, A; Form N-CR Part B,
C, D, E, F, Instructions which specify that responses to Items B.5,
C.8, C.9, C.10, D.3, E.5, E.6, F.3 and F.4 may be filed within four
business days.
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8. Economic Analysis
As discussed above and in our proposal,\1337\ we believe that the
Form N-CR reporting requirements will provide important transparency to
investors and the Commission, and also should 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 will 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 in this format and with this timing because
it will 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 will give
investors and the Commission a greater understanding of the
circumstances leading to stress events, and how a fund manages them. We
believe that investors may find this information to be meaningful in
determining whether to purchase fund shares or remain invested in a
fund.
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\1337\ See Proposing Release, supra note 25, at section III.G.3.
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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.\1338\ For example, as discussed
with respect to timing in section III.F.7 above, commenters argued that
providing additional time would permit funds to ensure that filings are
prepared accurately and thoughtfully \1339\ while also better enabling
fund personnel to prioritize other exigent matters during times of
crisis.\1340\ They also argued that it may not be feasible or may be
extremely costly for a fund in times of crisis to formulate within one
business day the actions it may take in response to an event of default
and prepare a corresponding description, as required under the
proposal.\1341\ As discussed in section III.F.7 above, to help ease the
filing burden we have revised Form N-CR to move certain disclosures
that may take longer to prepare from the initial filing due within one
day to the follow-up filing due in four business days. We therefore
believe that the final deadlines adopted today for Form N-CR balance
the exigency of the report with the time and cost it will reasonably
take a fund to compile the required information.
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\1338\ Various commenters expressed concern that preparing Form
N-CR would likely compete with other priorities that fund personnel
would be handling during a crisis. See, e.g., SIFMA Comment Letter,
Dreyfus Comment Letter.
\1339\ See, e.g., SIFMA Comment Letter; IDC Comment Letter, SSGA
Comment Letter, Stradley Ronon Comment Letter, MFDF Comment Letter.
\1340\ See SIFMA Comment Letter. See also, e.g., Dreyfus Comment
Letter.
\1341\ See, e.g., Schwab Comment Letter (noting that ``[s]ome of
the requested information can be provided in one business day, such
as the securities affected, the date or dates on which the default
or event of insolvency occurred, the value of the affected
securities, and the percentage of the fund's total assets
represented by the affected security. But we believe it is
unreasonable to require a fund's board to determine in a single day
what actions it should take in response to the event.''). Commenters
also noted that it may be extremely costly to provide some of the
reported information in a single business day. See, e.g., Fidelity
Comment Letter (stating that ``[i]t would be difficult for MMFs to
produce validated data ready for public dissemination within one
business day . . . . Further, providing data within a short
timeframe would come at an estimated cost of $300,000-$500,000 [. .
.].'').
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We believe that the proposed Form N-CR reporting requirements may
complement the benefits of increased 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 DERA Study noted 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 60-day lag).\1342\ The DERA Study
also noted that this ``increased transparency, even if reported on a
delayed basis, might affect 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.'' \1343\
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
[[Page 47850]]
studies and analyses of money market fund operations and risks.\1344\
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\1342\ See DERA Study, supra note 24, at 31; see also, infra
note 1441 and accompanying text (discussing the elimination of the
60-day delay in making Form N-MFP information publicly available).
\1343\ See DERA Study, supra note 24, at 38.
\1344\ See Money Market Mutual Funds, Risk, and Financial
Stability in the Wake of the 2010 Reforms, 19 ICI Research
Perspective No. 1 (Jan. 2013), at note 29 (noting that certain
portfolio-related data points are often only available from the
SEC's Form N-MFP report).
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The Form N-CR reporting requirement should enhance our
understanding of the money market fund industry that the Commission has
gained from analyzing Form N-MFP data by providing complementary data
and additional transparency about money market funds' risks on a near
real-time basis that is not currently available on Form N-MFP. This
requirement may, like Form N-MFP disclosure, help impose market
discipline on portfolio managers \1345\ and provide additional data
that would allow investors to make investment decisions, and allow the
Commission and the money market fund industry to conduct risk- and
operations-related analyses.
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\1345\ See American Bankers Ass'n Comment Letter (for example,
stating that ``[k]nowing that any form of sponsor support would be
required to be disclosed within 24 hours, fund managers would likely
do everything they could to avoid needing sponsor support.'').
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We believe that the reporting requirements we are adopting today
may positively affect regulatory efficiency because all money market
funds would be required to file information about certain material
events on a standardized form. This will improve the consistency of
information disclosure and reporting, and assist the Commission in
overseeing individual funds, and the money market fund industry
generally, more effectively. The requirements also could positively
affect informational efficiency. This should assist investors in
understanding various risks associated with certain funds, and risks
associated with the money market fund industry generally, which in turn
should assist investors in choosing whether to purchase or redeem
shares of certain funds. Currently, funds compete on information
provided on a fund's Web site and Form N-MFP, as well as on more
traditional competitive factors such as price and yield. Implicitly,
investors have also relied on sponsors to step in and support a fund
when there is an adverse event. However, as we observed with the
Reserve Primary Fund, this does not always happen. As such, the
requirements should positively affect competition because funds may
compete with each other based on information required to be disclosed
on Form N-CR. For instance, investors might view a fund that invests in
securities whose issuers have never experienced a default as a more
attractive investment than another fund that frequently files reports
in response to Form N-CR Part B (``Default or Event of Insolvency of
portfolio security issuer''). However, it is also possible that
investors may move their assets to larger fund complexes if, based on
Form N-CR disclosures, they determine that such fund complexes are more
likely than smaller entities to provide financial support to their
funds. 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 Form N-CR reporting requirements, this could
negatively affect the competitive stance of certain money market funds,
or the money market fund industry generally.
The filing of Form N-CR could have additional effects on capital
formation. The information filed on Form N-CR could improve capital
formation if investors better understand that a fund is not
sufficiently addressing the cause that led to the Form N-CR filing. One
commenter \1346\ suggested that certain Form N-CR disclosures would
make money market funds more susceptible to heavy redemptions during
times of stress. While we acknowledge the possibility of pre-emptive
redemptions, as discussed in detail above, several aspects of today's
amendments are designed to mitigate this risk. In addition, the other
reforms we are adopting today (such as liquidity fees and redemption
gates) will provide some fund managers additional tools for managing
such redemptions, if they were to occur.\1347\ Moreover, the additional
information should assist investors in making a more informed
investment decision, which leads to improved efficiency and capital
formation. Furthermore, commenters have also argued that the proposed
Form N-CR disclosures will actually decrease redemption risk by
heightening self-discipline at funds, which would also increase capital
formation.\1348\ In addition, it is possible that investors will react
positively to the information on Form N-CR if they feel the fund is
sufficiently addressing the cause of the Form N-CR filing. For example,
as noted in section III.F.5, we believe disclosure of a board's
reasoning is particularly important in times of stress in order to
mitigate against investor flight to transparency that might otherwise
occur.
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\1346\ See, e.g., Federated V Comment Letter (``The goal of
reform should be not to have the filing of a Form N-CR cause the
widespread redemptions the Reform Proposal seeks to avoid.'');
Federated VIII Comment Letter.
\1347\ In addition, as discussed in more detail in sections
III.F.4 and III.F.5 above, we note that some of our responses in
section III.A.1.c.i to concerns over pre-emptive run risk related to
the liquidity fees and gates requirement would similarly apply to
run risk concerns with respect to certain specific disclosures in
Form N-CR.
\1348\ See, e.g., American Bankers Ass'n Comment Letter.
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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.\1349\ 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 would allow
investors to more efficiently or more effectively invest in money
market funds. Additional effects of these 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 disclosure requirements,
as discussed in more detail above.\1350\
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\1349\ For an analysis of the potential macroeconomic effects of
our main reforms, see supra section III.K.
\1350\ We believe that the effects on efficiency, competition,
and capital formation of filing Form N-CR in response to Part B or C
overlap significantly with the effects of the disclosure
requirements regarding the financial support provided to money
market funds. See discussion in supra section III.F. We believe that
the effects of filing Form N-CR in response to Part D overlap
significantly with the effects of the disclosure requirements
regarding a money market fund's daily market-based NAV per share.
See discussion in supra section III.F.4. We believe that the effects
of filing Form N-CR in response to Parts E, F, and G overlap
significantly with the effects of the disclosure requirements
regarding current and historical instances of the imposition of
liquidity fees and/or gates. See supra section III.F.5.
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The Commission is unable to measure the quantitative benefits of
these requirements because of uncertainty about how increased
transparency may affect different investors' behavior, their
understanding of the risks associated with money market funds, and the
potential effects of the disclosure on market discipline.
a. Alternatives Considered
As a possible alternative, we could have chosen to not adopt Form
N-CR or any of its disclosures (as well as any of the corresponding SAI
or Web site disclosures). A variation of this alternative would have
been to eliminate Form N-CR but adopt the corresponding SAI and/or Web
site disclosures. As discussed above, commenters expressed concern
about
[[Page 47851]]
the potential redundancy of Form N-CR or parts thereof in light of the
corresponding Web site and SAI disclosures.\1351\ If we did not adopt
Form N-CR and/or any of the corresponding SAI and Web site disclosures,
affected funds would not incur the additional costs related to Form N-
CR that we discuss in more detail below.\1352\ In addition, with
respect to the board disclosure requirements in Parts E and F for Form
N-CR, fund boards would not be concerned about the loss of board
confidentiality or the possibility of opportunistic shareholder
litigation.\1353\ However, we rejected this set of alternatives for a
number of reasons, including the following. First, each of the
disclosures in Form N-CR serves to alert Commission staff, investors,
and other market observers (such as news services, which in turn may
alert investors) about important events in a timely manner.\1354\
Second, as discussed in more detail in section III.F.3 (Concerns over
Potential Redundancy), although we acknowledge there will be some
textual overlap between these different forms, we believe each serves a
distinct purpose.\1355\ Moreover, as discussed in section III.F.5
(Board Disclosure) above, we have revised the board disclosure
requirements in a number of ways in order to minimize any concerns over
board confidentiality or opportunistic litigation.
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\1351\ See supra note 1249 and accompanying discussion.
\1352\ Similarly, if we also had not adopted the corresponding
SAI or Web site disclosures, funds would further not incur their
related costs previously described. See supra sections III.E.8 and
III.E.9.h.
\1353\ See our discussion about commenters' concerns in supra
note 1290 and accompanying discussion.
\1354\ See also supra section III.F.8 for our discussion of the
other economic benefits of Form N-CR.
\1355\ See supra section III.F.3. (Concerns over Potential
Redundancy).
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Another alternative suggested by a number of commenters is to
extend the deadline for filing Form N-CR by up to two weeks. \1356\ A
variation of this alternative would have been to move all or certain
parts of Form N-CR to other (and typically later) periodic reports. For
example, one commenter recommended that the board disclosure
requirements under Parts E and F of Form N-CR ``be provided in the
report to shareholders covering the relevant period.'' \1357\ Extending
the deadline or moving these disclosures to a later periodic report or
other filing could lower the cost for funds since funds may have
additional cost due to the short time period to prepare the initial
filings within one day and the follow-up within four days. Such
additional preparation time may also lower opportunity costs for the
fund, in that personnel of a fund can spend the initial time responding
to the event that requires Form N-CR reporting rather than filing the
Form N-CR. However, we rejected this set of alternatives because, as
discussed above, in times of market stress the purpose of Form N-CR is
to alert the Commission, shareholders and other market observers about
significant events that affect the fund.\1358\ If investors feel that
they will have the necessary information to make an informed decision
in times of stress, then this may lead to additional capital for funds.
Likewise, we also believe that having the initial filing within one
business day and the follow-up within four business days may lead to
more market discipline among funds, resulting in increased investor
willingness to participate in this market, which could also lead to
additional capital for funds.
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\1356\ See supra note 1320 and accompanying text for a
discussion of commenters who proposed extending the filings
deadlines.
\1357\ NYC Bar Committee Comment Letter. See, also, e.g., MFDF
Comment Letter (move the discussion of the circumstances that led to
a fee or gate to a new annual management discussion of fund
performance.).
\1358\ For example, see also our related discussion in supra
notes 1329-1333 and the accompanying text.
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We also considered making the definition of financial support
subject to a specific threshold or general materiality qualification,
such as a specific drop in the NAV or liquidity.\1359\ For example,
such a threshold might apply if a fund's NAV drops by more than \1/4\
of 1 percent and the sponsor's investment in the fund causes the fund's
NAV to recover. We rejected this alternative for several reasons.
First, some types of sponsor support like a sponsor support agreement
or a performance guarantee, which is included in the definition, does
not necessarily or immediately result in a change in NAV or liquidity.
Second, it is possible that sponsors would provide financial support to
their funds before reaching the particular threshold, thereby avoiding
the reporting requirement. As one commenter stated, ``[k]nowing that
any form of sponsor support would be required to be disclosed within 24
hours, fund managers would likely do everything they could to avoid the
need for sponsor support.''\1360\
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\1359\ See, e.g., T. Rowe Price Comment Letter.
\1360\ See American Bankers Ass'n Comment Letter.
---------------------------------------------------------------------------
We also considered various other refinements that specifically
related to one of the particular disclosure items in Form N-CR, such as
commenters' proposal to increase the deviation in the NAV triggering a
report on Part D of Form N-CR from 0.25% to 0.5%.\1361\ We generally
consider and address these other suggestions in our discussion of the
final amendments above.
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\1361\ See supra note 1276.
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b. Operational Costs: Overview
The operational costs of filing Form N-CR in response to the events
specified in Parts B though H of Form N-CR are discussed below.\1362\
Our estimates of operational costs below generally reflect the costs
associated with an actual filing of Form N-CR. We continue to expect
that the operational costs to money market funds to report the new
information will generally be the same costs we discuss in the
Paperwork Reduction Act analysis in section IV.D.2.a below.\1363\
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\1362\ 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.
\1363\ As discussed in more detail in infra section IV.D.2.a, we
have revised our cost estimates associated with filing a report with
respect to each Part of Form N-CR. The Proposing Release originally
estimated that a fund would spend on average approximately 5 burden
hours and total time costs of $1,708 to prepare, review, and submit
a report under any Part of Form N-CR. See Proposing Release, supra
note 24, at nn.1203 and 1204 and accompanying text. This resulted in
a total annual burden of approximately 301 burden hours and total
annual time costs of approximately $102,765 under the floating NAV
alternative and approximately 341 burden hours and total annual time
costs of approximately $116,429 under the liquidity fees and gates
alternative. See Proposing Release, supra note 25, at nn.1113 and
1205 and accompanying text.
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We recognize that there could also be some advance discussions and
preparation within the industry and at money market funds about having
the necessary monitoring systems and controls in place to detect
relevant issues immediately, escalate them quickly and get the form
approved and filed. While we acknowledge these potential additional
costs, we are unable to estimate them with any specificity,\1364\
largely because we do not have the necessary information on how
prepared funds may already be or how much advance preparation is needed
in regards to filing a report in Form N-CR. For example, because
certain disclosures such as Part B and C of Form N-CR will in part
replace existing email notification
[[Page 47852]]
requirements,\1365\ we expect that many funds may already be prepared
to detect and respond to these particular items. Moreover, in
particular with respect to the disclosures about any liquidity fee or
gate on Parts E through G of Form N-CR, we question the extent to which
any advance preparation would be useful in light of the highly fact-
specific nature of these disclosures.\1366\ Accordingly, some funds may
engage in very little or no advance preparation. In addition, we
believe that most (if not all) preparational costs related to an event
reportable on Parts E through G of Form N-CR, such as planning
appropriate processes for the consideration of a liquidity fee or gate
by the board, are more directly attributable to the liquidity fees and
gates requirement itself,\1367\ rather than the corresponding
disclosure requirement on Form N-CR.\1368\
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\1364\ No commenters provided concrete cost estimates
specifically in regards to these potential preparatory costs. For a
more general discussion of commenters' comments on the burdens of
Form N-CR, see, e.g., supra note 1363 and III.F.8.
\1365\ See supra notes 1211 and 1213.
\1366\ For similar reasons, our cost estimates in the PRA
analysis in infra section IV.D.2 generally presume no particular
advance preparation when preparing a filing on Form N-CR.
\1367\ See, e.g., SIFMA Comment Letter (estimating costs of
implementing the ability to impose liquidity fees and gates).
\1368\ See supra section III.A.1.
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As discussed in sections III.F.2-III.F.6 above, we are making a
number of changes in our final amendments, a number of which we expect
to impact the costs associated with filing a report on Form N-CR.\1369\
For example, with respect to Parts B, C and D, we are now permitting
filers to split their response into an initial and follow-up
filing,\1370\ similar to what we had already proposed for Parts E and F
in the Proposing Release. Accordingly, in addition to our new estimate
for Part H, we are updating and providing a more nuanced estimate of
the costs associated with filing a report with respect to each of Parts
B through G of Form N-CR.
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\1369\ See supra sections III.F.2-III.F.6 for a more detailed
discussion of each of our final amendments.
\1370\ See supra section III.F.7.
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In updating our estimates, we also considered comments about the
operational costs related to Form N-CR. One commenter estimated that
requiring disclosure of certain Items in Form N-CR within one business
day could cost $300,000 to $500,000.\1371\ However, our final
amendments incorporate this commenter's proposed solution by shifting
Items B.5, C.4, C.9, C.10, and D.3 from the initial filing to the
follow-up filing.\1372\ Because today's amendments permit funds to file
a response to these Items within four business days instead of just one
business day, we expect the costs of filing Form N-CR to be notably
less than what this commenter originally estimated.\1373\ Although we
received no other specific cost estimates from commenters with respect
to Form N-CR, we also took into account commenters' general concerns
and suggestions about the timing and various costs and burdens of Form
N-CR.\1374\ For example, we noted that commenters particularly cited
the burdens and the role of the board in drafting and reviewing the
board disclosures in Parts E and F.\1375\
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\1371\ See Fidelity Comment Letter (stating that ``[i]t would be
difficult for MMFs to produce validated data ready for public
dissemination within one business day, particularly for items such
as B.5, C.4, C.9, and C.10. Providing quantitative data within one
business day would not only call for the coordination of information
and its sources, but also its review and verification to ensure
accuracy and completeness. Accordingly, we do not believe that this
strict filing deadline is operationally feasible. Further, providing
data within a short timeframe would come at an estimated cost of
$300,000-$500,000, without factoring in the costs of ongoing
compliance and filing, all of which greatly exceeds the SEC's
estimated cost of $1,700 and five hours to prepare and review
information.'').
\1372\ See supra note 1326 and accompanying text.
\1373\ We are generally unable, however, to fully evaluate the
basis or validity of this commenter's cost estimate, as we do not
have all the data or assumptions on which this commenter's estimate
is based. See supra note 1324 and accompanying text; Fidelity
Comment Letter.
\1374\ See, e.g., Dreyfus Comment Letter, Federated VIII Comment
Letter, Legg Mason & Western Asset Comment Letter, MFDF Comment
Letter.
\1375\ See, e.g., IDC Comment Letter (``Any public disclosure
about a board's decision-making process would require careful and
thoughtful drafting and multiple layers of review (by board counsel,
fund counsel, and the directors, among others).''); Stradley Ronon
Comment Letter; SIFMA Comment Letter.
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We also updated our estimates to reflect the likelihood that some
funds may engage legal counsel to assist with the drafting and review
of Form N-CR, by which they would incur additional external costs. For
example, as noted above, commenters cited the particular burdens and
the role of various parties in drafting and reviewing the board
disclosures in Parts E and F.\1376\ In addition, given commenters'
concern about timing as noted in section III.F.7, we take these various
concerns to be an indicator that some funds may engage legal counsel.
Accordingly, we estimate, in particular with respect to the follow-up
reports under Parts B through F as well as any reports on Part H, that
certain funds will engage legal counsel to assist with the drafting and
review of Form N-CR, thereby incurring additional external costs.\1377\
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\1376\ See id.
\1377\ See infra note 2386 and accompanying discussion.
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c. Operational Costs of Part B: Default Events
As noted in the Proposing Release,\1378\ we have estimated that the
costs of filing a report in response to an event specified on Part B of
Form N-CR will be higher than the costs that money market funds
currently incur in complying with the rule 2a-7 provision which
currently requires money market funds to report defaults or events of
insolvency to the Director of Investment Management or the Director's
designee by email.\1379\
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\1378\ See Proposing Release, supra note 25, at n.730 and
accompanying text.
\1379\ The requirements of current 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 current rule 2a-7(c)(7)(iii)(A). However, we
understand that funds disclosing events of default or insolvency
pursuant to current rule 2a-7(c)(7)(iii)(A) already have
historically reported substantially the same information required by
Part B. As noted, we are eliminating the existing email notification
requirements in rule 2a-7 and are replacing it with the notification
requirements of Form N-CR. See supra note 1211. We discuss the
impact on costs of this elimination in sections III.F.8 and III.N.3.
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In updating our estimates for Part B of Form N-CR, we estimate the
costs of filing and amending the report in response to an event
specified on Part B of Form N-CR to include time costs of $4,830 and
external costs of $1,000, for total costs of $5,830 for each set of
initial and follow-up reports,\1380\ 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.\1381\
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
$116,600.\1382\
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\1380\ 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.D.2.b.
\1381\ The Commission 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 we
previously estimated money market funds to file pursuant to current
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). We
believe that this estimate is likely to be high, in particular when
markets are not in crisis as they were during 2008 or 2011. However,
we are continuing to use this higher estimate to be conservative in
our analysis.
\1382\ These estimates are based on the following calculations:
$5,830 (cost per complete filing) x 20 filings per year = $116,600
per year. See supra notes 1380 and 1381 and accompanying text.
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[[Page 47853]]
d. Operational Costs of Part C: Financial Support
In addition to the general discussion above, in updating our
estimate for Part C we also considered certain changes from the
proposal specifically related to Part C of Form N-CR,\1383\ most
notably our changes to the definition of financial support,\1384\ which
we estimate will impact the frequency of filings on Part C of Form N-
CR. As we noted in the Proposing Release,\1385\ we have estimated 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 complying with the rule 2a-7 provision that requires
disclosure to the Director of Investment Management or the Director's
designee by email when a sponsor supports a money market fund by
purchasing a security in reliance on rule 17a-9.\1386\ However, because
Part C of Form N-CR is more extensive and defines ``financial support''
more broadly than the current requirements, we expect that the costs
associated with filing a report in response to a Part C event would be
higher than the current estimated costs of compliance with the current
notification requirement.\1387\
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\1383\ See supra section III.F.3. (Definition of Financial
Support).
\1384\ See supra section III.F.3 and note 1242.
\1385\ See Proposing Release, supra note 25, at paragraph
following n.733.
\1386\ Current rule 2a-7(c)(7)(iii)(B).
\1387\ As previously noted, we are eliminating the existing
email notification requirements in rule 2a-7 and are replacing it
with the notification requirements of Form N-CR. See supra note
1213. We discuss the impact on costs of this elimination in sections
III.F.8 and III.N.3.
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In updating our proposed estimates for Part C of Form N-CR, we
estimate the costs of filing and amending the report in response to an
event specified on Part C of Form N-CR to include time costs of $6,660
and external costs of $1,400, for total costs of $8,060 for each set of
initial and follow-up reports,\1388\ 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 30\1389\ such filings per year.\1390\ 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 $241,800.\1391\
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\1388\ 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.D.2.c.
\1389\ In the Proposing Release, we originally estimated 40
filings per year under Part C of Form N-CR. See Proposing Release,
supra note 25, at n.735 and accompanying text. As discussed in supra
section III.F.3, today we are adopting certain exclusions from the
definition of financial support that will narrow the definition to a
certain degree. Correspondingly, in anticipation of a slight
reduction in instances that meet the definition as amended today, we
predict an estimated 30 filings per year under Part C of Form N-CR.
\1390\ 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)].
\1391\ These estimates are based on the following calculations:
$8,060 (cost per complete filing) x 30 filings per year = $241,800
per year. See supra note 1388-1390 and accompanying text.
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e. Operational Costs of Part D: Shadow Price Declines
In an event of filing, we continue to believe a fund's particular
circumstances that gave rise to a reportable event under Part D would
be the predominant factor in determining the time and costs associated
with filing a report on Form N-CR, in particular with respect to the
follow-up filing amending the initial report.\1392\
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\1392\ See Proposing Release, supra note 25, at paragraph
following n.736.
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In updating our proposed estimates for Part D of Form N-CR, we
estimate the costs of filing and amending the report in response to an
event specified on Part D of Form N-CR to include time costs of $4,830
and external costs of $1,000, for total costs of $5,830 for each set of
initial and follow-up reports,\1393\ and we expect, based in part by
reference to our estimate of the average number of instances in which
the shadow price for a non-institutional money market fund has deviated
downward by more than \1/4\ of 1 percent from its stable per share NAV
price each year, that we will receive approximately 0.3 such filings
per year.\1394\ Therefore, we expect that the annual costs relating to
filing a report on Form N-CR in response to an event specified on Part
D would be $1,749.\1395\
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\1393\ The costs associated with filing Form N-CR in response to
an event specified on Part D of Form N-CR are paperwork-related
costs and are discussed in more detail in infra section IV.D.2.d.
\1394\ Our staff has analyzed form N-MFP data from November 2010
to February 2014 and found that only one non-institutional fund had
a \1/4\ of 1 percent deviation from the stable $1.00 per share NAV.
1 fund in over 39 months is equivalent to less than 1 (1 x 12 / 39 =
0.31) funds per year. In the Proposing Release, we had estimated
0.167 reports filed per year in respect of Part D. See Proposing
Release, supra note 25, at n.1205. We revised this estimate to
reflect more accurate accounting and updated data.
\1395\ These estimates are based on the following calculations:
$5,830 (cost per complete filing) x 0.3 filings per year = $1,749
per year. See supra note 1393 and 1394 and accompanying text.
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f. Operational Costs of Part E and F: Imposition of Fees and Gates
In addition to the general discussion above, in updating our
estimates we also considered certain changes from the proposal
specifically related to Parts E and F of Form N-CR,\1396\ most notably
our changes to the board disclosure requirements \1397\ and the weekly
liquid asset thresholds permitting or triggering board consideration of
a liquidity fee or gate.\1398\ Moreover, in particular with respect to
the board disclosures, we expect that most if not all funds may engage
legal counsel to assist with the drafting and review of Form N-CR,
thereby incurring additional external costs. \1399\ We have also
revised our estimates of the frequency of filings under Parts E and
F.\1400\ In an event of filing, we continue to believe a fund's
particular circumstances that gave rise to a reportable event under
Parts E or F would be the predominant factor in determining the time
and costs associated with filing a report on Form N-CR, in particular
with respect to the follow-up filing amending the initial report.\1401\
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\1396\ See supra section III.F.5.
\1397\ See supra section III.F.5. (Board Disclosures).
\1398\ See supra section III.F.5. (Conforming and Related
Changes).
\1399\ For example, commenters cited the particular burdens and
the role of the board in drafting and reviewing the board
disclosures in Parts E and F. See, e.g., IDC Comment Letter (``Any
public disclosure about a board's decision-making process would
require careful and thoughtful drafting and multiple layers of
review (by board counsel, fund counsel, and the directors, among
others).''); Stradley Ronon Comment Letter; SIFMA Comment Letter.
\1400\ See infra notes 1410-1414 and accompanying text.
\1401\ See Proposing Release, supra note 25, at paragraph
following n.736.
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In revising our estimates for Part E of Form N-CR,\1402\ we
estimate the costs of filing and amending the report in response to an
event specified on Part E of Form N-CR to include time costs of $10,910
and external costs of $3,600, for total costs of $14,510 for each set
of initial and follow-up reports.\1403\ The Proposing Release and the
DERA Study analyzed the distribution of weekly liquid assets to
determine how often a prime fund's weekly liquid asset percentage fell
below the 30% and 10% thresholds. The analysis found that on
[[Page 47854]]
average 6.9 out of 253 prime funds, or 2.7% of the funds, had their
monthly weekly liquid assets percentages fall below 30%.\1404\ This
corresponds to 83 funds per year.\1405\ The analysis also found that on
average 0.05 out of 253 prime funds, or 0.02% of the funds, had their
monthly weekly liquid assets percentages fall below 10%.\1406\ This
corresponds to 0.6 funds per year.\1407\ As a result of the new
reporting requirements, we believe that funds will in general try to
avoid having to file Form N-CR by keeping their weekly liquid asset
percentages above 10%.\1408\ In addition, of the 83 funds per year that
reported a weekly liquid assets value below 30%, it is unclear how many
would have decided to impose a fee, but we expect it to be lower than
83 funds given that not all boards would have likely imposed such a
discretionary fee. As such, we expect, based on our calculation of the
average number of instances in which a fund would breach the 10% and
30% weekly liquid asset threshold each year, that the Commission would
receive between 0.6 and 83 such filings per year. For purposes of the
Paperwork Reduction Act section below,\1409\ we estimate that 0.6 funds
per year would file a report triggered by the 10% weekly liquid asset
threshold\1410\ and an additional 0.6 funds per year would file a
report because they crossed the 30% weekly liquid asset threshold and
their board determined to impose a liquidity fee,\1411\ for a total
average of 1.2 instances per year. Therefore, we expect that the annual
costs relating to filing a report on Form N-CR in response to an event
specified on Part E will be $17,412.\1412\
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\1402\ The Proposing Release estimated that a fund would spend
on average approximately 5 burden hours and total time costs of
$1,708 to prepare, review, and submit a report under any Part of
Form N-CR, including Part E. See Proposing Release, supra note 25,
at nn.1203 and 1204 and accompanying text.
\1403\ The costs associated with filing Form N-CR in response to
an event specified on Part E of Form N-CR are paperwork-related
costs and are discussed in more detail in infra section IV.D.2.e.
\1404\ See the table in the Proposing Release, supra note 25,
referencing n.384; DERA Study, supra note 24, at 22.
\1405\ We estimate 83 funds per year as follows: 6.9 funds per
month x 12 months = 83 funds per year.
\1406\ See the table in the Proposing Release, supra note 25,
referencing n.384; DERA Study, supra note 24, at 22.
\1407\ We estimate 0.6 funds per year as follows: 0.05 funds per
month x 12 months = 0.6 funds per year.
\1408\ See generally, e.g., SIFMA Comment Letter (``[Some
members] believe the existence of the liquidity trigger for the fee
and gate will motivate fund managers to maintain fund liquidity well
in excess of the trigger level, to avoid triggering the fee or
gate.'');
\1409\ See infra section IV.D.2.e. In the Proposing Release, we
had previously estimated a total of 4 reports in response to Parts E
and F based on the previously proposed 15% weekly liquid asset
trigger. See Proposing Release, supra note 25, at n.1202. For a more
detailed discussion of the reasons for our changed estimates, see
also infra note 2408.
\1410\ As noted above, as a result of the new reporting
requirements, we believe that funds will in general try to avoid
having to file Form N-CR by keeping their weekly liquid asset
percentages above 10%. Accordingly, we believe our estimates of the
frequency of filings in response to Part E of Form N-CR are likely
to be high. However, we are using these higher estimates to be
conservative in our analysis.
\1411\ As discussed in section IV.D.2.e, we estimate that funds
will voluntarily impose a liquidity fee at most as often as they
will be required to consider a liquidity fee based on the 10% weekly
liquid asset trigger. Accordingly, the Commission conservatively
estimates that 0.6 additional funds per year would file a report in
response to Part E because it breached the 30% weekly liquid asset
threshold and their board determined to impose such a discretionary
liquidity fee.
\1412\ These estimates are based on the following calculations:
$14,510 (cost per complete filing) x [0.6 + 0.6] filings per year =
$17,412 per year. See supra notes 1403-1410 and accompanying text.
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In revising our estimates for Part F of Form N-CR,\1413\ we
estimate the costs of filing and amending the report in response to an
event specified on Part F of Form N-CR of Form N-CR to include time
costs of $10,910 and external costs of $3,600, for total costs of
$14,510 for each set of initial and follow-up reports.\1414\ As stated
above, the DERA study found that 83 prime funds per year had their
weekly liquid asset percentages fall below 30%.\1415\ Of these 83
funds, it is unclear how many would have decided to impose a gate, but
we expect it to be lower than 83 funds given that not all boards would
have likely imposed such a discretionary gate. Thus, we expect, based
on our calculation of the average number of instances in which a fund
would breach the 30% weekly liquid asset threshold each year, that the
Commission would receive between zero and 83 such sets of initial and
follow-up reports per year. For purposes of the Paperwork Reduction Act
section below,\1416\ we conservatively estimate that 0.6 funds per year
would file a report because they breached the 30% weekly liquid asset
threshold and their board determined to impose a gate.\1417\ Therefore,
we expect that the annual costs relating to filing a report on Form N-
CR in response to an event specified on Part F would be $8,706. \1418\
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\1413\ The Proposing Release estimated that a fund would spend
on average approximately 5 burden hours and total time costs of
$1,708 to prepare, review, and submit a report under any Part of
Form N-CR, including Part F. See Proposing Release, supra note 25,
at nn.1203 and 1204 and accompanying text.
\1414\ The costs associated with filing Form N-CR in response to
an event specified on Part F of Form N-CR are paperwork-related
costs and are discussed in more detail in infra section IV.D.2.f.
\1415\ See DERA Study, supra note 24, at 22.
\1416\ See infra section IV.D.2.f. In the Proposing Release, we
had previously estimated a total of 4 reports in response to Parts E
and F based on the previously proposed 15% weekly liquid asset
trigger. See Proposing Release, supra note 25, at n.1202. For a more
detailed discussion of the reasons for our changed estimates, see
also infra note 2421.
\1417\ As discussed and estimated in more detail in infra
section IV.D.2.f, we conservatively estimate the number of instances
in which a fund breached the 30% weekly liquid asset threshold and
its board determined to impose a voluntary gate to be equal to the
number of instances in which a fund breached the 30% weekly liquid
asset threshold and its board determined to impose a voluntary fee,
or 0.6 instances per year.
\1418\ These estimates are based on the following calculations:
$14,510 (cost per complete filing) x 0.6 filings per year = $8,706
per year. See supra notes 1414-1417.
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g. Operational Costs of Part G: Lifting of Fees and Gates
As discussed in the Proposing Release, we continue to believe the
frequency of filings under Part G on Form N-CR to be closely correlated
to the frequency of filings under Parts E and F.\1419\ Given our
revised estimates of the number of filings under Parts E and F,\1420\
we are correspondingly revising our estimate of the number of filings
under Part G.\1421\ We are further revising our estimates for Part G,
because we expect the cost per filing associated with responding to
Part G to be lower than for Parts E or F.\1422\ Unlike Parts B through
F and H, for which we have included estimated external costs to account
for the possibility that funds may engage legal counsel to assist in
the preparation and review of Form N-CR,\1423\ we have not done so here
because of the relative simplicity of Part G.
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\1419\ See, e.g., Proposing Release, supra note 25, at n.1202
and accompanying discussion. We expect there to be a close
correlation because Part G requires disclosure of the lifting of any
liquidity fee or gate imposed in connection with Part E or F.
\1420\ See supra notes 1410 and 1417 and accompanying
discussions.
\1421\ See infra section IV.D.2.g. The Proposing Release
estimated a total of 4 reports in response to Part G. See Proposing
Release, supra note 25, at n.1202. For a more detailed discussion of
the reasons for our revised estimates, see also infra notes 2433-
2437 and accompanying text.
\1422\ In the Proposing Release, our staff originally estimated
that a fund would spend on average approximately 5 burden hours and
total time costs of $1,708 to prepare, review, and submit a report
under any Part of Form N-CR. See Proposing Release, supra note 25,
at nn.1203 and 1204 and accompanying text. However, we expect a
response to Part G to be shorter than under Parts E or G, given that
Part G only requires disclosure of the date on which a fund removed
a liquidity fee and/or resumed Fund redemptions. See Form N-CR Item
G.1. In addition, unlike Part E or F, Part G would not require any
follow-up report.
\1423\ See supra sections IV.D.2.b--IV.d.2.f; see also infra
section IV.D.2.h.
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In revising our estimates for Part G of Form N-CR,\1424\ we
estimate the costs of
[[Page 47855]]
filing a report in response to an event specified on Part G of Form N-
CR to include time costs of $695 per filing,\1425\ and we expect, based
in part by reference to our estimate of how often funds would file Form
N-CR under Part E or F each year, that the Commission would receive
between zero and 83 such filings per year.\1426\ For purposes of the
Paperwork Reduction Act section below, we estimate that 1.8 funds per
year would file a report because they lifted a liquidity fee or
gate.\1427\ Therefore, we expect that the annual costs relating to
filing a report on Form N-CR in response to an event specified on Part
G would be $1,251.\1428\
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\1424\ The Proposing Release estimated that a fund would spend
on average approximately 5 burden hours and total time costs of
$1,708 to prepare, review, and submit a report under any Part of
Form N-CR, including Part F. See Proposing Release, supra note 25,
at nn.1203 and 1204 and accompanying text.
\1425\ The costs associated with filing Form N-CR in response to
an event specified on Part G of Form N-CR are paperwork-related
costs and are discussed in more detail in infra section IV.D.2.g.
\1426\ For purposes of this estimate of filings under Part G, we
conservatively assume that there would be a filing under Part G for
every filing under either Parts E or F. Given that some affected
funds may liquidate instead of ever lifting the respective liquidity
fee or gate, we therefore expect this estimate of the frequency of
Part G filings may be high.
\1427\ See infra section IV.D.2.g.
\1428\ These estimates are based on the following calculations:
$695 (cost per complete filing) x 1.8 filings per year = $1,251 per
year. See supra notes 1425-1427 and accompanying text.
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h. Operational Costs of Part H: Optional Disclosure
Given the broad scope and voluntary nature of the optional
disclosure under Part H of Form N-CR, we believe that, in an event of
filing, a fund's particular circumstances that led it to decide to make
such a voluntary disclosure would be the predominant factor in
determining the time and costs associated with filing a report on Form
N-CR. In estimating costs, we expect that some funds may engage legal
counsel to assist with the drafting and review of Form N-CR, thereby
incurring additional external costs.\1429\
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\1429\ In particular, we expect that funds are more likely to
file a report on Part H when there are more complex events that need
to be addressed, which we believe will make it correspondingly more
likely that funds will engage legal counsel.
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Accordingly, we estimate the costs of a filing in response to an
event specified on Part H of Form N-CR to include time costs of $1,390
and external costs of $800, for a total cost of $2,190 per
filing,\1430\ and we expect that the Commission will receive
approximately 18 such filings per year.\1431\ Therefore, we expect that
the annual costs relating to filing a report on Form N-CR in response
to an event specified on Part H will be $32,850.\1432\
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\1430\ The costs associated with filing Form N-CR in response to
an event specified on Part H of Form N-CR are paperwork-related
costs and are discussed in more detail in infra section IV.D.2.h.
\1431\ For purposes of our estimate in section IV.D.2.h below,
we conservatively estimate that funds would include a disclosure
under Part H in about a quarter of the instances they submit a
follow-up filing under Parts B through F, as well as with respect to
a quarter of all filings under Part G. Because of the timing
constraints, we generally would not expect funds would to make a
Part H disclosure in an initial filing. We also would not generally
expect funds to make a Form N-CR filing under Part H alone. However,
given the possibility that funds might make a Part H disclosure in
the initial filing or on a stand-alone basis, we conservatively
estimate one additional Part H filing per year under each scenario.
As calculated in in section IV.D.2.h below, we therefore estimate an
annual total of 15 filings in response to Part H.
\1432\ These estimates are based on the following calculations:
$2,190 (cost per complete filing) x 15 filings per year = $32,850
per year. See supra notes 1430 and 1431 and accompanying text.
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i. Aggregate Operational Costs
In the aggregate, we estimate that compliance with new rule 30b1-8
and Form N-CR would result in total annual time costs of approximately
$339,588\1433\ and total external costs of $80,780.\1434\ Given an
estimated 559 money market funds that would be required to comply with
new rule 30b1-8 and Form N-CR,\1435\ this would result in average
annual time costs of approximately $607 and average annual external
costs of $145 on a per-fund basis.\1436\
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\1433\ See infra note 2446.
\1434\ See infra note 2447.
\1435\ See supra note 2448.
\1436\ See infra note 2449.
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G. Amendments to Form N-MFP Reporting Requirements
The Commission is today adopting amendments to Form N-MFP, the form
that money market funds use to report their portfolio holdings and
other key information to us each month. We use the information to
monitor money market funds and support our examination and regulatory
programs. Each fund must file the required information on Form N-MFP
electronically within five business days after the end of each month.
Currently, we make the information public 60 days after the end of the
month.\1437\ Money market funds began reporting this information to us
in November 2010.\1438\
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\1437\ See current rule 30b1-7(b).
\1438\ On average, 575 money market funds (excluding feeder
funds) filed Form N-MFP with us each month throughout 2013. Funds
reported information on approximately 67,000 securities on average
each month.
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Today we are amending Form N-MFP to reflect the amendments to rule
2a-7 discussed above. In addition, we are requiring the reporting of
certain new information that will be useful for our oversight of money
market funds, and making other improvements to the form based on our
previous experience with filings submitted to us. Most commenters
generally supported the proposed amendments to Form N-MFP, agreeing
that the improved reporting would be useful to the Commission and
investors.\1439\ Although these commenters generally supported the
proposed amendments, many of them raised concerns with certain specific
changes and additional reporting items.\1440\ We did not receive any
comment on a number of the proposed amendments, and are generally
adopting those amendments as proposed.
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\1439\ See, e.g., Wells Fargo Comment Letter; ICI Comment Letter
(``We generally support the proposed amendments. . .''); Boston
Federal Reserve Comment Letter. One commenter opposed the amendments
generally, suggesting that Form N-MFP is a tool for the Commission,
not investors, and argued that the cost of the greater reporting
requirements is not justified by the usefulness of the information
to the Commission. See Dreyfus Comment Letter. We discuss the
usefulness of the information reported on Form N-MFP to investors
throughout this section, and similarly discuss the costs of
compliance in section III.G.5. below.
\1440\ See, e.g., Wells Fargo Comment Letter (objecting to
shareholder flow reporting); Fidelity Comment Letter (objecting to
lot level purchase and sale data); SIFMA Comment Letter (objecting
to shareholder concentration reporting).
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To respond to comments we received, the final form amendments
differ in some respects from what we proposed, such as not adopting the
lot level security and shareholder concentration reporting
requirements, as well as certain other refinements which are discussed
below. We are adopting many of the other proposed amendments unchanged,
including eliminating the 60-day delay on public availability of the
data. As proposed, we are not changing the requirement that funds
continue to file reports on Form N-MFP once each month (as they do
today), but are adopting a requirement that certain limited information
(such as the NAV per share, liquidity levels, and shareholder flow) be
reported on a weekly basis within the monthly filing.\1441\
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\1441\ We requested comment on potentially requiring filing of
Form N-MFP on a weekly, rather than a monthly basis. Commenters
generally opposed such an increase in frequency of filing of the
form, and we are retaining the requirement to file the form on a
monthly basis at this time. See, e.g., Dreyfus Comment Letter; SIFMA
Comment Letter.
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We are adopting these changes to Form N-MFP because they further
support the Commission's efforts to oversee the stability of money
market funds and compliance with rule 2a-7,\1442\ and should assist
money
[[Page 47856]]
market fund shareholders in better understanding the risks of their
investments. As proposed, in connection with these amendments, we are
renumbering the items of Form N-MFP to separate the items into four
separate sections and are making other minor reformatting
changes.\1443\ These amendments will apply to all money market funds,
with both stable value and floating NAV money market funds reporting on
Form N-MFP as amended.
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\1442\ References to amended Form N-MFP will be to ``Form N-MFP
Item'' or to ``Item'' and references to Form N-MFP as it was
proposed to be amended in 2013 will be to ``Proposed Form N-MFP
Item.'' We are not amending items in Form N-MFP that reference
credit ratings at this time.
\1443\ See 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
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.
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1. Amendments Related to Rule 2a-7 Reforms
We proposed a number of changes to Form N-MFP designed to conform
it with the general reforms of rule 2a-7.\1444\ Commenters generally
did not object to these proposed amendments, and we are adopting them
largely as proposed, with some revisions to reflect the revised
approach we are taking to the primary reforms.
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\1444\ See Proposing Release supra note 25, at section III.H.1.
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a. Amortized Cost
As part of the primary reforms to rule 2a-7, we proposed to
eliminate the use of the amortized cost valuation method for stable
value money market funds, and to correspond with that elimination, we
also proposed to remove references to amortized cost and shadow prices
from Form N-MFP. However, as discussed previously in section II.B.5,
the final amendments will permit the continued use of the amortized
cost valuation method for stable value money market funds.\1445\
Accordingly, to conform the changes to Form N-MFP to the final
amendments to rule 2a-7, we are not adopting the Form N-MFP amendments
that would have removed references to the amortized cost of securities
in certain existing items, although we are moving and rephrasing the
references where appropriate to be consistent with the final amendments
to rule 2a-7.\1446\
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\1445\ See supra section II.B.5.
\1446\ Form N-MFP currently 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). As
we proposed, we are amending Items 13 and 41 by replacing amortized
cost with ``value'' as defined in section 2(a)(41) of the Act
(generally the market-based value). See Form N-MFP Items A.14.b and
C.18, and Form N-MFP General Instructions, E. Definitions. As a
result, we are removing 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. Form N-MFP Item C.18 would require that
money market funds report portfolio security market values both
including and excluding the value of any sponsor support. As we
proposed, to improve transparency of MMF's risks, we are also
clarifying that money market funds 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. We are also continuing to require, as
proposed, reporting of the amortized cost value of money market
funds that use that method to value securities for all or any
portion of their portfolio. See Form N-MFP Item A.14.b.i .
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Because we proposed to eliminate amortized cost valuation (which
would have required all money market funds to value their shares at
market-based values even if they transacted at a dollar through penny
rounding), we had correspondingly proposed to eliminate the reporting
requirements related to money market fund ``shadow prices'' from Form
N-MFP and instead require funds to report their market-based NAV. As a
result of the final amendments to rule 2a-7 permitting the continued
use of amortized cost for certain money market funds, the final
amendments to Form N-MFP also continue to require reporting of fund
shadow prices (on a series and class level) for funds that use the
amortized cost method of valuation.\1447\ This requirement would be
part of the requirement to report the fund's NAV on a class and series
level.
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\1447\ See Form N-MFP Items A.20 and B.5. These requirements are
moved and reformatted from the existing form as part of the overall
renumbering and re-organizing of the form.
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b. Weekly Reporting Within Monthly Filing
The final rules also require reporting of a money market fund's NAV
per share (and shadow price), daily and weekly liquid assets, and
shareholder flows on a weekly basis within the monthly filing of the
form, as we proposed.\1448\ Two commenters generally objected to the
proposed requirements for weekly reporting within a monthly form.\1449\
These commenters argued that weekly information gathering will increase
fund costs and suggested that the benefits are speculative. They also
noted that this weekly reported information would be available on the
fund's Web site, resulting in redundant disclosure.\1450\ We appreciate
these concerns, but disagree. Form N-MFP and Web site disclosure have
different purposes. Under our final disclosure amendments, as discussed
above funds will be required to report market-based NAV per share
information daily on their Web sites (as well as the liquidity and
shareholder flow information), so the weekly information should be
readily available at little additional cost. Including this weekly
information on the fund's filing will allow Commission staff to better
monitor risks and trends in fund valuation (as well as liquidity and
shareholder flow) in an efficient and more precise manner without
requiring frequent visits to the Web sites of many different funds, and
will be a useful resource for investors and others as well. Because it
will be housed in a central repository of data, this information can be
aggregated and analyzed across the fund industry and can be used in a
standardized manner to enhance comparability.\1451\ The additional data
points we collect will enable us to better monitor trends and risks on
a more granular time level for individual funds and money market funds
as a whole. In contrast, the Web site disclosures are intended to be
more accessible and ``user-friendly'' than Form N-MFP for individual
investors trying to research particular funds. We have required other
such parallel reporting for similar reasons.\1452\
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\1448\ Form N-MFP Items A.13, A.20, B.5 and B.6. As discussed in
section IV.A.6.c funds would also be required to report their NAV
per share and shadow price on a daily basis on their Web site.
\1449\ Dreyfus Comment Letter; SIFMA Comment Letter. These
commenters objected to all of the proposed weekly items, including
reporting on the funds' NAV per share, levels of daily and weekly
liquid assets, and shareholder flows.
\1450\ Id.
\1451\ See also supra section III.F.
\1452\ For example, money market funds are currently required to
disclose much of the portfolio holdings information they disclose on
Form N-MFP on the fund's Web site as well. See current rule 2a-
7(c)(12)(ii); Form N-MFP General Instruction A.
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c. NAV Per Share (and Shadow Price) Reporting to Fourth Decimal Place
Today on Form N-MFP, funds report, both for each series and each
class, shadow price of their NAV, 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).\1453\ Under the proposed
amendments to the Form, we proposed to keep this reporting requirement
(although in a different place within the Form consistent with the
general reformatting). This reporting is consistent with the rounding
convention that was proposed for floating NAV money market funds to
price and transact in our rule proposal. No commenters specifically
addressed this current Form N-MFP requirement, or its reformatting. As
discussed in section III.B.3.c above we are adopting a requirement for
floating NAV funds to transact at this ``basis point rounding''
[[Page 47857]]
level of accuracy. As when we originally adopted this requirement in
2010, we continue to believe that information about a fund's NAV priced
to a basis point rounding level of accuracy will be relevant and useful
for the Commission and investors when monitoring money market fund
risks and trends.\1454\ This information will be used by the Commission
and others to identify money market funds that continue to seek to
maintain a stable price per share \1455\ and help us better evaluate
any potential deviations in their unrounded share price. Reporting the
NAV per share to the fourth decimal place on Form N-MFP is also
consistent with the precision of NAV reporting that funds would be
required to provide on their Web sites under our final amendments.
Accordingly, the Form continues to require reporting of a money market
fund's NAV to the fourth decimal place, as is required today and under
the proposal.\1456\
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\1453\ Form N-MFP Items 18 and 25. See also Proposing Release
supra note 25, at section III.H.1.
\1454\ See 2010 Adopting Release, supra note 81, at section
II.E.2. We note that many large fund complexes already disclose on
their Web sites the 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). See also sections III.B and IV.A.6.
\1455\ We are also adopting, as proposed, a new item requiring
reporting for funds that seek to maintain a stable price per share
to state the price that the fund seeks to maintain. See Form N-MFP
Item A.18.
\1456\ Form N-MFP Items A.20 and B.5.
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d. Category Reporting
As we proposed, we are also amending the category options at the
series level that money market funds use to identify themselves to
include exempt government fund as an option.\1457\ We are also adding a
sub question, new from the proposal, asking if the fund is an exempt
retail fund under rule 2a-7.\1458\ This new subsection is necessary to
help identify whether a fund is exempt because it is a government fund
or if it is exempt because it is a retail fund which will be important
in our ongoing monitoring efforts. These new categories will allow us
to better identify the types of funds operating.
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\1457\ See Form N-MFP, Item A.10.
\1458\ See Form N-MFP, Item A.10.a.
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e. Economic Analysis
Consistent with the proposal, any effect resulting from these
amendments (except as noted below), including the requirement that each
monthly report include information on a weekly basis, is included in
our economic analysis of our amendments that require money market funds
to disclose NAV, liquidity and shareholder flow daily on fund Web
sites.\1459\ Accordingly, we do not believe that the proposed
amendments would impose other costs not discussed in that section on
money market funds other than those required to modify systems used to
aggregate data and file reports on Form N-MFP, as discussed below. We
expect, as discussed previously in this section, that the revised forms
will benefit investors by enhancing their understanding of money market
funds, and will enhance our monitoring and regulatory programs.
---------------------------------------------------------------------------
\1459\ See supra section III.E.9.h.
---------------------------------------------------------------------------
We believe that the revised form will be easier for investors to
understand because the amendments will allow investors to better focus
on a single market-based valuation for individual portfolio securities
and the fund's overall NAV per share. Accordingly, we expect that the
overall effects will be to increase efficiency for investors. Because
we believe that investors are likely to make at least incremental
changes to their trading patterns in money market funds due to the
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 changes to Form N-
MFP will be small relative to the effects of the underlying reforms.
2. New Reporting Requirements
We are also adopting several new items to Form N-MFP that we
believe will improve our (and investors') ability to monitor money
market funds. As discussed further below, these final amendments
include some, but not all of the new reporting requirements that we had
proposed. For example, as proposed, the final amendments include
additional information about fair value categorization and LEIs (if
available). We are also adopting, with some changes from the proposal,
revisions to several other items, including revised investment
categories for portfolio securities and repurchase agreement
collateral. However, we are not adopting the lot level portfolio
security disclosure, top 20 shareholder information, and security
identifier level reporting on repo collateral that we had proposed.
These amendments we are adopting should help address gaps in data that
have become apparent from analysis of Form N-MFP filings that we have
received to date. As discussed further below, each amendment requires
reporting of additional information that should be readily available to
the fund and, in many cases, should infrequently change from report to
report.
a. Security Identifiers
Certain of the final amendments we are adopting today are designed
to help us and investors better identify fund portfolio
securities.\1460\ 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
will 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.\1461\ To address this issue,
we are adopting as proposed the requirement that funds also report the
LEI that corresponds to the security, if available.\1462\ We are also
[[Page 47858]]
adopting as proposed final amendments that require that funds report at
least one other security identifier, if available.\1463\ One commenter
suggested that the proposed requirement to include multiple securities
identifiers might not be possible for certain securities, such as
municipal securities, which may only have a single identifier
available.\1464\ We note that the requirement to include multiple
identifiers is only required if such identifiers are actually
available.\1465\
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\1460\ We also are also adopting, as proposed, a requirement
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 from Commission staff. We will exclude
this information from Form N-MFP information that is made publicly
available through EDGAR. See Form N-MFP Item 8.
\1461\ Our inability to identify specific securities, for
example, limits our ability to compare ownership of the security
across multiple funds and monitor issuer exposure. As discussed in
the proposal, during the month of February 2013, funds reported
6,821 securities without CUSIPs (approximately 10% of all securities
reported on the form).
\1462\ See Form N-MFP Item C.4; 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 requiring, as proposed, that each registrant
provide its LEI, if available. See 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 http://www.sec.gov/rules/final/2011/ia-3308-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 http://www.treasury.gov/initiatives/ofr/data/Documents/LEI_FAQs_February2013_FINAL.pdf. Consistent with staff guidance
provided in a Form PF Frequently Asked Questions, available at
http://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.
\1463\ See Form N-MFP Item C.5 (requiring that, in addition to
the CUSIP and LEI, a fund provide at least one additional security
identifier, if available). Security identifiers should be readily
available to funds. See, e.g., http://www.sec.gov/edgar/searchedgar/cik.htm (providing a CIK lookup that is searchable by company name).
We are also requiring that a fund provide the LEI (if available) for
a security subject to a repurchase agreement (but unlike under the
proposal, not the CUSIP). See Form N-MFP Items C.8.
\1464\ See Vanguard Comment Letter.
\1465\ Form N-MFP Items C.4 and C.5.
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b. Fair Value Categorization
We are also adopting, with certain modifications from the proposal
described below, 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 and investors'
understanding of a fund and its potential risks by providing
information about how the fund is valuing its investments.
We proposed 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. GAAP.\1466\ We noted in the Proposing
Release that we understood that most money market fund portfolio
securities are categorized as level 2, and that although we understood
that very few of a money market fund's portfolio securities are
currently valued using significant unobservable inputs, and thus
categorized as level 3, information about any such securities would
enable our staff to identify individual securities that may be more
susceptible to wide variations in pricing.\1467\ We also discussed how
Commission staff could 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. One
commenter objected to the requirement to report the fair value level of
portfolio securities, arguing that because most money market fund
securities are categorized as level 2, a more efficient approach would
be to only require disclosure if a security is categorized as level
3.\1468\ We agree that because most money market fund securities are
categorized as level 2, the relevant information for us and investors
is whether the security is categorized as level 3, and that it would be
simpler and less costly for funds to report whether a security is
categorized as level 3, rather than the level used for each security in
the fund's portfolio. Accordingly, the final amendments require funds
to disclose whether a security is categorized at level 3, not the fair
value level of each security.\1469\ We believe that most funds directly
evaluate the fair value level measurement categorization when they
acquire the security and reassess the categorization when they perform
portfolio valuations.\1470\ Accordingly, we continue to believe that
funds should have ready access to the nature of the portfolio security
valuation inputs used.
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\1466\ See Accounting Standards Codification 820, ``Fair Value
Measurement''; Proposed Form N-MFP Item C.20. Level 1 categorized
measurements include quoted prices for identical securities in an
active market. Level 2 categorized measurements include: (i) Quoted
prices for similar securities in active markets; (ii) quoted prices
for identical or similar securities in non-active 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.
Security measurements 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.
\1467\ 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, 25
Rev. Fin. Stud. 55,95 (2011).
\1468\ See Federated VIII Comment Letter.
\1469\ Form N-MFP Item C.20.
\1470\ 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).
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c. Lot Level Reporting
We proposed to require funds to report additional information about
each portfolio security, including, in addition to the total principal
amount, the purchase date, the yield at purchase, the yield as of the
Form N-MFP reporting date (for floating and variable rate securities,
if applicable),\1471\ and the purchase price.\1472\ This information
would have been required to be reported separately for each lot
purchased.\1473\ In addition, we proposed to require that money market
funds disclose the same information for any security sold during the
reporting period.\1474\ In the Proposing Release, we suggested that
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 security. Therefore, our
proposed amendments, if adopted, could have had the incidental benefit
of facilitating price discovery and would have enabled the Commission,
investors, and others to evaluate pricing consistency across funds (and
identify potential outliers).\1475\
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\1471\ We understand that the yields on variable rate demand
notes, for example, may vary daily, weekly, or monthly. Our
amendments would have provided Commission staff and others with a
way to monitor the market's response to changes in credit quality,
as well as identify potential outliers.
\1472\ See proposed N-MFP Item C.17. Because yield at purchase
would be disclosed in a separate item, we proposed to delete the
reference to ``(including coupon or yield)'' from current Form N-MFP
Item 27 (Form N-MFP Item C.2). Because as discussed below, we are
not adopting the lot level reporting requirements we proposed, we
are retaining the reference to coupon in the title of the issue.
However, to facilitate use of the data collected and to clarify the
time that the yield of the security must be calculated (as of the
Form N-MFP reporting date), we are moving the question about yield
out of the title question and adopting it as a standalone response.
See proposed N-MFP Item C.17. When disclosing a security's coupon or
yield (as required in proposed Form N-MFP Items C.2 or C.8.e), funds
generally should report (i) the stated coupon rate, where the
security is issued with a stated coupon, and (ii) the coupon rate as
of the Form N-MFP reporting date, if the security is floating or
variable rate. Because we not adopting the lot level reporting
requirement, funds would not need to report, as discussed in the
proposal, the interest rate at purchase. Finally, funds generally
should disclose the name of the collateral issuer (and not the name
of the issuer of the repurchase agreement).
\1473\ See proposed Form N-MFP Item C.17.
\1474\ See proposed Form N-MFP Item C.25.
\1475\ See 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''), supra
note 48 (suggesting that more frequent reporting on Form N-MFP might
increase price discovery for market-based NAV calculations).
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A number of commenters strongly opposed this proposed new lot level
reporting requirement.\1476\ They noted that the number of reporting
line items could go up tenfold under this requirement, and that costly
new systems would need to be built to effectively report this
information on an ongoing basis.\1477\ Commenters also
[[Page 47859]]
noted that the lot level security information is proprietary, and could
be used to the disadvantage of funds and shareholders.\1478\ They also
questioned the value of this information to the Commission, noting the
high costs of providing it.\1479\ We appreciate the concerns of
commenters, and are modifying the final amendments to eliminate the
proposed lot level security reporting requirement. Although collecting
data on the purchase and sale of money market fund securities could
improve pricing transparency, and allow us to better monitor risks and
valuation issues, we are persuaded by commenters that reporting this
information at the lot level may be costly and could disclose
proprietary information about security purchase prices that could harm
funds, and therefore their shareholders. We also believe that this data
might be more useful if collected on a systematic, market-wide basis
which may both provide more comprehensive and consistent coverage and
mitigate the concerns about proprietary data disclosure.\1480\
Accordingly, we are not adopting the lot level purchase and sale data
reporting requirements that we proposed.
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\1476\ See, e.g., ICI Comment Letter; Federated II Comment
Letter; Wells Fargo Comment Letter.
\1477\ See, e.g., Dreyfus Comment Letter; Fidelity Comment
Letter (noting that for one fund, one month's reporting included 336
lines at the CUSIP level, and under the proposed lot level
requirement, that fund would have contained over 2100 reporting
lines, and that of those lots, only 15 were purchased at different
yields, and 11 of those were Treasury securities).
\1478\ See, e.g., Vanguard Comment Letter; BlackRock II Comment
Letter.
\1479\ See, e.g., ICI Comment Letter (``Indeed, our members have
expressed concern that the reporting of this type of confidential
trading information could compromise management of their
portfolios.''); Fidelity Comment Letter.
\1480\ One commenter discussed a similar approach, suggesting
that ``price discovery might be enhanced through other methods, such
as increasing the categories of securities reported through the
Financial Industry Regulatory Authority's Trade Reporting and
Compliance Engine (TRACE) system.'' Wells Fargo Comment Letter.
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d. Liquidity and Shareholder Flow Data
We are also adopting amendments, with certain modifications from
the proposal as described below, that require funds to report the
amount of cash they hold,\1481\ the fund's daily liquid assets and
weekly liquid assets,\1482\ and whether each security is considered a
daily liquid asset or weekly liquid asset.\1483\ Unlike the other items
of disclosure on Form N-MFP that must be disclosed on a monthly basis,
as discussed previously, we are requiring that funds report their Daily
Liquid Assets and Weekly Liquid Assets on a weekly basis.\1484\ One
commenter suggested that we align reporting of fund liquid assets on
Form N-MFP (which is dollar based) with the reporting of liquid assets
on fund Web sites (which is percentage based).\1485\ We agree that such
alignment would provide better consistency and comparability of
information between information on fund's Web site and the information
reported on Form N-MFP. Accordingly, the final amendments to Form N-MFP
require reporting of fund daily and weekly liquid assets on both a
dollar and percentage basis.\1486\ Because the percentages are already
reported on fund Web sites, this information should be readily
available. The information should help us and others to better
understand the relative liquidity of fund portfolios.
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\1481\ See Form N-MFP Item A.14.a and Form N-MFP General
Instructions, E. Definitions (requiring, as proposed, disclosure of
the amount of cash held and defining ``cash'' to mean demand
deposits in insured depository institutions and cash holdings in
custodial accounts, respectively). We are also amending, as
proposed, Item 14 of 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
Form N-MFP Item A.14.c. This amendment would ensure that reported
amounts are not double counted.
\1482\ See Form N-MFP Item A.13.
\1483\ Form N-MFP Items C.21-C.22.
\1484\ See supra note 1448.
\1485\ Fidelity Comment Letter. Requiring both the total value
and percentage of total assets of these data points parallels the
information that is collected for each security in Items C.18 and
C.19 (dollar value and percentage basis).
\1486\ Form N-MFP Items A.13.a-A.13.d. As discussed in section
III.G.2.i, we are not requiring disclosure of liquid assets on fund
Web sites on a dollar basis because we believe that the most
relevant information to investors is the percentage of fund assets
that are liquid.
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Similarly, we are adopting the proposed amendments 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.\1487\ 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) would be reported weekly within the
form. Several commenters objected to the requirement to disclose
shareholder flow data, arguing that such disclosure could be confusing
to shareholders, and is not necessarily indicative of stress.\1488\ One
commenter also suggested that if shareholder flow data was reported, it
should be on a net rather than gross basis.\1489\
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\1487\ See Form N-MFP Item B.6. We also are continuing to
require that money market funds disclose the monthly gross
subscriptions and monthly gross redemptions for the month reported.
See current Form N-MFP Item 23.
\1488\ See, e.g., Legg Mason & Western Asset Comment Letter;
Dreyfus Comment Letter; Wells Fargo Comment Letter.
\1489\ SIFMA Comment Letter.
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We agree that shareholder flows do not necessarily indicate stress
in a fund, but they can be informative in monitoring fund activity and
evaluating the potential risks. We believe gross rather than net flow
data is more useful for us and investors because it allows more
transparency into the particular redemption and purchase patterns at a
fund. We do not believe this additional information would confuse
investors, because they can compare the gross inflows to the gross
outflows if they believe that the net data is the relevant information
in their decision making process. We continue to believe that these
amendments would provide Commission staff and others with additional
relevant data to efficiently monitor fund risk (such as monitoring the
risk that a fund might cross the 10% liquidity-based fee threshold
under the liquidity fee amendments we are adopting today), and
correlated risk shifts in liquidity across the industry.\1490\
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, investors, and
others to better understand the significance of other liquidity
disclosures required by our proposals (e.g., daily and weekly liquid
assets). It will also allow the Commission to better understand
patterns of shareholder flows over time and how funds respond to those
shareholder flows, and compare those flows to funds' liquid assets, and
we may use them in connection with our examination and regulatory
efforts. Accordingly, we are adopting the amendments to disclose weekly
gross subscriptions and weekly gross redemptions as proposed.
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\1490\ As discussed in section III.E.9.a, money market funds
would also be required to disclose each day on its Web site the
fund's Daily Liquid Assets and Weekly Liquid Assets and shareholder
flows.
---------------------------------------------------------------------------
e. Fee Waivers
We are today also adopting the proposed requirement that each fund
must disclose whether its adviser or a third party paid for or waived
all or part of its operating expenses or management fees during a given
reporting period.\1491\
[[Page 47860]]
One commenter objected to this proposed requirement, arguing that fee
waivers are not necessarily indicative of an adviser's financial
position, and that such information may confuse investors and leave an
incorrect impression of the health of the adviser because waivers are
just one aspect of the financial ability of an adviser to support a
fund.\1492\
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\1491\ 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)).
\1492\ Schwab Comment Letter.
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We agree that fee waivers are not necessarily dispositive
information about an adviser's financial position or its willingness to
potentially support a fund. We do not agree that this information would
confuse investors, in part because fee waivers are already disclosed in
the fund's prospectus (as discussed below), and interested investors
may wish to use this information in their investment decision making
process, even if it is not the sole or even most dispositive piece of
information used in evaluating the financial health of the adviser or
the ability of the adviser to support the fund in times of stress. We
continue to believe, as stated in the proposal, that information about
expense waivers is relevant and will help both investors and the
Commission better evaluate money market fund performance and risk and
respond accordingly. To the extent that money market funds waive fees
to boost performance and attract assets, the new disclosure requirement
should help investors better understand the basis of fund performance
so they can make more informed investment choices.\1493\ In addition,
the Commission will be better able to evaluate and respond to financial
strains on fund advisers. In low interest rate environments, money
market fund yields can become sufficiently small that advisers must
waive fees to offer investors positive returns.\1494\ It may also help
us better monitor the overall financial impact of fee waivers on money
market fund advisers and the effect of such waivers on the industry as
a whole. Accordingly, we are adopting the fee waiver reporting
requirement as proposed.
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\1493\ We recognize fee waivers are also required to be
disclosed in a fund's fee table, but believe it is useful to have
them reported on Form N-MFP as well, for the same reasons discussed
in the section on weekly reporting within a monthly filing above, as
each set of disclosures may reach different audiences who may be
seeking out the information for different purposes (i.e. an investor
looking at fee waivers in the fee table may be looking at them for
purposes of whether fees on their investments may go up later, while
investors looking in Form N-MFP may be looking to help determine the
potential impact on the adviser).
\1494\ In some cases, fee waivers can have similar effects as
capital support. Since 2009, MMFs have dramatically increased fee
waivers to keep yields positive in a low interest rate environment.
In 2011, MMFs waived more fees ($5.2 billion) than they collected
($4.7 billion). See Investment Company Institute, ``Submission by
the Investment Company Institute Working Group on Money Market Fund
Reform Standing Committee on Investment Management International
Organization of Securities Commissions,'' Feb 7, 2012. Moreover,
more money was forfeited in fee waivers from 2009-2011 ($13.3
billion) than was spent during the financial crises from 2007-2009
by fund advisers on capital support events ($12.0 billion) to
stabilize the NAVs of the largest 100 (US and European) prime funds.
See Moody's Sponsor Support Report, supra note 54.
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f. Percentage of Shares Held by Top 20 Shareholders
We proposed to amend Form N-MFP to require funds to disclose the
total percentage of shares outstanding held by the twenty largest
shareholders of record. At the time, we noted that this information
could 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.\1495\
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\1495\ Form N-MFP Item A.19.
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A number of commenters objected to this proposed reporting
requirement, arguing that such data could be confusing to shareholders
because investments through omnibus accounts would be counted as single
shareholders of record, potentially portraying a misleading portrait of
the concentration level of the fund.\1496\ A commenter also suggested
that the appearance of higher shareholder concentration levels as a
result of omnibus accounts does not necessarily correlate with higher
run risk and may mislead the public.\1497\ We recognize this, and agree
that because of the prevalence of omnibus accounts, the proposed
shareholder concentration disclosure may not succeed in achieving its
purpose as the information provided may portray an incorrect and
misleading picture of the level of shareholder concentration in a fund.
This disclosure may create confusion if certain funds appear more
concentrated than they actually are, as a result of those omnibus
accounts appearing to be a single shareholder. For the same reasons, we
expect that the information would similarly not be particularly useful
for us in our monitoring efforts. Accordingly, upon further
consideration of these concerns, we are not adopting the requirement to
report the percentage of fund shares held by the top 20 shareholders.
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\1496\ See, e.g., Schwab Comment Letter; Federated VIII Comment
Letter.
\1497\ Dreyfus Comment Letter.
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g. Investment Categories
We are also adopting, with some changes in response to comments,
certain amendments to Form N-MFP's investment categories for portfolio
securities. The new investment categories should 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'').\1498\
Several commenters suggested revisions to the investment categories we
proposed, noting that these changes would better match investment
categories that are used more broadly and consistently in the
industry.\1499\ After reviewing these comments, we have revised the
final investment categories to better align the categories with typical
industry categorizations and provide a more precise description of fund
investments.\1500\ We expect that the revised categories should not
pose an
[[Page 47861]]
additional burden compared to the categories we proposed, as they are
very similar, with minor changes to better reflect our understanding of
common industry practice.
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\1498\ Currently N-MFP requires funds to categorize their
investments from among the following categories: ``Treasury Debt;
Government Agency Debt; Variable Rate Demand Note; Other Municipal
Debt; Financial Company Commercial Paper; Asset Backed Commercial
Paper; Other Commercial Paper; Certificate of Deposit; Structured
Investment Vehicle Note; Other Note; 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.''
Current Form N-MFP Item 31. We proposed 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 Asset-Backed 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).''
\1499\ See Wells Fargo Comment Letter; Fidelity Comment Letter.
\1500\ The final rules would amend the amend the investment
categories in Form N-MFP Item C.6 to include the following
selections: ``U.S. Treasury Debt; U.S. Government Agency Debt; Non-
U.S. Sovereign, Sub-Sovereign and Supra-National Debt; Certificate
of Deposit; Non-Negotiable Time Deposit; Variable Rate Demand Note;
Other Municipal Security; Asset Backed Commercial Paper; Other Asset
Backed Securities; U.S. Treasury Repurchase Agreement, if
collateralized only by U.S. Treasuries (including Strips) and cash;
U.S. Government Agency Repurchase Agreement, collateralized only by
U.S. Government Agency securities, U.S. Treasuries, and cash; Other
Repurchase Agreement, if any collateral falls outside Treasury,
Government Agency and cash; Insurance Company Funding Agreement;
Investment Company; Financial Company Commercial Paper; Non-
Financial Company Commercial Paper; or Tender Option Bond. If Other
Instrument, include a brief description.''
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h. Other Amendments
In addition, we are adopting, as we proposed, the amendments 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 (``WAL'') (i.e., without reference to the
exceptions in rule 2a-7(i) regarding interest rate
readjustments).\1501\ As we discussed in our proposal, this information
will assist the Commission in monitoring and evaluating this risk, at
the security level, as well as help evaluate compliance with rule 2a-
7's maturity provisions.\1502\ In addition, our amendments would make
clear that funds must disclose for each security all three maturity
calculations as required under rule 2a-7: WAM, WAL, and the legal
maturity date.\1503\
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\1501\ Form N-MFP Item C.12.
\1502\ We are also newly clarifying that the maturity date
required to be reported in current Form N-MFP Item 35 is the
maturity date used to calculate WAM under rule 2a-7(d)(1)(ii) (see
Form N-MFP Item C.11) and the maturity date required to be reported
in current Form N-MFP Item 36 is the ultimate 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 Form
N-MFP Item C.13). The ultimate legal maturity date, as clarified,
will help us distinguish between debt securities that are issued by
the same issuer.
\1503\ Form N-MFP Items C.11, C.12 and C.13. In a modification
from the proposal, we have changed the term ``final legal maturity
date'' in Item C.13 of Form N-MFP to ``ultimate legal maturity
date'' to clarify the reporting date for securities that may have
varying maturity dates.
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We are also adopting, as proposed, a requirement that a fund
disclose the number of shares outstanding, to the nearest hundredth, at
both the series level and class level.\1504\ This information would
permit us to verify or detect errors in information provided on Form N-
MFP, such as NAV. We are also adopting, as proposed, 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.\1505\ As
we discussed in the proposal, these amendments will improve the
Commission's and (investors') ability to evaluate and monitor a
security's credit and default risk. We did not receive comment on these
other amendments and are adopting them as proposed.
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\1504\ Form N-MFP Items A.17 and B.4.
\1505\ Form N-MFP Items C.14.e and C.14.f.
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i. Economic Analysis
As detailed above and discussed in the proposal, these new
reporting requirements are intended to address gaps in the reporting
regime that Commission staff has identified through our experience with
Form N-MFP and to enhance the ability of the Commission and investors
to monitor funds. Although the benefits are difficult to quantify, they
will 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, if available,
already required). In addition, many of our new reporting requirements
will enhance the ability of the Commission and investors to evaluate a
fund's risk characteristics (by requiring that funds disclose, for
example, the following data: security categorizations, whether a
security is valued using level 3 measurements; more detailed
information about securities at the time of purchase; and liquidity
metrics). We believe that the additional information required is
readily available to funds as a matter of general business practice and
therefore will 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 IV.C.2 below.
These new reporting requirements will 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 among funds 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. As
we discussed in the Proposing Release, the newly disclosed information
may cause some money market fund investors to move their assets among
different money market funds, but we do not have the information
necessary to provide a reasonable estimate of this possibility. In
addition, some investors may move assets among money market funds and
alternative investments (e.g., private liquidity funds, separately
managed accounts, or certificates of deposit) 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
other underlying assets compare with those of money market funds. In
addition, it is difficult to establish the extent to which any such
exchanges would be a result of the broader amendments we are making or
a marginal effect of the amendments we are making to Form N-MFP. In
addition, no commenters suggested ways for us to quantify these
exchanges with specificity. Thus, we continue to remain unable to
estimate the amount of such asset movements with specificity.
Therefore, we are unable to estimate the overall net effect on capital
formation or competition. Nevertheless, we believe that the net effect
will be small, especially during normal market conditions, in part
because such asset movements would generally be among investment
alternatives, rather than avoiding investment entirely.
3. Clarifying Amendments
We are adopting, as proposed, 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.\1506\ We believe that many of our clarifying amendments are
consistent with current filing practices.\1507\
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\1506\ We are also adopting, as proposed, 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 sub-parts. See Form N-MFP Items 6 and 7.
\1507\ As discussed below, the final amendments are consistent
with written guidance our staff has provided to money market fund
managers and service providers completing Form N-MFP.
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We understand that some fund managers compile their funds'
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 are amending, as proposed, 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.\1508\ We are also revising, as proposed, the
definition of ``Master-Feeder Fund'' to clarify that the definition of
``Feeder Fund'' includes unregistered funds (such as offshore
[[Page 47862]]
funds).\1509\ Our final amendments also would clarify, as proposed,
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.\1510\ We also are requiring, as proposed, 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.\1511\
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\1508\ See Form N-MFP General Instruction A (Rule as to Use of
Form N-MFP); rule 30b1-7. Our 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 http://www.sec.gov/divisions/investment/guidance/formn-mfpqa.htm.
\1509\ See 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 amendment
is designed to address inconsistencies in reporting of master-feeder
fund data that we have observed in filings, and will help us
determine the extent to which feeder funds, wherever located, hold a
master fund's shares. The change will also reflect how we understand
data from master-feeder funds is collected by the ICI for its
statistical reports. We are also making grammatical and conforming
amendments to Form N-MFP Items A.7 and A.8, as proposed.
\1510\ See Form N-MFP Items A.11 and A.12 (defining ``WAM'' and
``WAL'' and cross-referencing the maturity terms to rule 2a-7). We
are also amending 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. Form N-MFP Item A.19.
These amendments are intended to achieve consistency in reporting
and remove potential ambiguity for feeder funds when reporting the
7-day gross yield.
\1511\ See text before 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 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.
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We also are amending, with certain modifications from the proposal
discussed below, the reporting requirements for repurchase agreements
by restating the item's requirements as two distinct questions.\1512\
The amendment would 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.\1513\ As part of
these amendments, we proposed to amend form N-MFP to require reporting
of a security identifier of collateral securities underlying repurchase
agreements.\1514\ One commenter objected to this revision, arguing that
this level of detail would publicly disclose proprietary information
about broker-dealer inventories, which may negatively affect
allocations of repurchase agreements to money market funds.\1515\ We
appreciate this concern and are not adopting the requirement to report
a security identifier of the collateral securities underlying
repurchase agreements for that reason.\1516\ In addition, the same
commenter objected to the revised investment categories we proposed
regarding this collateral, arguing that we should instead use the
categories used to report tri-party repurchase agreement information to
the Federal Reserve Bank of New York (``NY Fed'').\1517\ We agree that
conforming these categories to those used in other reporting contexts
will ease reporting burdens and enhance comparability, and accordingly
have modified the proposed investment categories to conform them to the
categories used by the NY Fed.\1518\
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\1512\ See 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 Form N-
MFP Item C.8. (requiring that a fund describe the securities subject
to the repurchase agreement). This information should be readily
available to funds and would 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 Form N-MFP Item C.8.a.
\1513\ We are also making several other non-substantive
clarifications to other items. See Form N-MFP Item 1 (amending the
format of reporting date provided by funds); and Form N-MFP Item
A.10 (modifying, for consistency, the names of money market fund
categories).
\1514\ Proposed Form N-MFP Item C.8.c.
\1515\ Wells Fargo Comment Letter.
\1516\ See Form N-MFP Item C.8.
\1517\ Wells Fargo Comment Letter.
\1518\ See Form N-MFP Item C.8.h.
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Finally, we are amending, as proposed, 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, which should
help us monitor funds diversification.\1519\ Our amendments also
clarify, as proposed, 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.\1520\
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\1519\ See Form N-MFP Items C.14--C.16.
\1520\ 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 are amending, as proposed, 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 Form N-MFP Items C.14 and C.15.
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As discussed above, and in the proposal, these 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 these clarifying amendments would
impose any new costs on funds other than those required to modify
systems used to aggregate data and file reports on Form N-MFP, to the
extent that funds in the past may have reported this information
differently. These costs are discussed in section III.G.5 below.
Because these clarifying amendments will not change funds' current
reporting obligations, we believe there will be no effect on
efficiency, competition, or capital formation.
4. Public Availability of Information
As we proposed, we are today eliminating the 60-day delay on public
availability of Form N-MFP data.\1521\ 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.
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\1521\ See rule 30b1-7 (eliminating subsection (b), public
availability).
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Several commenters objected to our proposed elimination of the 60-
day delay, particularly considering the sensitivity of the new lot
level security reporting that we had proposed (but, as discussed above,
are not adopting).\1522\ Other commenters supported shortening the
delay to five or ten days (primarily to permit amendments to fix
problems in the data if needed),\1523\ or eliminating it
entirely.\1524\
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\1522\ See, e.g., BlackRock II Comment Letter; Legg Mason &
Western Asset Comment Letter.
\1523\ See, e.g., ICI Comment Letter; Federated II Comment
Letter; Vanguard Comment Letter.
\1524\ See U.S. Bancorp Comment Letter (``We are in full support
of immediate release of a monthly Form N-MFP. . .'').
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This delay, which we instituted when we adopted the form in 2010,
responded to commenters' concerns regarding potential reactions of
investors to the extent of the additional disclosure of funds'
portfolio information and shadow NAVs in the form.\1525\ Although we
expected that, over time, investors and analysts would become more
accustomed to the information disclosed about fund portfolios and thus
there may be less need in the future to keep
[[Page 47863]]
the portfolio information private for 60 days, we believed then that
the shadow price data should not be made public immediately, at least
initially.\1526\ However, with experience, we now believe that the
immediate release of the shadow price data and other money market fund
portfolio security data would not be harmful and that investors may
benefit from more timely access to the data. 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, and frequently
provide lists of holdings and information about liquidity to the public
as well.
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\1525\ See 2010 Adopting Release, supra note 17, at section
II.E.2 (noting that there may be less need in the future to require
a 60-day delay).
\1526\ See 2010 Adopting Release, supra note 17, at text
accompanying nn.329-343.
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Several commenters requested that if we eliminated the public
availability delay that we lengthen the 5-day filing time period in
light of the increased reporting requirements under the amended form,
in order to provide additional time to fix any potential errors.\1527\
As discussed above, we are not adopting some of the more extensive
reporting requirements that we proposed (such as lot level security
reporting) and we have streamlined and revised other requirements to
better ease the filing burden. In addition, the longer the filing
period provided, the more it increases the risk of staleness in the
reported data and thereby reduces its usefulness to the Commission and
to the public. We do not believe providing a filing period of longer
than 5 days is necessary, in part because we are not adopting some of
the more onerous reporting requirements we proposed, and in part
because in our experience, less than 0.5% of money market funds have
needed to make amendments to Form N-MFP filings after the reporting
deadline to fix reporting issues in their filings. This leads us to
believe that the value of immediate public access to the data justifies
the risk of needing to make amendments. Accordingly, we are not
changing the current 5-day reporting period at this time.
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\1527\ See, e.g., ICI Comment Letter; Dechert Comment Letter;
Schwab Comment Letter.
---------------------------------------------------------------------------
Eliminating the 60-day delay will 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. Because, as
discussed above, shadow prices (which were a primary reason why we
adopted the 60-day delay in making filings public) have been disclosed
by a number of money market funds since February 2013 apparently
without incident, we do not believe that eliminating the 60-day delay
would affect capital formation.
5. Operational Implications of the N-MFP Amendments
We anticipate that fund managers would incur costs relating to
reporting the new items of information we are requiring on Form N-MFP.
To reduce costs, we have decided to make needed improvements to the
form at the same time we are making amendments necessitated by the
amendments to rule 2a-7 we are adopting.\1528\ We note that the
clarifying amendments should not affect, or should only minimally
affect, current filing obligations or the information content of the
filings.
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\1528\ One commenter noted the benefit of consolidating changes
to the form at a single time, noting that each time they have to
amend their systems to report new information to the Commission on
Form N-MFP they incur significant technology related costs. See
Dreyfus Comment Letter.
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As we discussed in the proposal, 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, and we
requested comment on that belief.\1529\ No commenters provided specific
data or estimates regarding the cost estimates we provided in the
Proposing Release for the amendments to Form N-MFP, although some
suggested that the costs of some amendments could be significant.\1530\
As discussed above, we have revised the final amendments from our
proposal in a number of ways in order to reduce costs to the extent
feasible and still achieve our goals of enhancing and improving the
monitoring of money market fund risks. Accordingly, we continue to
expect that the operational costs to money market funds to report the
information required in Form N-MFP would be the same costs we discuss
in the Paperwork Reduction Act analysis in section IV.C.3 of the
Release, below, which have been reduced to account for the changes we
are making from the proposal, as discussed in that section. As
discussed in more detail in that section, we estimate that our
amendments to Form N-MFP will result in first-year aggregate additional
47,515 burden hours at a total time cost of $12.3 million plus $356,256
in total external costs for all funds, and 33,540 burden hours at a
total time cost of $8.7 million plus $356,256 in total external costs
for all funds each year hereafter.\1531\
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\1529\ See Proposing Release supra note 25, at section III.H.6.
\1530\ See, e.g., Fidelity Comment Letter.
\1531\ See infra section IV.C.3.
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H. Amendments to Form PF Reporting Requirements
Today the Commission is also amending Form PF, the form that
certain investment advisers registered with the Commission use to
report information regarding the private funds they manage. Among other
things, Form PF requires advisers to report certain information about
the ``liquidity funds'' they manage, which are private funds that seek
to maintain a stable NAV (or minimize fluctuations in their NAVs) and
thus can resemble money market funds.\1532\ In the proposal, we noted a
concern that some of the proposed reforms could result in assets
shifting from registered money market funds to unregistered products
such as liquidity funds, and we proposed amendments to Form PF to, in
part, help the Commission and FSOC track any such potential shift in
assets and better understand the risks associated with it.\1533\
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\1532\ For 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 Form PF: Glossary of Terms.
\1533\ See Proposing Release, supra note 25, at section I.
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Most commenters who addressed the proposed PF amendments supported
them, agreeing that they would help track such a potential shift,\1534\
and one commenter objected, urging the Commission to consider the
significant costs, and questioning the potential benefits.\1535\ As
discussed in greater detail below, we have considered the costs of
filing this information with us, and believe that they are justified by
the significant benefits to the Commission and FSOC in better enabling
us to track and respond to potential shifts in assets from registered
money market funds into unregistered alternatives. Accordingly, today
we are adopting the Form PF amendments largely as proposed, with some
revisions to respond to comments and correspond the reporting as much
as possible to the
[[Page 47864]]
amendments we are making to Form N-MFP.
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\1534\ See, e.g., Goldman Sachs Comment Letter; ICI Comment
Letter; Oppenheimer Comment Letter.
\1535\ See SSGA Comment Letter.
---------------------------------------------------------------------------
We adopted Form PF, as required by the Dodd-Frank Act,\1536\ to
assist in the 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.\1537\ As discussed in more detail below, the Commission and
FSOC have recognized the potentially increased significance of cash
management products other than money market funds, including liquidity
funds, after the money market fund reforms we are adopting today are
effective.\1538\ Therefore, to enhance the ability to monitor and
assess the short-term financing markets and to facilitate our oversight
of those markets and their participants, we are today requiring 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.\1539\
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\1536\ 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 are amending today, and section 4 were adopted only by the
Commission. Id.
\1537\ 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 1536, at sections II and VI.A.
\1538\ See infra note 1565 and accompanying text.
\1539\ As we proposed, we are incorporating 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 amended, 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 amended Form N-MFP. As we proposed, we are not
including 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 are collecting 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. As we proposed, we are not
including 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.
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As discussed in the Proposing Release, we share the concern
expressed by some commenters that, if the money market fund reforms we
are adopting today 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 increase
risk by reducing transparency of the potential purchasers of short-term
debt instruments.\1540\ We discuss in detail the potential for money
market fund investors to reallocate their assets to alternative
investments in section III.A.1.c.iv above.
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\1540\ See Proposing Release, supra note 25, n.803.
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The amendments that we are adopting 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, which will
better enable FSOC to monitor and address any related systemic risks
and better enable us to develop effective regulatory policy responses
to any shift in investor assets. Second, the amendments to Form PF are
designed to enable more effective administration of relevant regulatory
programs even if investors do not shift their assets as a result the
amendments we are adopting today, 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 Form PF amendments apply only to large liquidity fund advisers,
which generally are SEC-registered investment advisers that advise at
least one liquidity fund and manage, collectively with their related
persons, at least $1 billion in combined liquidity fund and money
market fund assets.\1541\ Large liquidity fund advisers today are
required to file information on Form PF quarterly, including certain
information about each liquidity fund they manage.\1542\ Under our
final amendments, 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:\1543\
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\1541\ 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).
\1542\ See Form PF Instruction 3 and section 3. This in contrast
to Form N-MFP, which is filed on a monthly basis. As discussed
below, we currently believe that quarterly filing of this
information most appropriately balances our need for this
information with the burdens of filing the data, especially
considering that large liquidity fund advisers file information
quarterly already about the funds they advise, but do not currently
file portfolio information about those funds.
\1543\ See Form PF Question 63. Advisers will be required to
file this information with their quarterly liquidity fund filings
with data for the quarter broken down by month. Advisers will 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.
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The name of the issuer;
the title of the issue;
certain security identifiers;
the category of investment \1544\ (e.g., Treasury debt,
U.S. government agency debt, asset-backed commercial paper, certificate
of deposit, repurchase agreement \1545\);
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\1544\ As under amended Form N-MFP, we are revising the
investment categories form the proposal in the same way to more
accurately reflect the investment categories commonly used today.
See supra section III.G.2.g.
\1545\ For repurchase agreements we are also requiring 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). As under amended Form N-MFP, we are not
adopting the proposed CUSIP reporting requirement, and we are
amending the proposed repurchase agreement collateral investment
categories to better align with the categories used by the NY Fed.
See supra section III.G.3.
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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)
[[Page 47865]]
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 ultimate legal maturity date; \1546\
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\1546\ We are changing this from ``final'' as proposed to
``ultimate'' for the same reasons we are making this change in Form
N-MFP. See supra note 1503.
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whether the instrument is subject to a demand feature,
guarantee, or other enhancements, and information about any of these
features and their providers;
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 3 asset or
liability on Form PF; \1547\
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\1547\ See Form PF Question 14. See also infra notes 1466-1470
and accompanying and following text.
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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.\1548\
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\1548\ We are also defining the following terms in Form PF, as
proposed: conditional demand feature; credit rating agency; demand
feature; guarantee; guarantor; and illiquid security. See Form PF:
Glossary of Terms.
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These amended reporting requirements are largely the same as the
reporting requirements for registered money market funds under amended
Form N-MFP, with some modifications to better tailor the reporting to
private liquidity funds. As we proposed, the final amendments will also
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 will 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. The amendments will also require, as proposed, 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.\1549\
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\1549\ See Form PF Question 64. This question is based on the
current definition of a ``parallel fund structure'' in Form PF. See
Form PF: Glossary of Terms (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'').
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After considering the comments received and the importance and
utility of the information that would be reported on amended Form PF
(as discussed further below), we are today adopting the Form PF
amendments substantially as proposed. As noted above, most commenters
who discussed the Form PF amendments generally supported them,\1550\
although one commenter objected, suggesting that the costs of
compliance would outweigh the benefits.\1551\ We have made a number of
modifications to the Form PF reporting requirement, such as removing
lot level purchase and sale reporting, that should help minimize costs
and ease the burden. Nonetheless, we recognize that there are costs to
filing this information with us which are discussed in detail below,
and believe that they are justified by the significant benefits to FSOC
and the Commission in better enabling tracking and responding to
potential shifts in assets from registered money market funds into
unregistered alternatives.
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\1550\ See, e.g., Goldman Sachs Comment Letter; ICI Comment
Letter; Oppenheimer Comment Letter.
\1551\ SSGA Comment Letter.
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Another commenter suggested that we reorganize and consolidate the
questions in the proposed form amendments to minimize the system
changes necessary to file the form.\1552\ We agree with this commenter
and the final amendments have been organized to minimize system changes
and costs as much as possible.\1553\
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\1552\ Comment Letter of Axiom SL (Aug. 28, 2013) (``Axiom
Comment Letter'').
\1553\ By eliminating lot level sale data reporting (proposed
question 64 of Form PF) and accordingly renumbering proposed
question 65 (parallel funds) as question 64, we have restructured
the amendments to Form PF so that the amendments keep the same
numbering range as the current form like the commenter suggested.
See Form PF Question 64.
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Consistent with our proposed amendments to Form N-MFP, we proposed
to require large liquidity fund advisers to provide lot level
information about any securities purchased or sold by their liquidity
funds during the reporting period, including sale and purchase
prices.\1554\ As discussed in section III.G.2.c above, we have been
persuaded by commenters that the costs of such reporting do not justify
the potential benefits at this time, and that the data may be better
collected on a more systematic market wide basis. Accordingly, we are
not today adopting the proposed lot level reporting for Form PF.\1555\
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\1554\ See proposed Form PF Question 64. See also supra notes
1474-1475 and accompanying text.
\1555\ See supra note 1476 and accompanying text. Although as
discussed above, we are not adopting the lot level reporting
requirements generally, we are adopting a requirement to report the
coupon or yield of the security as of the reporting date. We
proposed to include this reporting requirement with the other lot
level reporting questions. See proposed Form PF Question 63(o).
Reporting this information would not require the use of lot level
data, and thus should not pose the same difficulties as the other
reporting requirements we are not adopting. Much like under the
final amendments to Form N-MFP, the final Form PF amendments would
include reporting of the coupon in the title of the issue but
information about yield would be in a standalone question. See
proposed Form PF Questions 63(c) and 63(o). As a result of not
adopting question 64 about lot level sales, we are also renumbering
proposed question 65 on parallel funds as question 64 and relabeling
the Item as F rather than Item G. See Form PF Item F, Question 64.
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One commenter suggested that Form PF be filed monthly like N-MFP,
rather than on a quarterly basis, to better align the information in
the two forms,\1556\ although another comment opposed such a monthly
filing requirement.\1557\ We are not requiring monthly filing of Form
PF at this time because we believe the ongoing costs and system changes
necessary for large liquidity funds to make such a monthly filing would
not be justified by the utility of more frequent filing, especially in
light of the fact that these funds currently file Form PF on a
quarterly basis and these amendments are an enhancement to that filing.
To require large liquidity advisers to move to a monthly reporting
schedule would impose significant new costs, over and above the costs
associated with the Form PF amendments we are adopting today, requiring
these advisers to change systems and processes designed for quarterly
reporting to a monthly schedule. As noted above, several reporting
requirements do ask for information on a monthly basis within the
quarterly filed Form PF, which should allow an effective comparison of
the data to the information collected on Form N-MFP and will allow for
effective oversight of investment activities of large liquidity
advisers.
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\1556\ ICI Comment Letter.
\1557\ Oppenheimer Comment Letter.
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Another commenter asked that we exempt unregistered money market
funds from filing the Form PF amendments if the unregistered money
market fund is exclusively owned by registered funds investing in an
unregistered fund pursuant to rule 12d1-1 under the Investment Company
[[Page 47866]]
Act.\1558\ Rule 12d1-1 permits a registered fund to invest in an
unregistered money market fund in excess of the limits of section
12(d)(1) of the Act, provided, among other things, that the
unregistered fund operates in compliance with rule 2a-7 of the Act. The
commenter argued that because these funds are exclusively owned by
registered funds, any shift in assets to these unregistered money
market funds would not represent the kind of shift that the Form PF
amendments are designed to monitor, and thus such 12d1-1 funds should
not be required to bear the burdens of filing the Form PF amendments.
Our amendments to Form PF are designed, in part, to allow better
monitoring of risks associated with investments in money market
instruments and to generally track and monitor money market asset
flows. Exempting such funds from filing amended Form PF would not be
consistent with this goal, and could leave a significant gap in our
ability to monitor and track money market instrument holdings. In the
absence of the Form PF portfolio security reporting requirements, if
there was a shift in assets from registered money market funds that
file portfolio holdings reports under Form N-MFP to unregistered 12d1-1
funds that do not file such information about their holdings, we and
FSOC would lose significant transparency and monitoring ability.
Accordingly, we are not adopting such an exemption.
---------------------------------------------------------------------------
\1558\ See Wells Fargo Comment Letter.
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2. Utility of New Information, Including Benefits, Costs, and Economic
Implications
As discussed in the 2013 Proposing Release, the information that
advisers must report on Form PF (both currently and under the final
amendments) 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.\1559\ The information that advisers must report is
intended to aid FSOC in its determination of whether and how address
issues related to systemic risk.\1560\ Finally, the information that
advisers must report is designed to assist FSOC and the Commission 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.
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\1559\ See Form PF Adopting Release, supra note 1536, at section
II.C.3.
\1560\ Id.
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We believe, based on our staff's consultations with staff
representing the members of FSOC, that the additional information we
are requiring advisers to report on Form PF will assist FSOC in
carrying out these responsibilities. Several commenters agreed that the
Form PF amendments will assist FSOC and the Commission in these
responsibilities.\1561\ FSOC and the 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 after we adopt the money market fund
reforms we are making today.\1562\ FSOC has 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.''\1563\ We expect, therefore, that
requiring advisers to provide additional information on Form PF will
enhance the ability to monitor and assess risk in the short-term
financing markets.
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\1561\ See Goldman Sachs Comment Letter (the PF amendments will
``. . . assist the Financial Stability Oversight Council in
fulfilling its responsibilities and better enable the Commission to
develop effective regulatory policy responses to any shift in
investor assets from money funds to private liquidity funds.''); ICI
Comment Letter.
\1562\ See Proposed Recommendations Regarding Money Market
Mutual Fund Reform, Financial Stability Oversight Council [77 FR
69455 (Nov. 19, 2012)] (the ``FSOC Proposed Recommendations''), 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 1536, 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 note 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'').
\1563\ See FSOC Proposed Recommendations, supra note 1562, 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 506, 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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We are requiring only large liquidity fund advisers to report this
additional information for the same reason that we previously
determined to require only larger private fund advisers to provide more
comprehensive information on their respective industries on Form PF:
because a relatively small group of advisers represents a substantial
portion of the assets.\1564\ Based on information filed on Form PF and
Form ADV, as of the end of 2013, we estimate that there were
approximately 24 large liquidity fund advisers (out of 43 total
advisers that advise at least one liquidity fund), with their aggregate
liquidity fund assets under management representing approximately 91%
of liquidity fund assets managed by all advisers registered with the
Commission.
---------------------------------------------------------------------------
\1564\ See Form PF Adopting Release, supra note 1536, at n.88
and accompanying text.
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This threshold also should minimize the costs of our amendments
because large liquidity fund advisers already are required to make
quarterly reports on Form PF and, as of the end of 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 amendments, which we discuss
below, because large liquidity fund advisers generally already have (or
may be able to readily 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 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.
[[Page 47867]]
In addition to our concerns about the ability to assess risks
associated with money market fund investments, we also are concerned
about losing transparency regarding money market fund investments that
may shift into liquidity funds as a result of the other reforms we are
adopting today and our ability effectively to formulate policy
responses to such a shift in investor assets.\1565\ We noted in the
proposal that a run on liquidity funds could spread to money market
funds because, for example, both types of funds often invest in the
same securities as noted above.\1566\ 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.
Several commenters agreed that the Form PF amendments would reduce the
chance that these reforms will diminish transparency in the short-term
financing markets.\1567\ 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 will be heightened if money market fund investors
shift their assets to liquidity funds in response to the amendments we
are adopting today.
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\1565\ See, e.g., DERA Study, supra note 24, 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).
\1566\ Liquidity funds may generally have a higher percentage of
institutional shareholders than money market funds because liquidity
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, 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. Having a larger 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 financial crisis suggest 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.
\1567\ See, e.g., Goldman Sachs Comment Letter (``Finally, GSAM
generally supports the amendments to Form PF, which will ensure that
further money market fund reforms do not decrease transparency in
the short-term financing markets . . .'); ICI Comment Letter.
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Finally, this increased information on liquidity funds managed by
large liquidity fund advisers also will be useful even absent a shift
in money market fund investor assets resulting from these reforms.
Collecting this information about these liquidity funds will, when
combined with information collected on Form N-MFP, provides a more
complete picture of the short-term financing markets, allowing the SEC
and FSOC to more effectively fulfill our respective statutory mandates.
For example, we discuss the contagion risk above. But it may be
difficult to assess this risk fully 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, without these amendments, our staff would be unable to
determine which liquidity funds, if any, held that security, much like
before we adopted Form N-MFP for registered money market funds. 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.\1568\ 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.
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\1568\ See Form PF Question 56 (requiring advisers to provide
exposures and maturity information, by asset class, for liquidity
fund assets under management); Form PF Question 57 (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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Position level information for liquidity funds managed by large
liquidity fund advisers also will 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 our examinations efforts of these
advisers, and could better inform the staff's policy recommendations.
As we discussed in the proposal, our experience with the portfolio
information money market funds report on Form N-MFP--which was limited
at the time we adopted Form PF--has proved useful in our regulation of
money market funds in these and other ways and has informed the
amendments we are adopting today.\1569\ During the 2011 Eurozone debt
crisis, for example, we and our staff benefitted from the ability to
determine which money market funds had exposure 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
types of funds, our experience with portfolio information filed on Form
N-MFP suggests that receiving virtually the same information for
liquidity funds managed by large liquidity fund advisers will provide
significant benefits to oversight efforts.
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\1569\ Money market funds were required to begin filing
information on Form N-MFP by December 7, 2010. See 2010 Adopting
Release, supra note 17 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 1562;
Form PF Adopting Release, supra note 1536.
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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 are requiring today will
provide substantial benefits for us and FSOC, including positive
effects on efficiency and capital
[[Page 47868]]
formation. As we explained in more detail when we initially adopted
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.\1570\
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\1570\ See generally Form PF Adopting Release, supra note 1536,
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''). 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 PF data, to better anticipate regulatory
problems and the implications of our regulatory actions, and thereby
to increase investor protection. See id. 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. See id. at text accompanying and
following n.494.
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The additional information on Form PF should better inform our
understanding of the activities of liquidity funds and their advisers
and the operation of the short-term 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 that seek
financing in the short-term financing markets. The additional
information that advisers will report on Form PF, particularly when
combined with similar data reported on Form N-MFP, therefore should
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.
As discussed in detail in the proposal, we 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, but noted that such data may be not
be as sensitive in this context when compared to other private funds,
largely because of the types of securities that liquidity funds invest
in.\1571\ No commenters on the proposed Form PF amendments objected to
the amendments on the basis of the information being sensitive or
proprietary. As we discussed 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.\1572\
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\1571\ See Proposing Release, supra note 25, at Section I.2.
\1572\ See Form PF Adopting Release, supra note 1536, at section
II.D.
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We note that although the increased transparency to regulators
provided by our amendments could positively affect capital formation as
discussed above, increased transparency, as we observed when adopting
Form PF, also may have a negative effect on capital formation if it
increases advisers' aversion to risk and, as a result, reduces
investment in enterprises that may expose the fund to more risk but be
beneficial to the economy as a whole.\1573\ Nevertheless, the
information collected generally will be non-public, it should not
affect large liquidity fund advisers' ability to raise capital. To the
extent that our amendments were to cause changes in investment
allocations that lead to reduced economic outcomes in the aggregate,
our amendments may result in a negative effect on capital available for
investment.
---------------------------------------------------------------------------
\1573\ See id. at text accompanying and following n.537.
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We also do not believe that our amendments to Form PF will have a
significant effect on competition because the information that advisers
report on Form PF, including the new information we are requiring,
generally will be non-public and similar types of advisers will have
comparable burdens under the form as we propose to amend it.\1574\ We
do not believe the amendments' effect on capital formation discussed
above will be significant, again because the information collected
generally will be non-public and, therefore, should not affect large
liquidity fund advisers' ability to raise capital.\1575\
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\1574\ See id. at text accompanying and following n.535.
\1575\ See id.
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j. Alternatives Considered
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 will provide a
number of benefits and will allow better understanding of 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 adopt, changes 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, given our experience with Form N-MFP data, we believe that
not only could different portfolio holdings information be less useful
than that required by Form N-MFP, it also 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 should be more efficient for advisers and reduce the costs of
reporting from a systems standpoint, because many large liquidity
advisers also manage money market funds and already have the systems in
place to report the data.
Finally, we considered whether to require large liquidity fund
advisers to provide their liquidity funds' portfolio information more
frequently than quarterly, but as discussed in greater detail above,
chose not to adopt this requirement.\1576\ Monthly filings, for
example, would provide 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 is more appropriate.\1577\
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\1576\ See supra note 1556.
\1577\ 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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k. Operational Costs
We recognize, however, that our amendments to Form PF, while
limited to large liquidity fund advisers, will create some costs for
those advisers, and also could affect competition, efficiency, and
capital formation. We continue to expect that the operational costs to
advisers to report the new information will be the same costs we
discuss in the Paperwork Reduction Act analysis in section IV.H.3
below, as reduced by the lower costs associated with the changes
[[Page 47869]]
we are making from the proposal discussed in that section. As discussed
in more detail in that section, we estimate that our amendments to Form
PF would result in an annual aggregate additional burden per large
liquidity fund adviser of 298 burden hours, at a total time cost of
$79,566, and external costs of $17,104. This will result in increased
aggregate burden hours across all large liquidity fund advisers of
8,344 burden hours,\1578\ at a time cost of $2,227,848, and $478,912 in
external costs.\1579\
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\1578\ This estimate is based on the following calculation: 298
estimated additional burden hours per large liquidity fund adviser x
28 large liquidity fund advisers = 8,344.
\1579\ See infra section IV.H.3.
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These estimates are based on our estimates of the paperwork burdens
associated with our final amendments to Form N-MFP because advisers
will be required to file on Form PF virtually the same information
about their large liquidity funds as money market funds will be
required to file on Form N-MFP as we are amending it. We therefore
expect that the paperwork burdens associated with Form N-MFP (as we are
amending it) are representative of the costs that large liquidity fund
advisers will incur as a result of our 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 will 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 will be less than the combined estimated Paperwork
Reduction Act costs associated with Forms PF and Form N-MFP.
I. Diversification
We are amending the rule 2a-7 diversification provisions as
proposed, with certain modifications as discussed below. Under the
current rule, money market funds generally must limit their investments
in: (i) The securities of any one issuer of a first tier security
(other than with respect to government securities and securities
subject to a guarantee issued by a non-controlled person) to no more
than 5% of fund assets; and (ii) securities subject to a demand feature
or a guarantee to no more than 10% of fund assets from any one
provider.\1580\ Under our diversification amendments, we are requiring
that money market funds treat certain entities that are affiliated with
each other as single issuers when applying rule 2a-7's 5% issuer
diversification limit.\1581\ As discussed further below, the amended
diversification provisions exclude certain majority equity owners of
asset-backed commercial paper (``ABCP'') conduits from the requirement
to aggregate affiliates for purposes of the 5% issuer diversification
limit. The diversification provisions that we are adopting today also
require that a money market fund treat the sponsors of asset-backed
securities (``ABS'') as guarantors subject to rule 2a-7's 10%
diversification limit applicable to guarantees and demand features,
unless the fund's board makes certain findings.\1582\ Lastly, we have
decided to adopt (i) as proposed, the removal of the twenty-five
percent basket, under which as much as 25% of the value of securities
held in a money market fund's portfolio may be subject to guarantees or
demand features from a single institution for money market funds other
than tax-exempt money market funds, and (ii) the reduction to 15%,
rather than the elimination of, the twenty-five percent basket for tax-
exempt money market funds, including single state money market funds.
Under our amendments, up to 15% (as compared to 10%, which was
proposed) of the value of securities held in a tax-exempt money market
fund's portfolio may be subject to guarantees or demand features from a
single institution.\1583\
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\1580\ See current rules 2a-7(c)(4)(i) and (c)(4)(iii). The
current rule also provides a ``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. See current rule 2a-7(c)(4)(iii). A money market
fund may currently use a twenty-five percent basket to invest in
demand features or guarantees that are first tier securities issued
by non-controlled persons. See id.
\1581\ See rule 2a-7(d)(3)(ii)(F).
\1582\ See rule 2a-7(a)(18)(ii) (definition of guarantee).
\1583\ See rule 2a-7(d)(3)(iii)(B). We note that amended rule
2a-7(d)(3)(iii)(B), which provides a basket for tax-exempt money
market funds, has been revised from current rule 2a-7(c)(4)(iii).
The revised rule text is intended to be a clarifying change from the
current rule text and is not designed to have any substantive effect
other than to reduce the twenty-five percent basket to a fifteen
percent basket for tax-exempt funds.
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1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's Five
Percent Issuer Diversification Requirement
As noted above, today we are amending rule 2a-7's diversification
provisions to provide that money market funds limit their exposure to
affiliated groups, rather than to discrete issuers.\1584\ As discussed
in the Proposing Release, financial distress at an issuer can quickly
spread to affiliates and the valuations and creditworthiness of the
issuer may depend, in large part, on the financial well-being of other
firms within the same corporate family.\1585\ By requiring
diversification of exposure to entities that are affiliated with each
other, the rule mitigates credit risk to a money market fund by
limiting the fund from assuming a concentrated amount of risk in a
single economic enterprise. Commenters generally supported the proposal
to treat certain entities that are affiliated with each other as single
issuers when applying rule 2a-7's 5% issuer diversification
limit.\1586\ Commenters also confirmed our understanding that money
market funds today generally attempt to identify and measure their
exposure to entities that are affiliated with each other as part of
their risk management processes.\1587\ Based on the comments we
received, we continue to believe that requiring diversification of
exposure to affiliated entities will mitigate a money market fund's
credit risk.
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\1584\ As discussed below, entities are ``affiliated'' with one
another if one controls the other entity or is controlled by it or
is under common control with it. ``Control'' for this purpose, is
defined to mean ownership of more than 50% of an entity's voting
securities. Rule 2a-7(d)(3)(ii)(F)(1). We note that we are not
amending rule 2a-7's diversification requirements to require that
money market funds treat affiliates as a single entity for purposes
of the 10% diversification limit on investments in securities
subject to a demand feature or guarantee.
\1585\ See Proposing Release supra note 25, at section III.J.1.
\1586\ See, e.g., ICI Comment Letter; U.S. Bancorp Comment
Letter; Goldman Sachs Comment Letter; Dreyfus Comment Letter; Wells
Fargo Comment Letter; Vanguard Comment Letter.
\1587\ See, e.g., ICI Comment Letter; U.S. Bancorp Comment
Letter; Goldman Sachs Comment Letter; Dreyfus Comment Letter;
Vanguard Comment Letter; Federated II Comment Letter.
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a. Definition of Control
We are adopting as proposed that, for purposes of applying the
amended rule, entities are affiliated with one another if one controls
the other entity or is controlled by it or is under common control with
it.\1588\ For this purpose only, control is defined to mean ownership
of more than 50% of an entity's voting securities.\1589\ By using a
more than 50% test (i.e., majority ownership), we continue to believe
the alignment of economic interests and risks of the affiliated
entities is sufficient to justify aggregating their
[[Page 47870]]
exposures for purposes of rule 2a-7's 5% issuer diversification limit.
As discussed in the Proposing Release, we considered several
alternative approaches to delineating a group of affiliates. We
requested comment as to whether we should use any of these alternative
approaches or whether there are other approaches we should consider. A
number of commenters supported the proposed majority ownership
test.\1590\ Some commenters also agreed with us that other approaches
to defining control could limit a money market fund's investment
flexibility unnecessarily.\1591\ One commenter noted that while the
proposed definition of control would not generally limit money market
funds' investment flexibility or be difficult to apply, incorporating
the definition of a ``majority-owned subsidiary'' from section 2(a)(24)
of the Investment Company Act, rather than introducing a new definition
of control, would be more desirable.\1592\ Under the section 2(a)(24)
definition, a ``majority-owned subsidiary'' of a person means a company
50% or more of the outstanding voting securities of which are owned by
such person, or by a company which is a majority-owned subsidiary of
such person.\1593\ We note however, that the section 2(a)(24)
definition is not in itself a definition of control and only includes
the circumstances in which an entity is a majority-owned subsidiary of
another entity. Although we requested comment as to whether we should
incorporate the section 2(a)(24) definition of majority-owned
subsidiaries into our definition of control, we believe that a more
than 50% test is indicative of circumstances in which an entity
controls another entity or is controlled by it as opposed to
circumstances in which an entity owns half of another entity's voting
securities. The definition of control we are adopting today is used to
define entities that are required to be consolidated for purposes of
our diversification requirements. Therefore, we believe it is
appropriate to look at the circumstances in which entities generally
are required to be consolidated because they represent exposure to a
single economic entity. We continue to believe that the approach we are
adopting today is preferable because it is consistent with various
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.\1594\ These majority-owned subsidiaries generally must be
consolidated under GAAP because the operations of the group are
sufficiently related such that they are presented under GAAP as if they
``were a single economic entity.''
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\1588\ See rule 2a-7(d)(3)(ii)(F).
\1589\ See id. We note that the definition of control we are
adopting today with respect to the treatment of affiliates for
purposes of issuer diversification under rule 2a-7 is not the same
as the definition of control in section 2(a)(9) of the Investment
Company Act.
\1590\ See, e.g., ABA Business Law Section Comment Letter; Wells
Fargo Comment Letter.
\1591\ See ICI Comment Letter (stating that a definition of
control that would include more attenuated relationships or lower
ownership levels could limit a money market fund's investment
opportunities to issuers whose risks are not necessarily correlated
to the issuer's parents). See also Wells Fargo Comment Letter
(supporting the decision to not require money market funds to treat
as affiliates all entities that must be consolidated on a balance
sheet).
\1592\ See ICI Comment Letter.
\1593\ See Section 2(a)(24).
\1594\ See, e.g., FASB ASC, supra note 425, 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.'').
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b. Majority Equity Owners of Asset-Backed Commercial Paper Conduits
We requested comment as to whether the exposures to risks of
issuers that would be treated as affiliated under our proposal would be
highly correlated and whether our proposed approach to delineating
affiliates was too broad or too narrow.\1595\ After further
consideration, based on the comments we received in response to our
proposal, we recognize that the majority ownership definition of
control that we proposed may encompass certain affiliated parties that
are not part of the same economic enterprise and therefore should be
excluded from the definition. Accordingly, as discussed further below,
the majority ownership definition of control that we are adopting today
excludes certain equity owners of ABCP conduits from the requirement to
aggregate affiliates for purposes of the 5% issuer diversification
limit.\1596\
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\1595\ See Proposing Release, supra note 25, at section III.J.1.
\1596\ One commenter suggested that we also exclude TOBs from
the amended rule, noting that under certain circumstances liquidity
providers may own more than 50 percent of the securities issued by a
TOB but may not be part of the same corporate family. See SIFMA
Comment Letter. We believe that excluding TOBs from the amended rule
is unnecessary in light of the fact that an owner of TOB-issued
securities would not likely have voting rights in a TOB trust and
therefore would not fall under the definition of affiliate for
purposes of the 5% issuer diversification limit. We note that the
Volcker Rule may likely have an impact on TOB program structures.
---------------------------------------------------------------------------
Without an exclusion from the amended rule, money market funds
would be required to aggregate their exposure to the ABCP conduits and
to the equity owners of ABCP conduits for purposes of the 5% issuer
diversification limit. One commenter argued that we should exclude
equity owners of ABCP conduits from the proposed affiliate aggregation
rule to allow money market funds to treat each special purpose entity
(``SPE'') issuing ABCP as a separate issuer for purposes of issuer
diversification, even if the same entity or affiliate group controls
the voting equity of multiple ABCP conduits.\1597\ This commenter noted
that voting equity of an ABCP conduit is typically almost entirely
owned by an otherwise unaffiliated third party that is in the business
of owning such entities and providing management and administrative
services, and not by the ABCP conduit sponsor, and that requiring money
market funds to aggregate conduits on the basis of common equity
ownership would unnecessarily restrict the amount of ABCP available for
purchase by money market funds.\1598\ We agree that if certain
independent equity owners are simply providing services in a management
and administrative capacity and are concentrated in the ABCP industry,
failure to provide an exception to those equity owners could
unnecessarily limit ABCP investment or reduce economies of scale in
ABCP administration with no diversification benefit to money market
funds.
---------------------------------------------------------------------------
\1597\ Comment Letter of Structured Finance Industry Group
(Sept. 17, 2013) (``SFIG Comment Letter'').
\1598\ Id.
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The purpose of treating affiliated parties as a single issuer when
applying the diversification limit is to mitigate risk to a money
market fund by limiting the fund from assuming a concentrated amount of
risk in a single economic enterprise, not to limit the exposure to
entities that might fall under the definition of ``affiliated'' but are
otherwise independent and not part of the same economic enterprise. In
light of these considerations, we have decided to provide an exception
from the amended rule for certain independent equity owners of ABCP
conduits. The commenter that argued we should exclude equity owners of
ABCP conduits recommended that we provide that money market funds need
not aggregate an ABCP conduit and its independent equity owners if
owning equity interests in SPEs is a primary line of business of such
owner.\1599\ This commenter also noted that the voting equity of an
ABCP conduit is typically owned by an unaffiliated third party that
provides certain management services to the ABCP conduit. In
[[Page 47871]]
addition, this commenter suggested limiting the exception to those
equity owners that are not originating qualifying assets to the ABCP
conduits.\1600\ We agree with the commenter's statements above and we
are providing an exception, which we expect addresses the concerns
regarding the current marketplace organization of ABCP conduits.
Accordingly, under the exception, money market funds will be subject to
the 5% issuer diversification limit on the ABCP conduit and any ten
percent obligors,\1601\ but need not aggregate an ABCP conduit and its
independent equity owners for purposes of the 5% issuer diversification
limit provided that a primary line of business of those independent
equity owners is owning equity interests in SPEs and providing services
to SPEs, the independent equity owners' activities with respect to the
SPEs are limited to providing management or administrative services,
and no qualifying assets of the ABCP conduit were originated by the
equity owners.\1602\ Subject to the exception for certain majority
equity owners of ABCP conduits, we continue to believe that the
majority ownership test appropriately requires a money market fund to
limit its exposure to particular economic enterprises without
unnecessarily limiting a fund's investments.
---------------------------------------------------------------------------
\1599\ Id.
\1600\ Id.
\1601\ See infra note 1603 (definition of ten percent obligor).
\1602\ See rule 2a-7(d)(3)(ii)(F)(2).
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c. Treatment of Affiliates for Ten Percent Obligor Determinations
One commenter expressed concern regarding the impact of the
proposed diversification amendments on the treatment of ten percent
obligors \1603\ for ABS.\1604\ The commenter noted that currently each
ABS issued by a separate entity is analyzed separately, and an ABCP
conduit typically represents to money market funds that it does not
intend to purchase any ABS which would result in a ten percent
obligor.\1605\ The commenter expressed concern that, if the proposed
treatment of affiliates is made applicable to the ten percent obligor,
it is likely that some of the ABS held by an ABCP conduit will need to
be aggregated, resulting in ten percent obligors.\1606\ This commenter
argued that such a result may create legal and practical issues for
sponsors, given confidentiality restrictions that may prevent funds
from determining which obligors are affiliated, and may not reflect
actual risks if such obligors are not part of the same economic
enterprise.\1607\ In addition, this commenter noted that conduits may
restructure their programs to avoid having consolidated affiliate ten
percent obligors, which would potentially reduce funding capacity to
those obligors.\1608\
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\1603\ Generally, ABS acquired by a money market fund (``primary
ABS'') are deemed to be issued by the SPE that issued the ABS (e.g.,
the trust, corporation, entity organized for sole purpose of issuing
the ABS). See rule 2a-7(d)(3)(ii)(D)(1). However, if obligations of
any issuer constitute 10% or more of the qualifying assets of the
primary ABS, that issuer will be deemed to be the issuer of that
portion of the primary ABS that is comprised of its obligations
(``ten percent obligor''). See rule 2a-7(d)(3)(ii)(D)(1)(i).
\1604\ See SFIG Comment Letter. See also Memorandum from the
Division of Investment Management regarding a September 10, 2013
meeting with representatives of the Structured Finance Industry
Group.
\1605\ Id.
\1606\ Id.
\1607\ Id.
\1608\ Id.
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We acknowledge that the application of our diversification
amendments on the treatment of ten percent obligors may cause certain
sponsors to conduct additional due diligence and also may mean that
some conduits would have to restructure their programs, which could
result in reduced funding capacity from money market funds. However, we
understand that these affiliated obligors generally represent exposure
to the same economic enterprise. Therefore, after further
consideration, we continue to believe that requiring aggregation of
obligors in determining whether an obligor is a ten percent obligor
reflects our objective.\1609\ We continue to believe that by using a
more than 50% test, the alignment of economic interests and risks of
affiliated obligors is sufficient to justify aggregating their
exposures for purposes of applying rule 2a-7's 5% issuer
diversification limit. Requiring aggregation of obligors in determining
ten percent obligors will require diversification of exposure to
obligors that are affiliated with each other, thereby mitigating the
credit risk to a money market fund when taking a highly concentrated
position in ABS with affiliated obligors.
---------------------------------------------------------------------------
\1609\ See rule 2a-7(d)(3)(ii)(F)(3).
---------------------------------------------------------------------------
d. Issuers of Securities Subject to a Guarantee Issued by a Non-
Controlled Person
Under current rule 2a-7, a money market fund is not required to be
diversified with respect to issuers of securities that are subject to a
guarantee issued by a non-controlled person.\1610\ Under our proposed
rule 2a-7 amendments, non-ABS that are subject to a guarantee by a non-
controlled person would be subject to rule 2a-7's 10% diversification
limit applicable to guarantees and demand features but would continue
to have no issuer diversification limit. However, we proposed that a
presumed guarantee issued by a sponsor of an SPE with respect to ABS
would no longer qualify as a guarantee issued by a non-controlled
person, thereby creating a disparity between treatment because ABS and
non-ABS would be treated differently under the proposal.\1611\
Therefore, as proposed, ABS would be subject to both a 5% issuer
diversification limit on the SPE and any ten percent obligors, and a
10% limit on the sponsor as the presumed guarantor. One commenter
mentioned this potential discrepancy and argued that the portion of ABS
presumed to be guaranteed by the sponsor should not be subject to the
issuer diversification limitations and thus treated parallel with other
money market fund portfolio securities subject to a guarantee issued by
a non-controlled person.\1612\ After further consideration of this
disparity in treatment, we preliminarily believe that the approach that
most advances our diversification reform goal of limiting concentrated
exposure of money market funds to particular economic enterprises is to
eliminate the exclusion from the 5% issuer diversification requirement
for both ABS and non-ABS that are subject to a guarantee by a non-
controlled person. Therefore, instead of creating a disparity in
treatment between ABS and non-ABS by adopting the proposed definition
of a guarantee issued by a non-controlled person, we are retaining the
current definition of a guarantee issued by a non-controlled person,
and we are proposing in our Release issued today regarding removing
references to credit ratings in rule 2a-7 that the 5% issuer
diversification limit be imposed on all
[[Page 47872]]
securities with a guarantee by a non-controlled person.\1613\
---------------------------------------------------------------------------
\1610\ Current rule 2a-7(a)(18). A guarantee issued by a non-
controlled 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 for these purposes means ``control'' as
defined in section 2(a)(9); or (ii) a sponsor of an SPE with respect
to ABS. Current rule 2a-7(a)(18)(i) and (ii).
\1611\ See proposed (Fees and Gates) rule 2a-7(a)(17). Under the
proposed rule, ABS that are subject to a guarantee by a non-
controlled person that meets the definition in current rule 2a-
7(a)(18)(i) would continue to have no issuer diversification limit.
\1612\ Memorandum from the Division of Investment Management
regarding a September 10, 2013 meeting with representatives of the
Structured Finance Industry Group.
\1613\ See Removal of Certain References to Credit Ratings and
Amendment to the Issuer Diversification Requirement in the Money
Market Fund Rule, Investment Company Act Release No. ----------
(July 23, 2014).
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e. Additional Economic Analysis
As discussed in the Proposing Release, these amendments are
intended to more efficiently achieve the diversification of risk
contemplated by the rule's current 5% issuer diversification limit. The
treatment of affiliates for purposes of rule 2a-7's 5% issuer
diversification limit, and our diversification amendments collectively,
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.
Except to the extent that money market funds choose to reinvest some or
all of their excess exposure in securities of higher risk, requiring
money market funds to more broadly diversify against credit risk should
reduce the volatility of fund returns (and hence NAVs) and limit the
impact of an issuer's distress on fund liquidity, which should mitigate
the risk of heavy shareholder redemptions from money market funds in
times of financial distress and may promote capital formation by making
money market funds a more stable source of financing for issuers of
short-term credit instruments. Reducing money market funds' volatility
and making their liquidity levels more resilient also could 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 continue to 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 amendments to
provide. We received no comments providing quantification of benefits.
More fundamentally, as discussed in the Proposing Release, these
amendments are designed to more effectively achieve the diversification
of risk contemplated by the rule's current 5% issuer diversification
limit. As discussed in the Proposing Release, we explained that
``[d]iversification limits investment risk to a fund by spreading the
risk of loss among a number of securities.'' \1614\ 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. In addition, if Issuers A, B
and C are affiliated with each other, they likely would share financial
resources in the event of a crisis, which would make it more likely
that they would experience declines in value simultaneously and to
approximately the same extent. Prime money market funds' concentrated
exposures to financial institutions increase these concerns because
prime money market funds' portfolios already appear correlated to some
extent.\1615\
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\1614\ See Proposing Release, supra note 25, at section III.J.1.
\1615\ See Proposing Release, supra note 25, nn.66-67 and
accompanying text.
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As discussed in the Proposing Release, we recognize, however, that
the amendments could impose costs on money market funds and could
affect competition, efficiency, and capital formation. We expect that
the requirement to aggregate affiliates for purposes of the 5% issuer
diversification limit will increase the diversification of at least
some money market funds.\1616\ 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 some of the proceeds in a
different parent or corporate group (or in unrelated issuers).\1617\ We
requested comment on how the amendment would affect competition,
efficiency and capital formation, and the ways in which money market
funds may invest in response to the amendment. One commenter stated
that the requirement to treat affiliates as a single issuer for
purposes of the 5% issuer diversification limit could impede a money
market fund's ability to purchase high quality securities, and that, as
a result, money market funds could be forced to purchase securities of
issuers with credit ratings lower than those of the affiliated
issuers.\1618\ As noted above and discussed further below, we believe
that any effect caused by a money market fund investing in securities
with higher credit risk will be minimal due to the substantial risk-
limiting provisions of rule 2a-7.\1619\
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\1616\ See The Exposure Money Market Funds Have to the Parents
of Issuers (``DERA Diversification Memo'') (July 10, 2013),
available at http://www.sec.gov/comments/s7-03-13/s70313-20.pdf. The
Division of Risk, Strategy, and Financial Innovation (``RSFI'') is
now known as the Division of Economic and Risk Analysis (``DERA''),
and accordingly we are no longer referring to this study as the
``RSFI Diversification Memo'' as we did in the Proposing Release,
but instead as the ``DERA Diversification Memo.'' The DERA
Diversification 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 DERA
Diversification Memo) between November 2010 and November 2012. For
example, our staff's analysis shows that 30 money market funds, on
average, invest at least 5% of their portfolios in the issuances of
the largest parent. Our staff's analysis also shows that the largest
fund-level exposure of at least 7% to the issuances of one parent is
14 while the largest average fund-level exposure of at least 10% of
the issuances of one parent is 3.
\1617\ Money market funds will not be required to sell any of
their portfolio securities as a result of any of our diversification
amendments because rule 2a-7's diversification limits are measured
at acquisition.
\1618\ Schwab Comment Letter. See also Dechert Comment Letter
(arguing that our diversification amendments, in combination, may
have the effect of reducing a money market fund's ability to invest
in high quality securities).
\1619\ See supra notes 10 and 11 and accompanying text.
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As discussed above, we acknowledge that the application of our
diversification amendments on the treatment of ten percent obligors may
cause certain sponsors to conduct additional due diligence and also may
mean that some conduits would have to restructure their programs,
particularly if information regarding the identity of obligors is
unavailable, which could result in reduced funding capacity from money
market funds. To the extent ABCP conduits may decide to restructure
their programs, we expect that the ABCP conduits might incur costs
associated with the restructuring, although we are unable to quantify
any such costs as we do not know to what extent ABCP conduits will
decide to restructure, and we also did not receive any comments
regarding costs that ABCP conduits may incur.
We acknowledge that, as a result of our amendments, it is possible
that some money market funds may purchase securities of issuers with
lower credit quality, although we note that money market funds will
continue to be required to meet the minimum credit risk standards set
forth in rule 2a-7.\1620\ It also 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
[[Page 47873]]
for another money market fund whose holdings in that affiliated group
does not constrain it. If the credit qualities of the investments were
similar, there should be no net effect on fund risk and yield, although
we discuss below how fund risk and yield may be affected if money
market funds choose to invest in securities of higher or lower credit
risk than they do currently. In the Proposing Release we discussed ways
in which a money market fund may reallocate its investments under our
amendments to the diversification provisions of rule 2a-7 as well as
possible ways in which the amendment might affect capital formation. We
discuss above that requiring money market funds to more broadly
diversify against credit risk may promote capital formation by making
money market funds a more stable source of financing for issuers of
short-term investments. However, the rule amendment could also reduce
capital formation if money market funds choose to reinvest some or all
of their excess exposure in securities of higher risk. In these
instances, a money market fund's portfolio risk would increase, its NAV
and fund liquidity may become more volatile and yields would rise.
Money market funds in this scenario 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 might choose to reinvest excess
exposure in securities of lower risk. In these instances, portfolio
risk (e.g., credit risk, counterparty risk) would decrease, 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.
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\1620\ See rule 2a-7(d)(2) (portfolio quality).
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As stated in the Proposing Release, we cannot predict how money
market funds will invest in response to our amendments and we thus do
not have a basis for determining money market funds' likely
reinvestment strategies. We also did not receive comment on this issue.
We note that money market funds' current exposures in excess of what
our amendments will permit may reflect the overall risk preferences of
their managers. To the extent that these amendments reduce the
concentration of issuer risk, fund managers that have particular risk
tolerances or preferences may shift their funds' remaining portfolio
assets, within rule 2a-7's minimal credit risk requirements,\1621\ 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).
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\1621\ See id.
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We continue to be unable to predict or quantify the precise effects
this amendment will have on competition, efficiency, or capital
formation and did not receive comments addressing the precise effects.
The effects depend on how money market funds, their investors, and
companies that issue securities to money market funds will adjust on a
long-term basis to our amendment. 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. For
example, if a money market fund must reallocate its investments under
our amendment, whether that will affect capital formation depends 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 will
depend on the amount of yield the issuers of the alternative
investments will be required to pay as compared to the amount they
would have paid absent our amendments. For example, our amendment 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 amendments
and larger money market funds are better positioned to expend this
additional effort or to do so at a lower marginal 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.
As discussed in the Proposing Release, the amendments could require
money market funds to update the systems they use to monitor their
compliance with rule 2a-7's 5% issuer diversification limit in order to
aggregate exposures to affiliates. Although we understand, as discussed
above, 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).
We requested comment as to whether funds expect that they would
incur operational costs in addition to, or that differ from the costs
estimated in the Proposing Release. We did not receive comments
regarding specific costs, although one commenter stated that it did not
believe that the amendments would have a significant impact on the
operations of most money market funds.\1622\ Another commenter stated
that additional time and data costs may be required to determine issuer
affiliations, but also stated that it did not see a significant
increase in costs related to complying with our amended issuer
diversification requirements.\1623\
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\1622\ ICI Comment Letter.
\1623\ State Street Comment Letter.
---------------------------------------------------------------------------
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 estimated
in the Proposing Release, and continue to estimate, that the one-time
systems modifications costs (including modifications to related
procedures and controls) for a money market fund associated with these
amendments would range from approximately
[[Page 47874]]
$600,000 to $1,200,000.\1624\ As we stated in the Proposing Release, we
do not expect that money market funds will incur material ongoing costs
to maintain and modify their systems as a result of this amendment
because we expect modifications required by this amendment will 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).
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\1624\ Staff estimates that these costs will 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 section III.A.5.a.
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Although we have estimated the costs that a single money market
fund could incur as a result of this amendment, we expect that these
costs will be shared among various money market funds in a complex. As
discussed in the Proposing Release, we do not expect that money market
funds will be required to spend additional time determining
affiliations under our amendments, or if an additional time commitment
is required, we expect that it would be minimal. We estimated in the
Proposing Release that the costs of this minimal additional time
commitment to a money market fund, if it were to occur, will range from
approximately $5,000 to $105,000 annually.\1625\ We did not receive
comments on these particular estimates, although we have updated our
estimates based on more recent data, and now estimate that the costs of
this minimal additional time commitment to a money market fund, if it
were to occur, will range from approximately $6,700 to $109,500
annually.\1626\
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\1625\ In arriving at this estimate in the Proposing Release, we
expected 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 makes 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 estimated
that a money market fund could be required to make such a
determination between 33 and 339 times each year. This was 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 estimated that the
additional time commitment imposed by our amendments, 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, was 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 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 our amendments 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.
\1626\ In arriving at this estimate, we expect that any required
additional work generally will 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 will 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 42 and 342 times each
year. This is based on our staff's review of data filed on Form N-
MFP as of February 28, 2014, which showed that the 10 smallest money
market funds (not including government or Treasury funds) by assets
had an average of 42 investments and the 10 largest money market
funds (not including government or Treasury funds) by assets had an
average of 342 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 our amendments, if any, will 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: (42
Evaluations x 1 hour of a junior business analyst's time at $160 per
hour = $6,720) to (342 evaluations x 2 hours of a junior business
analyst's time at $160 per hour = $109,440). 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 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 our amendments 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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2. ABS--Sponsors Treated as Guarantors
We are amending rule 2a-7, as proposed, to require that money
market funds treat the sponsors of ABS as guarantors subject to rule
2a-7's 10% diversification limit applicable to guarantees and demand
features, unless the money market fund's board of directors (or its
delegate) determines that the fund is not relying on the sponsor's
financial strength or its ability or willingness to provide liquidity,
credit or other support to determine the ABS's quality or
liquidity.\1627\ As discussed in the Proposing Release, money market
funds' reliance on and exposure to sponsors of ABCP, a type of ABS,
specifically during 2007, suggests that current rule 2a-7 potentially
permits money market funds to become overexposed to ABCP
sponsors.\1628\ Our amendments today therefore provide that, subject to
an exception, money market funds investing in ABS rely on the sponsor's
financial strength or its ability or willingness to provide liquidity,
credit, or other support to the ABS, and require diversification
against such reliance and exposure to ABS sponsors.\1629\
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\1627\ As a result, subject to an exception, a money market fund
cannot invest in 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.
See rule 2a-7(a)(18)(ii) and rule 2a-7(d)(3)(iii). Current rule 2a-7
applies a 10% diversification limitation on demand features and
guarantees to 75% of money market funds' total assets. As discussed
in infra section III.I.3, we are amending rule 2a-7 to apply the 10%
diversification limitation to 85% of a tax-exempt money market
fund's assets and to 100% of a fund's assets for money market funds
other than tax-exempt funds.
\1628\ See Proposing Release, supra note 25, at section III.J.2.
\1629\ Under the amended rule, the sponsor of an ABS will be
deemed to guarantee the entire principal amount of those ABS, except
that the sponsor will not be deemed to have provided such a
guarantee for purposes of the following paragraphs of rule 2a-7:
(a)(12)(iii) (Definition of eligible security); (d)(2)(iii) (credit
substitution); (d)(3)(iv)(A) (fractional guarantees); and (e)
(guarantees not relied on). We also are adopting a number of
conforming amendments to other provisions of rule 2a-7 to implement
the treatment of ABS sponsors as guarantors. See rule 2a-
7(f)(4)(iii) (defining defaults for purposes of rule 2a-7(f)(2) and
(3) as applied to guarantees issued by ABS sponsors); rule 2a-
7(g)(7) (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 the quality or
liquidity of ABS); and rule 2a-7(h)(6) (recordkeeping requirements
for the periodic re-evaluations).
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A number of commenters generally supported the requirement to treat
sponsors of ABS as guarantors.\1630\ For
[[Page 47875]]
example, one commenter noted that ABS sponsors have provided explicit
as well as implicit credit and liquidity support for the vehicles they
have sponsored and that it is therefore appropriate that such support
be presumed for purposes of applying rule 2a-7 diversification
limitations.\1631\ Several commenters however, generally opposed the
proposed requirement.\1632\ Some of these commenters argued that the
requirement to treat sponsors of ABS as guarantors is not consistent
with the current practice of money market funds.\1633\ For example, one
commenter stated that while money market funds cannot usually review
information about the particular assets underlying ABS,\1634\ money
market funds nevertheless base their credit decisions on a multitude of
factors other than the sponsor's financial strength.\1635\ Some
commenters also argued that money market funds look to the legal
requirement for a sponsor to provide a guarantee rather than relying on
an implicit guarantee by the sponsor,\1636\ and that partial or
incidental reliance on the financial strength of an ABS sponsor should
not require treatment of the sponsor as a 100% guarantor of the
ABS.\1637\ Another commenter argued that the requirement to treat the
sponsor of an SPE issuing ABS as a guarantor of ABS would require money
market funds to expand diversification of ABS sponsors at the same time
many of these sponsors are exiting the market.\1638\ While we recognize
that in many cases a money market fund is not basing its investment
decision solely on the financial strength of the sponsor or on an
implicit guarantee by the sponsor, we understand, as discussed in the
Proposing Release, that money market funds often make investment
decisions based, at least in part, on the presumption that the sponsor
will take steps to prevent the ABS from defaulting.\1639\ However,
money market funds are generally not required to diversify against ABS
sponsors because the support that ABS sponsors provide, implicitly or
explicitly, which money market funds often rely on, typically does not
meet the current rule's definition of ``guarantee'' or ``demand
feature.'' \1640\
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\1630\ See, e.g., Goldman Sachs Comment Letter; Schwab Comment
Letter; U.S. Bancorp Comment Letter; Vanguard Comment Letter;
BlackRock II Comment Letter; Wells Fargo Comment Letter.
\1631\ Goldman Sachs Comment Letter.
\1632\ See, e.g., SSGA Comment Letter; Federated II Comment
Letter. See also ICI Comment Letter (arguing that the amendment
could result in a reduction of the supply of securities to money
market funds without any increase in investor protection).
\1633\ See, e.g., Federated VIII Comment Letter; SSGA Comment
Letter; ICI Comment Letter.
\1634\ See Proposing Release, supra note 25, nn.870-872 and
accompanying text (discussing that an asset-liability mismatch in
ABCP conduits causes ABCP investors to analyze the structure of the
ABCP conduits more so than underlying asset level information).
\1635\ Federated II Comment Letter (describing information it
reviews, including pool level information about the underlying
assets). See also Federated VIII Comment Letter (discussing its
evaluation of ABCP before investing, noting that only a portion of
their analysis is based on the sponsor, and that significant
emphasis is placed on the qualifying assets); SSGA Comment Letter
(stating that it believes credit analysis with regard to ABS should
not solely rely upon sponsor support).
\1636\ See, e.g., Federated II Comment Letter; ICI Comment
Letter (arguing that because the proposed requirement would treat a
sponsor as a guarantor of the entire amount of the ABS even when the
sponsor has no legal obligation to support its ABS, the amendment
seems to endorse the practice of relying on an ``implicit''
guarantee when assessing the credit risk of ABS). See also Federated
VIII (arguing that the amendment would encourage investors that are
assessing the credit risk of ABS to rely on an unproven assumption
that a sponsor will voluntarily assume losses on its financial
products, and that because such ``implicit guarantees'' are not
reliable, endorsing this practice would only increase risks to money
market funds that invest in ABS.)
\1637\ See, e.g., ICI Comment Letter; Federated VIII Comment
Letter.
\1638\ Invesco Comment Letter.
\1639\ Comment Letter of the American Securitization Forum (Aug.
2, 2010) (available in File No. S7-08-10) (``ASF August 2010 Comment
Letter''). (``[T]he liquidity and credit support for the vast
majority of ABCP conduits are provided by their financial
institution sponsors.''). But see SFIG Comment Letter (describing
that a subset of ABCP conduits are administered by entities that are
not financial institutions and that credit or liquidity support to
the ABCP conduit is provided by financial institutions that are not
affiliated with the administrator); ICI Comment Letter (suggesting
that there is no reason to require diversification against sponsors
as opposed to other service providers such as servicers and
liquidity providers). Although persons other than the sponsor, such
as servicers and liquidity providers, could support ABS, we
understand that, to the extent ABS have explicit support, it
typically is provided by the sponsor. We also understand that
investors in ABS without explicit support may view the sponsor as
providing implicit support. See, e.g., Goldman Sachs Comment Letter.
\1640\ See Proposing Release, supra note 25, n.868 and
accompanying text.
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We acknowledge that if sponsor supply were to become limited, it
may be more difficult for money market funds to obtain ABS. However,
after further consideration, we continue to believe it is appropriate
to amend rule 2a-7 to require diversification against such support to
limit a money market fund's concentration in a single sponsor because a
fund could seek to rely on liquidity or capital support from that
sponsor, if necessary. When a money market fund is determining the
ABS's quality or liquidity based, at least in part, on the ABS
sponsor's financial strength or its ability or willingness to provide
liquidity, credit or other support, limiting a money market fund's
concentration in that sponsor mitigates the risk that a money market
fund would face in the case where such ABS sponsor would be unable to
support the value of the fund's investments in times of severe market
stress because it reduces the amount of a money market fund's
investments that would be impacted by the inability of the sponsor to
support the value of those investments.
As discussed further below, we recognize that in certain cases an
ABS sponsor should not be deemed to guarantee the ABS. An ABS sponsor
therefore will 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. We also discuss below that an ABS
sponsor will not be deemed to guarantee the full amount of ABS in cases
of fractional guarantees.
Commenters noted that under current rule 2a-7, if a company
guarantees or provides a demand feature of a portion of the qualifying
assets, only that portion of the ABS is counted towards the
diversification limit.\1641\ These commenters expressed concern that
amended rule 2a-7 would change this result by treating a company that
sponsors ABS as a guarantor of the entire amount held by a fund, even
if the company's guarantee or demand feature is limited to a smaller
amount.\1642\ As proposed, in cases where a security is subject to a
fractional demand feature or guarantee by the sponsor, as defined in
rule 2a-7, a money market fund may count the fractional demand feature
or guarantee in place of deeming the sponsor as a guarantor of the
entire principal amount of the ABS.\1643\ However, in cases where a
money market fund is partially or incidentally relying on the financial
strength of the ABS sponsor, but such partial or incidental reliance
does not fall under the definition of a fractional guarantee, the money
market fund will be required to treat the sponsor as a guarantor of the
entire principal amount of the ABS. In this case, even though a sponsor
may not be providing a full guarantee, the fund would not be able
[[Page 47876]]
to readily determine the actual portion of assets for which the
guarantor is providing structural support. Therefore, except in cases
of fractional guarantees as discussed above, we continue to believe
that, unless the board of directors determines that the fund is not
relying on the financial strength of the sponsor, it is appropriate to
require diversification against such sponsor with respect to all the
qualifying assets in order to mitigate the risk that an ABS sponsor
would be unable to support the value of a money market fund's
investments in times of severe market stress.
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\1641\ See, e.g., ICI Comment Letter; Memorandum from the
Division of Investment Management regarding a September 10, 2013
meeting with representatives of the Structured Finance Industry
Group.
\1642\ Id.
\1643\ See rule 2a-7(d)(3)(iv)(A) (calculation of fractional
demand features or guarantees) and rule 2a-7(a)(18)(ii) (providing
an exception from the requirement to deem a sponsor of an SPE as
providing a guarantee with respect to the entire principal amount of
ABS in the case of fractional guarantees).
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One commenter suggested that explicit support would not always be
dispositive in determining the sponsor's identity and that treating
certain entities as sponsors would not reflect actual economic risks to
the fund.\1644\ This commenter also recommended that we define the term
sponsor in our final amendments, noting that otherwise it may be
difficult for certain money market funds to determine the entity that
is providing the deemed guarantee.\1645\ Although providing a specific
definition of ABS sponsor may exclude certain entities that should
otherwise be treated as a sponsor, and may not allow for future
flexibility with regards to new types of ABS structures, we understand
that determining the ABS sponsor in certain cases may present
difficulties. We recognize that in some cases where the administrator
of an ABCP conduit, which may otherwise be commonly thought of as the
sponsor, is not providing liquidity or credit support, the
administrator would not appropriately be defined as a sponsor for
purposes of our amended diversification requirements. In this case,
requiring diversification against entities that do not, or could not,
provide liquidity, credit or other support to the ABCP conduit would
not reflect the actual risks of a fund's exposure to such an entity.
For ABCP, we believe that the sponsor will typically be the financial
institution that provides explicit liquidity and/or credit support and
also provides administrative services to the ABCP conduit.\1646\ The
amended diversification requirements we are adopting today aim to
diversify against the risks of concentration of exposure to entities
that a fund may be relying on, whether explicitly or implicitly, in
determining the ABS's quality or liquidity. Therefore, if a money
market fund is relying on an entity's financial strength or its ability
or willingness to provide liquidity, credit, or other types of support
to determine the ABS's quality or liquidity, such entity would
appropriately be defined as a sponsor for purposes of our amended
diversification requirements.
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\1644\ SFIG Comment Letter (recommending that we define a
provider of credit and liquidity support to an ABCP conduit that
equals or exceeds fifty percent of the outstanding face amount of
the ABCP of such conduit as the sponsor).
\1645\ Id.
\1646\ For TOB programs in which the liquidity provider for the
TOB program or its affiliate holds the residual interest in the TOB
trust, we believe the entity that provides both the liquidity
support and holds the residual interest typically will be the
sponsor. For TOB programs in which the liquidity provider or its
affiliate does not also own the residual interest in the TOB trust,
we believe the financial institution that sets up the TOB program,
markets and remarkets the TOBs, transfers the municipal security
into the TOB trust and/or provides liquidity typically will be the
sponsor.
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As proposed, our amended rule requires that, unless the board (or
its delegate) determines otherwise, all ABS sponsors are deemed to
guarantee their ABS. We are applying this requirement to all ABS
sponsors because we are concerned that applying the requirement only to
sponsors of certain types of ABS could become obsolete as new forms of
ABS are introduced. Because we recognize that it may not be appropriate
to require money market funds to treat ABS sponsors as guarantors in
all cases, under amended rule 2a-7, 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.\1647\ In determining whether a money market fund is relying
on the ABS sponsor's financial strength or its ability or willingness
to provide liquidity, credit, or other support, the money market fund
board of directors may want to consider, among other things, whether
the fund considers the ABS sponsor's financial strength or its ability
or willingness to provide liquidity, credit, or other support as a
factor when determining the ABS's quality or liquidity.
---------------------------------------------------------------------------
\1647\ Rule 2a-7(a)(18)(ii). This determination must be
documented and retained by the money market fund. See rule 2a-
7(g)(7) and rule 2a-7(h)(6).
---------------------------------------------------------------------------
While one commenter specifically supported the exception to the ABS
sponsor designation through money market fund board of directors (or
delegate) action,\1648\ other commenters expressed concern that
overseeing determinations that a money market fund is not relying on
ABS sponsors would impose further burdens on money market fund
directors.\1649\ However, a board can, and likely will, delegate this
responsibility.\1650\ While we recognize that a board will, at a
minimum, need to provide oversight and establish procedures \1651\ if
it delegates its responsibility, we believe that any incremental burden
to make a determination (by the board or its delegate) regarding
reliance on an ABS sponsor 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 consistent with rule 2a-
7's limits on investments in ``illiquid securities.'' \1652\ One
commenter supported a board exception that applied when a money market
fund board (or its delegate) determines that a sponsor's financial
strength or its ability or willingness to provide liquidity, credit or
other support did not play a substantial role in the money market
fund's assessment of the ABS's quality or liquidity.\1653\ On balance
however, we believe that even when a money market fund board of
directors (or its delegate) determines that a sponsor's financial
strength or its ability or willingness to provide liquidity, credit or
other support plays a less than substantial role in the money market
fund's assessment of the ABS's quality or liquidity, it is beneficial
to require diversification against such sponsor because it limits a
money market fund's concentration in a single sponsor on which the fund
could still seek to rely. In addition, requiring diversification
against such sponsor also mitigates the possible effect of an ABS
sponsor being unable to support the value of the ABS because a money
market fund will be required to diversify against its investments in
ABS with such sponsor. We are therefore adopting the board exception as
proposed.
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\1648\ Goldman Sachs Comment Letter.
\1649\ Federated VIII Comment Letter; ICI Comment Letter;
Fidelity Comment Letter.
\1650\ See rule 2a-7(j) (providing a money market fund's board
of directors the ability to delegate to the fund's adviser or
officers the responsibility to make certain determinations required
to be made by the board of directors under rule 2a-7).
\1651\ See rule 2a-7(j)(1) and (2).
\1652\ Rule 2a-7(a)(12) (definition of ``eligible security'')
and rule 2a-7(d)(4) (portfolio liquidity).
\1653\ Invesco Comment Letter.
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Several commenters argued that a board should not have to make a
finding in certain situations where the ABS is fully supported by a
guarantee or demand feature provided by a third party.\1654\ One of
these commenters argued that if an issuance of ABS has a
[[Page 47877]]
contractual guarantee of support by a third party, we should require
money market funds to count the third-party guarantor, rather than the
sponsor, for purposes of the diversification limit.\1655\ This
commenter noted that for ABS that carry contractual guarantees of
support by third parties, a fund manager often looks to financial
strength and creditworthiness of the third-party guarantor to evaluate
the creditworthiness or liquidity of the ABS.\1656\ We recognize that
in certain cases, ABS may be fully supported by a guarantee or demand
feature provided by a third party where the board (or its delegate)
would determine that the money market 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' quality or
liquidity. However, some money market funds may view the third-party
guarantee as a ``layered guarantee'' on top of the sponsor's guarantee,
which today are both subject to a 10% diversification limit under rule
2a-7. We believe it is appropriate to allow for instances of layered
guarantees when a third-party guarantor is present, and therefore
believe that in cases where a money market fund is relying only on the
third-party guarantor the board (or its delegate) can determine that it
is not relying on the sponsor, and in cases where a money market fund
views the third-party guarantor as providing a layered guarantee, the
amended rule will provide that the money market fund treat the
guarantee by the sponsor and the guarantee by the third-party guarantor
as layered guarantees.
---------------------------------------------------------------------------
\1654\ See, e.g., ICI Comment Letter; Fidelity Comment Letter;
Wells Fargo Comment Letter.
\1655\ Wells Fargo Comment Letter.
\1656\ Id.
---------------------------------------------------------------------------
Commenters also argued that the board should not have to make the
required findings for certain types of ABS, such as TOBs. Commenters
argued that diversification from TOB sponsors is unnecessary because
TOBs have dedicated liquidity providers and frequently have credit
enhancement, and the TOB sponsor may not necessarily be the provider of
either.\1657\ Commenters also stated that tax-exempt money market funds
in particular would suffer if TOBs were not excluded because the
amended diversification requirements would further restrict a money
market fund's ability to hold TOBs.\1658\ One commenter recommended
excluding sponsors of all types of ABS (other than ABCP) from the
proposed ABS sponsor rule, noting that sponsors of non-ABCP ABS do not
typically provide explicit credit or liquidity support.\1659\ We
recognize that in some cases diversification from non-ABCP ABS
sponsors, including TOB sponsors may be unnecessary if 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.
---------------------------------------------------------------------------
\1657\ See, e.g., Vanguard Comment Letter. See also SIFMA
Comment Letter.
\1658\ See, e.g., Fidelity Comment Letter; SIFMA Comment Letter
(noting that TOBs already have a limited number of sponsors).
\1659\ SFIG Comment Letter.
---------------------------------------------------------------------------
Although commenters suggested providing an exclusion from the
amended rule, we believe that non-ABCP ABS, including TOBs, are more
appropriately addressed through the board exception to the
diversification requirement. Because at least in some instances a fund
may be looking to 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, we have decided to retain the
presumption for ABS generally. In addition, we believe that it would be
inefficient to attempt to anticipate every type of ABS sponsor that
should be excluded now or in the future, and designating particular
exclusions in the amended rule may not provide for innovation of new
types of ABS over time. The rebuttable presumption we are adopting
today however, does allow for flexibility in instances where the fund
is not looking to the sponsor, irrespective of the actual type of ABS,
where the board of directors determines that the fund is not relying on
the sponsor to make determinations about quality or liquidity.
3. The Twenty-Five Percent Basket
We proposed amending rule 2a-7 to eliminate the ``twenty-five
percent basket,'' under which as much as 25% of the value of securities
held in a money market fund's portfolio may be subject to guarantees or
demand features from a single institution.\1660\ After further
consideration, and in light of the comments received, our final
amendments (i) remove the twenty-five percent basket for money market
funds other than tax-exempt money market funds, and (ii) reduce to 15%,
rather than eliminate, the twenty-five percent basket for tax-exempt
money market funds, including single state money market funds.\1661\
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\1660\ Current rule 2a-7 applies a 10% diversification limit on
guarantees and demand features only to 75% of a money market fund's
total assets. See current rule 2a-7(c)(4)(iii)(A). A 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 rules 2a-7(c)(4)(iii)(B) and
(C). Although we proposed to delete current rule 2a-7(a)(10)
(definition of demand feature issued by a non-controlled person)
because the term is used only in connection with the twenty-five
percent basket, we are retaining the definition because our
amendments provide a fifteen percent basket for tax-exempt money
market funds. See rule 2a-7(a)(10). We also are adopting 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 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.
\1661\ We note that Investment Company Act rule 12d3-1 also
refers to a twenty-five percent basket. See rule 12d3-1(d)(7)(v).
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 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 10 percent of the total value of its assets
in securities underlying Demand Features or Guarantees from the same
institution.'' We requested comment as to whether we should 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 assets, for consistency with the proposed elimination of the
twenty-five percent basket in rule 2a-7. We received no comments
regarding rule 12d3-1. At this time we are not amending rule 12d3-1
to reflect our amendments to rule 2a-7's diversification provisions
because although rule 12d3-1 provides a twenty-five percent basket
for purposes of section 12(d)(3) limitations, this twenty-five
percent basket is not directly associated with the twenty-five
percent basket in rule 2a-7.
---------------------------------------------------------------------------
As discussed in the Proposing Release, a number of recent events
have highlighted the risks to money market funds caused by their
substantial exposure to providers of demand features and
guarantees.\1662\ For example, during the financial crisis, many funds
were heavily exposed to bond insurers and a few major financial
institutions that served as liquidity providers. This concentration led
to considerable stress in the municipal markets when some of these bond
insurers and financial institutions came under pressure during the
financial crisis. We continue to believe that tightening
diversification requirements with respect to a money market fund's
exposure to securities subject to guarantees or demand features from a
single guarantor or demand feature provider will reduce this risk.
However, we are concerned that removing the twenty-five percent basket
entirely for tax-exempt money market funds would inhibit the ability of
these funds to be
[[Page 47878]]
fully invested in securities subject to guarantees or demand features
or may force them to invest in securities that have weaker credit than
the securities they might otherwise purchase, due to the more limited
availability of guarantors and demand feature providers for tax-exempt
money market funds as compared to non-tax-exempt money market
funds.\1663\ Accordingly, under our amendments, as much as 15% of the
value of securities held in a tax-exempt money market fund's portfolio
may be subject to guarantees or demand features from a single
institution.\1664\
---------------------------------------------------------------------------
\1662\ See Proposing Release, supra note 25, at section III.J.3.
\1663\ As discussed in more detail below, this concern primarily
applies to tax-exempt funds, the largest users of the basket, as
they face a significantly more constrained supply of investable
securities than other types of money market funds.
\1664\ See rule 2a-7(d)(3)(iii)(B) and rule 2a-7(a)(28). See
also supra note 1583.
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a. Use of Twenty-Five Percent Basket by Money Market Funds
i. Non-Tax-Exempt Money Market Funds
To help us evaluate the possible effects of removing the twenty-
five percent basket on non-tax-exempt money market funds, DERA staff
analyzed the exposure that money market funds have to guarantors, as
described in detail in the DERA Guarantor Diversification Memo.\1665\
As demonstrated below, DERA staff found that the majority of money
market funds do not use the twenty-five percent basket.
---------------------------------------------------------------------------
\1665\ See Municipal Money Market Funds Exposure to Parents of
Guarantors (``DERA Guarantor Diversification Memo'') (March 17,
2014), available at http://www.sec.gov/comments/s7-03-13/s70313-323.pdf. In the DERA Guarantor Diversification Memo, the term
``guarantors'' is used to refer both to the ultimate parent of
issuers of guarantees and issuers of demand feature, and the term
``guarantees'' is used to refer both to guarantees and demand
features.
---------------------------------------------------------------------------
As presented in the figure below, DERA staff examined the number of
money market funds for which guarantors compose more than 10%, 15% and
20% of their portfolios, respectively.\1666\
---------------------------------------------------------------------------
\1666\ Id. The DERA Guarantor Diversification Memo also provides
information regarding tax-exempt money market funds, which we
discuss below.
[GRAPHIC] [TIFF OMITTED] TR14AU14.001
As shown in the figure below, DERA staff also examined the percent
of all money market funds for which guarantors compose more than 10%,
15%, and 20% of their portfolios, respectively.\1667\
---------------------------------------------------------------------------
\1667\ Id.
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[[Page 47879]]
[GRAPHIC] [TIFF OMITTED] TR14AU14.002
In addition, as illustrated in the figure below, DERA staff
examined the amount of excess exposure that money market funds have
above the 10%, 15%, and 20% thresholds, respectively.\1668\
---------------------------------------------------------------------------
\1668\ Id.
[GRAPHIC] [TIFF OMITTED] TR14AU14.003
DERA staff also found, as illustrated below, that only a small
percentage of the entire money market fund industry assets are exposed
to guarantors in excess of the 10%, 15%, and 20% thresholds.\1669\
---------------------------------------------------------------------------
\1669\ Id.
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[[Page 47880]]
[GRAPHIC] [TIFF OMITTED] TR14AU14.004
In addition to showing that the majority of money market funds do
not use the basket, the data analyzed in the DERA Guarantor
Diversification Memo also shows that money market funds that do use the
twenty-five percent basket use the basket to a limited extent for
purposes of gaining a high level of exposure to any one particular
guarantor or demand feature provider.\1670\ In fact, commenters noted
that although a money market fund may use the full twenty-five percent
basket to gain exposure to one guarantor or demand feature, money
market funds will often use the twenty-five percent basket to gain a
smaller amount of exposure to two guarantors or demand feature
providers above the 10% diversification limit, for a total of up to
twenty-five percent.\1671\
---------------------------------------------------------------------------
\1670\ Id. The DERA Guarantor Diversification Memo shows that
money market funds' exposure in excess of the 15% diversification
threshold is relatively small, amounting to 0.03% of the assets in
the entire money market fund industry as of November 2012.
\1671\ See, e.g., Wells Fargo DERA Comment Letter; Comment
Letter of Federated Investors, Inc. (Municipal Money Market Funds)
(Apr. 23, 2014) (``Federated DERA III Comment Letter''); SIFMA DERA
Comment Letter. For example, money market funds may use the twenty-
five percent basket to obtain exposure for two demand feature
providers or guarantors above the 10% diversification limit, in
which case the exposure to any one demand feature provider or
guarantor would have to be less than 15%, and the average exposure
to any one demand feature provider or guarantor could not exceed
12.5%. See Federated DERA III Comment Letter.
---------------------------------------------------------------------------
As noted by commenters, currently, a money market fund can use the
twenty-five percent basket in two ways. First, a money market fund can
apply the basket to one guarantor where the guarantor can account for
as much as 25% of the portfolio's guarantees. The figures above show
that $260 million or 0.01% of the industry dollars are above the 20%
threshold as of November 2012 and $740 million or 0.03% of the industry
dollars are above the 15% threshold as of November 2012, suggesting
that few funds are using the basket this way. Second, a money market
fund can apply the basket to two guarantors where each guarantor has
between 10% and 15% of the portfolio guarantees and the sum equals 25%
or less. The difference between the 15% and the 10% threshold amounts
in the above illustrations represents the usage under this scenario. As
of November 2012, $6.02 billion or 0.2% of the industry dollars are
used this way, suggesting that most funds use the twenty-five percent
basket divided up among two guarantors with exposures up to 15%.\1672\
If we assume an even split of 12.5% between two guarantors, then
instead of having to reduce exposure from 25% to 10% for one guarantor,
most money market funds will be required to reduce exposure from 12.5%
to 10% for two guarantors. Thus, because most money market funds are
not today using the twenty-five percent basket to gain high levels of
exposure to any one particular guarantor or demand feature provider, we
believe that any negative effects for these money market funds that
would be associated with reducing exposure to guarantors would
generally be minimal.
---------------------------------------------------------------------------
\1672\ As discussed below, the DERA analysis further shows that
the usage of the twenty-five percent basket is predominantly used by
tax-exempt money market funds.
---------------------------------------------------------------------------
One commenter suggested that the figures we provided in the
Proposing Release (which were derived from monthly Form N-MFP filings)
only captured the funds that used the twenty-five percent basket on one
particular day, but that the basket is regularly relied upon during the
course of the fund's operations.\1673\ The DERA Guarantor
Diversification Memo addresses the commenter's concern by reviewing the
use of the twenty-five percent basket over a period of two years.\1674\
After further review, our staff found that the data we provided in the
Proposing Release is comparable with the use of the twenty-five percent
basket when we analyze money market funds' use over two years.\1675\
Therefore, although commenters suggest that the use of the twenty-five
percent basket may vary considerably during the course of operation,
and commenters did not provide any specific data suggesting otherwise,
our staff found that the use of the twenty-five percent basket over a
longer period was in fact relatively constant.
---------------------------------------------------------------------------
\1673\ BlackRock II Comment Letter. See also Federated II
Comment Letter (stating that tax-exempt money market funds regularly
rely on the twenty-five percent basket during the course of their
operations and that three quarters of its tax-exempt money market
funds and all but two of its 14 single state funds currently hold
securities in their twenty-five percent basket).
\1674\ See DERA Guarantor Diversification Memo, supra note 1665.
\1675\ Id.
---------------------------------------------------------------------------
The data and figures provided above, which show that most funds
that are using the basket are using the basket between the 15% and 10%
thresholds, suggest that eliminating the basket for all money market
funds (other than tax-exempt money market funds), as opposed to
providing a fifteen percent basket, most effectively addresses our
concerns about a money market fund's exposure to a single guarantor or
demand feature provider because eliminating the basket provides a
significant mitigation of the risks to money market funds caused by
their substantial exposure to these providers. After further
consideration, we continue to believe that removing the twenty-five
percent basket for money market funds (other than tax-exempt money
market funds) instead of providing a fifteen percent basket (or other
size basket),
[[Page 47881]]
more appropriately addresses the risk that a fund faces when it is
heavily exposed to a single guarantor or demand feature provider.
ii. Tax-Exempt Money Market Funds
As discussed in greater detail in the DERA Guarantor
Diversification Memo, and as discussed further below, DERA staff also
analyzed data and figures regarding the use of the twenty-five percent
basket by tax-exempt money market funds. DERA staff found that tax-
exempt money market funds in general, and single state money market
funds in particular, use the twenty-five percent basket to a higher
degree than money market funds as a whole. As set forth below, DERA
staff examined the number of other tax-exempt funds and single state
funds for which guarantors compose more than 10%, 15%, and 20% of their
portfolios, respectively.\1676\
---------------------------------------------------------------------------
\1676\ Id. The DERA Guarantor Diversification Memo divides
municipal money market funds into two categories, consistent with
the two types of municipal money market funds on Form N-MFP (Item
10), ``single state funds'' and ``other tax-exempt funds.''
[GRAPHIC] [TIFF OMITTED] TR14AU14.005
As illustrated below, DERA staff also examined the percent of other
tax-exempt funds and single state funds for which guarantors compose
more than 10%, 15%, and 20% of their portfolios, respectively.\1677\
---------------------------------------------------------------------------
\1677\ Id.
[GRAPHIC] [TIFF OMITTED] TR14AU14.006
[[Page 47882]]
In addition, DERA staff examined the amount of excess exposure that
other tax-exempt funds and single state funds have in assets above the
10%, 15%, and 20% thresholds, respectively.\1678\
---------------------------------------------------------------------------
\1678\ Id.
[GRAPHIC] [TIFF OMITTED] TR14AU14.007
Lastly, as illustrated below, DERA staff found that only a small
percentage of the entire other tax-exempt fund and single state fund
industry assets are exposed to guarantors in excess of the 10%, 15%,
and 20% thresholds.\1679\
---------------------------------------------------------------------------
\1679\ Id.
[GRAPHIC] [TIFF OMITTED] TR14AU14.008
DERA staff analyzed, among other things: (i) The percentage of tax-
exempt money market fund assets exposed to guarantors above the 10%
threshold, which shows the percentage of assets that would need to be
reinvested if we eliminated the twenty-five percent basket, as
proposed; and (ii) the percentage of tax-exempt money market fund
assets exposed to guarantors above the 15% threshold, which shows the
percentage of assets that will need to be reinvested as a result of the
fifteen percent basket that we are adopting today for tax-exempt money
market funds. We believe that our staff's analysis of the percentage of
assets invested in securities subject to demand features or guarantees
in excess of the 10% and 15% guarantor diversification limits,
respectively, provides an accurate reflection of the potential impact
that elimination or reduction of the twenty-five percent basket would
have on other tax-exempt funds and single state funds. We also believe
that looking to the percentage of assets, as
[[Page 47883]]
opposed to the number of funds or excess amount of assets in dollars
(which only show absolute numbers), most accurately shows the
corresponding level of assets that will need to be reinvested.
The above data shows that the percentage of other tax-exempt funds
and single state fund assets exposed to guarantors above the 10% and
15% guarantor diversification limits are relatively small when compared
to other municipal money market funds and the money market fund
industry as a whole, although the data also shows that other tax-exempt
funds and single state funds use the basket to a greater extent than
money market funds generally. In addition to acknowledging that the
proposed elimination of the basket would have a greater effect on tax-
exempt money market funds because of their higher use of the basket, we
have also taken into account commenters' concerns, as discussed below,
regarding the limited availability of guarantor and demand feature
providers for tax-exempt money market funds as opposed to non-tax-
exempt money market funds.
b. Additional Considerations
i. Non-Tax-Exempt Money Market Funds
Several commenters generally supported the removal of the twenty-
five percent basket.\1680\ For example, one commenter argued that
eliminating the twenty-five percent basket for all money market funds
would be an appropriate step to further reducing concentration risk in
money market funds.\1681\ Other commenters, however, opposed the
removal of the twenty-five percent basket.\1682\ Commenters argued that
the elimination of the twenty-five percent basket would increase money
market funds' reliance on lower quality investments with higher credit
risk, particularly due to the limited number of providers of guarantees
and demand features.\1683\ One commenter argued that since the
financial crisis, fewer issuers have been providing guarantees and
other credit support for securities to be purchased by money market
funds, and that removing the twenty-five percent basket could force
managers to purchase paper of lower quality issuers that are unable or
unwilling to obtain third-party demand features.\1684\ Another
commenter stated that consolidation in the banking industry has
substantially reduced the pool of high-quality demand feature and
guarantee providers, and increased regulatory capital requirements will
likely further reduce the number of available providers in coming
years.\1685\
---------------------------------------------------------------------------
\1680\ See, e.g., Barnard Comment Letter; CFA Institute Comment
Letter. See also U.S. Bancorp Comment Letter (supporting the removal
of the twenty-five percent basket for all money market funds); Wells
Fargo Comment Letter (supporting the removal of the twenty-five
percent basket only for taxable money market funds); Schwab Comment
Letter (supporting the removal of the twenty-five percent basket,
but recommending that state-specific municipal money market funds be
allowed to continue using the basket to some extent).
\1681\ U.S. Bancorp Comment Letter.
\1682\ See, e.g., SSGA Comment Letter; ICI Comment Letter; Legg
Mason & Western Asset Comment Letter. Most of the commenters that
opposed the removal of the twenty-five percent basket focused
specifically on the consequences for tax-exempt money market funds.
We address their particular concerns regarding tax-exempt money
market funds below.
\1683\ Goldman Sachs Comment Letter; SIFMA Comment Letter; J.P.
Morgan Comment Letter; ICI Comment Letter; Legg Mason & Western
Asset Comment Letter; Vanguard Comment Letter.
\1684\ Legg Mason & Western Asset Comment Letter. See also ICI
Comment Letter (expressing concern that eliminating the twenty-five
percent basket would increase rather than decrease risk by
increasing a fund's reliance on less creditworthy credit support
providers, noting that the universe of institutions issuing or
providing guarantees or liquidity for eligible money market fund
securities has become limited).
\1685\ J.P. Morgan Comment Letter.
---------------------------------------------------------------------------
As discussed below, we do not believe that the removal of the
twenty-five percent basket for non-tax-exempt money market funds will
cause money market funds to use lower credit quality guarantors and
demand feature providers or potentially reduce liquidity and
flexibility for money market funds, and if any such impact were to
occur, we expect that it would be limited. As noted above, the data
analyzed in the DERA Guarantor Diversification Memo shows, among other
things, that most funds, especially non-tax-exempt money market funds,
do not use the twenty-five percent basket, and thus we believe that
most money market funds will likely not be forced to use lower credit
quality guarantors and demand feature providers.\1686\ Under today's
amendments, non-tax-exempt money market funds will not be required to
include more than 10 guarantors or demand feature providers in their
portfolios if each one maximized the 10% diversification limit. DERA
staff evaluated the exposure to guarantors and found that the top five
guarantor parents accounted for a combined total of 43% of the exposure
across all money market funds. DERA staff measured the credit risk for
each guarantor by credit default swap (CDS) spreads and composite
credit ratings (NRSROs) and found that the credit quality of guarantors
among the top twenty guarantors is similar to that of the top five
guarantors.\1687\ Thus, we believe that, if today's amendments cause
non-tax-exempt money market funds to include additional guarantors or
demand feature providers in the funds' portfolios, there exists a
supply of guarantors and demand feature providers that have similar
credit quality as the top five guarantors used by funds. As such, we
believe that, for non-tax-exempt money market funds that are currently
using the twenty-five percent basket, it is likely that these money
market funds would be able to use these additional guarantors and
demand feature providers and will not be forced to resort to low credit
quality guarantors or demand feature providers because of the amended
rule.
---------------------------------------------------------------------------
\1686\ See DERA Guarantor Diversification Memo, supra note 1665
and accompanying text.
\1687\ Id.
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A few commenters argued that composite credit ratings from NRSROs
are not a reliable standalone metric to assess credit quality.\1688\ We
agree. This is why the DERA memo also assessed credit risk through CDS
spreads, which are the market's current assessment of a guarantor's
future financial capacity to provide the necessary support. A few
commenters also argued that money market funds analyze the credit
quality of guarantors using a variety of factors other than CDS spreads
and composite credit ratings.\1689\ While we recognize that money
market funds' internal analysis of the credit quality of guarantors and
demand feature providers might be different, we believe that using a
combination of the objective factors, CDS spreads and composite credit
ratings, for the purpose of our staff's analysis is an acceptable
alternative to conducting an individual credit risk analysis of
guarantors and closely approximates the credit risk of such guarantors
and demand feature providers. Thus, after further review, we believe
our staff's findings support the conclusion that, to the limited extent
a money market fund may need to engage new institutions as providers of
guarantees and demand features, there will be a sufficient supply of
first tier guarantors in the market. We therefore believe that, even
with a 10% guarantor limit for non-tax-exempt money market funds, any
increase in guarantor diversification should not lead to deterioration
in credit quality.
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\1688\ See, e.g., Wells Fargo DERA Comment Letter.
\1689\ See, e.g., Wells Fargo DERA Comment Letter; Dreyfus DERA
Comment Letter.
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ii. Tax-Exempt Money Market Funds
Although a number of commenters opposed the removal of the twenty-
five percent basket generally, many
[[Page 47884]]
commenters specifically opposed the removal of the twenty-five percent
basket for tax-exempt money market funds, and single state money market
funds in particular.\1690\ Some commenters argued that the twenty-five
percent basket has not been the reason tax-exempt money market funds
have experienced credit events in the past.\1691\ For example, one
commenter argued that the twenty-five percent basket did not have an
adverse impact on tax-exempt money market funds and their shareholders
and that significant disruptions should not justify removal of the
twenty-five percent basket for tax-exempt money market funds.\1692\
However, as we discussed in the Proposing Release, in 2008, the
concentration of tax-exempt money market funds in guarantee and demand
feature providers led to considerable stress in the municipal
markets.\1693\ During this time municipal issuers had to quickly find
substitutes for demand features on which they relied to shorten their
securities' maturities.\1694\ In addition, at least one provider of
demand features and guarantees for many municipal securities held by
money market funds avoided bankruptcy in part due to substantial
support received from various entities.\1695\ We believe the risk that
a money market fund faces in cases where the guarantor or demand
feature provider comes under significant strain is substantial and that
possible external support is unreliable in cases when guarantors or
demand feature providers may become stressed. We therefore continue to
believe that it is appropriate to amend rule 2a-7 to enhance the
diversification requirements by reducing the twenty-five percent basket
to a fifteen percent basket, in order to limit a tax-exempt money
market fund's exposure to any one guarantor or demand feature provider,
thereby mitigating the risk the fund faces when it heavily relies on a
single guarantor or demand feature provider.
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\1690\ See, e.g., Federated II Comment Letter; Dreyfus Comment
Letter; Wells Fargo Comment Letter; Schwab Comment Letter; Vanguard
Comment Letter; BlackRock II Comment Letter.
\1691\ See, e.g., Vanguard Comment Letter; Federated II Comment
Letter.
\1692\ Federated II Comment Letter. See also Federated VII
Comment Letter (arguing that tax-exempt money market funds weathered
problems by relying on the credit of the underlying obligor or
working with the obligor to substitute another guarantor).
\1693\ See Proposing Release, supra note 25, section III.J.3.
\1694\ Id.
\1695\ Id.
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As discussed above and in the Proposing Release, when evaluating
money market funds in the aggregate, most money market funds do not use
the twenty-five percent basket and those funds that do use the twenty-
five percent basket do not make significant use of it.\1696\
Commenters, however, argued that tax-exempt money market funds in
particular do regularly rely on the twenty-five percent basket.\1697\
For example, one commenter stated that as of June 30, 2013, 75% of
municipal money market funds made use of the twenty-five percent
basket.\1698\ Another commenter noted that nine of the top 10 largest
tax-exempt money market funds, which represent approximately 40% of the
tax-exempt money market fund assets, use the twenty-five percent
basket.\1699\ As previously discussed, commenters noted that besides
using a single guarantor in the twenty-five percent basket, money
market funds may also use two guarantors to fill the twenty-five
percent basket by having, for example, a 13% exposure to one guarantor
and a 12% exposure to another.\1700\ The DERA Guarantor Diversification
Memo found, as shown above, that 10.8% and 2.6% of ``single state
funds'' and ``other tax-exempt funds'' had at least one guarantor above
the 20% threshold as of November 2012, respectively.\1701\ The DERA
Guarantor Diversification Memo also found that 30.6% and 7.7% of single
state funds and other tax-exempt funds had at least one guarantor above
the 15% threshold as of November 2012, respectively. In addition, the
memo shows that 80.2% and 50.0% of single state and other tax-exempt
funds had at least one guarantor above the 10% threshold as of November
2012, respectively.\1702\ DERA staff's findings are consistent with the
data provided by the commenters above, which suggest that tax-exempt
money market funds use the twenty-five percent basket to a greater
extent than non-tax-exempt money market funds.
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\1696\ See Proposing Release, supra note 25, nn.892-893 and
accompanying text.
\1697\ See, e.g., SIFMA Comment Letter; Fidelity Comment Letter.
\1698\ SIFMA Comment Letter.
\1699\ Fidelity Comment Letter (noting that only one of those
nine funds was over 15% and recommending a fifteen percent basket
for all money market funds).
\1700\ See, e.g., Comment Letter of Investment Company Institute
DERA (Apr. 22, 2014) (``ICI DERA Comment Letter'').
\1701\ See DERA Guarantor Diversification Memo, supra note 1665.
\1702\ Id.
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One commenter argued that although the DERA staff analysis
demonstrates that most tax-exempt money market funds use the twenty-
five percent basket, the sample period (2010-2012) is not appropriate
because there were no events during this time period that caused stress
on money market funds.\1703\ We note, however, that another commenter
stated that it was beneficial for money market funds to have the
flexibility of the twenty-five percent basket during the Eurozone
concerns in 2011,\1704\ which occurred during our sample time period.
As discussed above, the data analyzed in the DERA Guarantor
Diversification Memo shows that over the course of two years, the use
of the twenty-five percent basket remained steady and there was minimal
variability in the use of the basket over time, even when certain
events during this time period caused stress on money market
funds.\1705\
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\1703\ See Wells Fargo DERA Comment Letter.
\1704\ See Fidelity DERA Comment Letter.
\1705\ See DERA Guarantor Diversification Memo, supra note 1665.
---------------------------------------------------------------------------
Many commenters expressed concern regarding the impact of the
proposed removal of the twenty-five percent basket for tax-exempt money
market funds, and single state money market funds in particular, due to
the limited availability of demand feature providers and guarantors for
these types of funds. Commenters argued that the elimination of the
twenty-five percent basket would limit a tax-exempt money market fund's
flexibility to obtain greater exposure to strong credit sources in
times when high credit quality may be scarce.\1706\ A number of
commenters also argued that the removal of the twenty-five percent
basket will make it difficult for tax-exempt money market funds to
acquire sufficient liquid assets.\1707\ Commenters argued that there is
a relatively narrow group of banks and other financial institutions
that provide much of the liquidity in the short-term municipal and TOB
markets,\1708\ and that single state funds in particular have even
fewer issuers available to them.\1709\
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\1706\ Vanguard Comment Letter; Invesco Comment Letter;
BlackRock II Comment Letter. See also Dreyfus Comment Letter; ICI
Comment Letter; Legg Mason & Western Asset Comment Letter; Federated
VII Comment Letter; Federated II Comment Letter.
\1707\ Wells Fargo Comment Letter; Invesco Comment Letter;
BlackRock II Comment Letter; SIFMA Comment Letter; Goldman Sachs
Comment Letter; Federated II Comment Letter. See also Fidelity
Comment Letter.
\1708\ Id.
\1709\ See, e.g., BlackRock II Comment Letter.
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One commenter stated that with a constrained supply of securities
with diverse guarantors, a twenty-five percent basket may actually
allow a manager to reduce risk by avoiding or reducing exposure to the
relatively weakest guarantors.\1710\ Some commenters also argued that
the twenty-five percent basket is an important tool
[[Page 47885]]
that money market funds may use to accommodate the variability and
unpredictability of supply and demand in the municipal market.\1711\ We
recognize commenters' concerns regarding the proposed removal of the
twenty-five percent basket for tax-exempt money market funds, and
single state money market funds in particular, due to the limited
availability of demand feature providers and guarantors for these types
of funds. As noted above, we believe that requiring tax-exempt money
market funds to limit exposure to any one guarantor or demand feature
provider while still providing tax-exempt money market funds with a
fifteen percent basket, will address many of the commenters' concerns
regarding the limited supply of demand feature providers and guarantors
for tax-exempt money market funds.
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\1710\ Wells Fargo Comment Letter.
\1711\ See, e.g., Dreyfus Comment Letter; BlackRock II Comment
Letter. See also Wells Fargo DERA Comment Letter (noting that the
basket provides a means for money market funds to limit portfolio
credit risk by concentrating exposure in the highest quality
guarantor).
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Several commenters suggested we reduce the twenty-five percent
basket to a fifteen percent basket for tax-exempt money market
funds.\1712\ One commenter stated that, although the twenty-five
percent basket may not have been heavily used recently by money market
funds, the availability of a basket would provide useful flexibility to
money market funds on occasion.\1713\ A second commenter argued that a
fifteen percent basket would achieve the objective of balancing
diversification and flexibility, while reducing the potential for
unintended consequences.\1714\ After further consideration, and in
light of the data for tax-exempt money market funds and commenters'
concerns and recommendations regarding the removal of the basket for
tax-exempt money market funds, we have decided to allow tax-exempt
money market funds, including single state funds, to rely on a fifteen
percent basket, under which as much as 15% of the value of securities
held in a tax-exempt money market fund's portfolio may be subject to
guarantees or demand features from a single institution. Although
eliminating the basket for tax-exempt money market funds would reduce
concentration risk by requiring tax-exempt money market funds to lessen
their exposure to a single guarantor or demand feature provider, we are
concerned that eliminating the basket entirely could cause these funds
to invest in weaker credits. We believe that a reduction of the twenty-
five percent basket to a fifteen percent basket for tax-exempt money
market funds, which the DERA Guarantor Diversification Memo shows use
the basket more than non-tax-exempt money market funds, appropriately
addresses the concerns related to heavy concentration in a single
guarantor or demand feature provider as well as the concerns that
eliminating the twenty-five percent basket for tax-exempt money market
funds could lead to an overall deterioration of credit quality or
liquidity because tax-exempt funds may have to obtain guarantees or
demand features from less creditworthy institutions due to a limited
supply of guarantees and demand features.
---------------------------------------------------------------------------
\1712\ See, e.g., Goldman Sachs Comment Letter; Fidelity DERA
Comment Letter. See also Schwab Comment Letter (recommending that
single state money market funds be allowed to continue using the
twenty-five percent basket except that within the basket no single
guarantor or demand feature provider could represent more than 15%
of the fund's assets). Some commenters suggested we reduce the
twenty-five percent basket to a fifteen percent basket for all money
market funds (both tax-exempt funds and non-tax-exempt funds). See
Goldman Sachs Comment Letter; SIFMA Comment Letter; Fidelity Comment
Letter. See also J.P. Morgan Comment Letter (recommending that
instead of eliminating the basket, we mandate a maximum guarantee
and/or demand feature exposure that can be held within the basket in
any one entity, such as at a 15% cap).
\1713\ Goldman Sachs Comment Letter (suggesting that our data is
limited to a short period of time and arguing that it supports the
conclusion that a smaller basket would satisfy portfolio managers of
most funds).
\1714\ Fidelity Comment Letter.
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We believe for several reasons that reducing the twenty-five
percent basket to a fifteen percent basket should not significantly
restrict the ability of guarantors to fill the needed capacity as the
guarantors become more diversified. First, the data analyzed in the
DERA Guarantor Diversification Memo shows 0.5% and 0.2% of the
guarantor's dollars are excess dollars above the 15% threshold when
single state funds and other tax-exempt funds, respectively, are
considered separately in November 2012, meaning little if any
additional capacity has to be developed.\1715\ Second, it is reasonable
to expect that a reduction by one money market fund (because its
exposure to a particular guarantor is too high) could become a
purchasing opportunity for another money market fund whose exposure to
a particular guarantor is below the 15% threshold. Third, should any of
the top guarantors listed in the DERA Guarantor Diversification Memo
choose to increase their capacity, this could become a purchasing
opportunity for a money market fund since the amount of excess dollars
above the 15% threshold is smaller than the amount needed for the
remaining funds to reach the 10% or 15% threshold for the same
guarantor. Lastly, it is also reasonable to expect that if a reduction
by any of the top guarantors does occur, this could become an
opportunity for another guarantor to step in. We therefore believe
that, although other tax-exempt funds and single state funds may
currently use the twenty-five percent basket to a higher degree than
money market funds generally and may face greater supply constraints
than non-tax-exempt funds, because these funds will be permitted to use
a fifteen percent basket, any increase in guarantor diversification
should not lead to deterioration in credit quality and any negative
effects for tax-exempt money market funds that currently use the
twenty-five percent basket will be minimal.\1716\
---------------------------------------------------------------------------
\1715\ See DERA Guarantor Diversification Memo, supra note 1665.
\1716\ See supra note 1665 and accompanying text (discussing
level of assets and supply of providers).
---------------------------------------------------------------------------
A couple of commenters argued that VRDNs provide a significant
source of liquidity for money market funds and that the proposed
removal of the twenty-five percent basket would therefore have a
negative impact on a fund's ability to access liquidity through
VRDNs.\1717\ In addition, one of these commenters argued that the
combination of regulatory requirements and the diminishing number of
financial guaranty companies and highly rated banks has significantly
reduced the number of entities offering credit support for VRDNs,\1718\
noting that in late 2012, tax-exempt money market funds had an average
of 83% of total assets invested in VRDNs.\1719\ As
[[Page 47886]]
discussed in the Proposing Release, and as discussed further below,
concerns about the creditworthiness of guarantors and demand feature
providers have reduced the amount of VRDNs outstanding since
2010.\1720\ We expect that reducing the twenty-five percent basket to a
fifteen percent basket instead of eliminating the basket will alleviate
commenters' concerns regarding the availability of VRDNs. In addition,
because the amount of outstanding VRDNs and other short-term municipal
debt has decreased 47% between 2008 and 2013, the top guarantors will
have some additional capacity built in should the overall demand for
such securities continue to decrease into the future.\1721\ Rule 2a-7
restricts money market funds to short-term maturities, which in turn
limits the municipal debt in money market funds to VRDNs and other
short-term municipal debt.\1722\ In addition, analyzing money market
fund municipal debt holdings and the availability of acceptable money
market fund municipal securities (VRDNs and other short-term municipal
debt) from 2002 to 2013 suggests that the municipal debt market is able
to adjust to both increasing and decreasing demand for such
securities.\1723\
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\1717\ Legg Mason & Western Asset Comment Letter; Invesco
Comment Letter. The interest rates on VRDNs are typically reset
either daily or every seven days. VRDNs include a demand feature
that provides the investor with the option to put the issue back to
the trustee at a price of par value plus accrued interest. This
demand feature is supported by a liquidity facility such as letters
of credit, lines of credit, or standby purchase agreements provided
by financial institutions. The interest-rate reset and demand
features shorten the duration of the security and allow it to
qualify as an eligible security under Rule 2a-7. See Handbook of
Fixed Income Securities 237 (Frank J. Fabozzi & Steven V. Mann eds.,
8th ed. 2012) nn.735-36.
\1718\ Invesco Comment Letter (stating that, while total
municipal market debt outstanding has held stable for the past five
years at about $3.7 trillion, VRDNs outstanding have declined
steadily from $444.9 billion in December 2008 to only $246.8 billion
in June 2013).
\1719\ Id. (noting that there has been a marked decline in the
issuance of credit enhanced securities and that the contraction in
the availability of these securities hinders the level of
diversification that managers can achieve in tax-exempt money market
fund portfolios; also providing data that securities issued with a
letter of credit, standby purchase agreement or guarantee comprised
25.6% of total municipal market issuance in 2008 and that in 2012
these securities made up 9.5% of total issuance).
\1720\ See Proposing Release, supra note 25, at section III.E.
\1721\ See infra note 1723.
\1722\ Our staff's review of portfolio holdings of single state
funds and other tax-exempt funds from Form N-MFP filings, using
aggregate amortized values from November 2010 to December 2013,
found that these funds held approximately 71% in VRDNs and 18% in
other municipal debt.
\1723\ The Federal Reserve Board's Flow of Funds of the United
States provides the amount of municipal securities held by money
market funds and the overall market. It ranged from about $270
billion in 2002 to a maximum of $520 billion in 2008 only to decline
to approximately $305 billion by 2013. The decrease shows that $215
billion ($520-$305) or 39% exited the money market fund industry
since the financial crisis. One can closely approximate these money
market fund holdings by summing the amount of outstanding VRDNs
(Source: Securities Market and Financial Markets Association Web
site) with the amount of outstanding short term municipal debt
(Source: Federal Reserve Board's Flow of Funds of the United
States), suggesting that money market funds hold nearly all the
VRDNs and short-term municipal debt. This sum has nearly halved from
a high of $500 billion in 2008 to $265 billion in 2013. This
corresponds to a decrease of $235 billion, or 47%, of short term
municipal debt and VRDNs money market funds holdings. We note, as
well, that the overall municipal debt market has absorbed these
large money market fund outflows, and, in fact, the overall
municipal debt market has grown approximately $200 billion during
this same time period. See Federal Reserve Board, Flow of Funds of
the United States, available at http://www.federalreserve.gov/releases/z1 and Securities Market and Financial Market Association
Reports, available at http://www.sifma.org/research/reports.aspx.
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c. Additional Economic Analysis
Our diversification amendments, including (i) the amendment to
require that money market funds treat the sponsors of ABS as guarantors
subject to rule 2a-7's 10% diversification limit applicable to
guarantees and demand features, unless the money market fund's board of
directors (or its delegate) determines that the fund is not relying on
the sponsor's financial strength or its ability or willingness to
provide liquidity, credit or other support to determine the ABS's
quality or liquidity (``ABS amendment'') and (ii) the amendment to
remove the twenty-five percent basket for money market funds other than
tax-exempt money market funds and to reduce to fifteen percent, rather
than eliminate, the twenty-five percent basket for tax-exempt money
market funds, including single state money market funds (``twenty-five
percent basket amendment''),\1724\ are designed to provide a number of
benefits, as discussed in more detail below. DERA staff's review of
data suggests that our ABS amendment and twenty-five percent basket
amendment (treating only ABCP sponsors as guarantors for purposes of
this analysis) \1725\ would have little impact on the majority of money
market funds, which do not make use of the twenty-five percent basket,
and would likely have a minimal impact on those funds that do. Because
tax-exempt money market funds make greater use of the basket than non-
tax-exempt money market funds and may face greater constraints
regarding the availability of demand feature providers and guarantors,
we have provided tax-exempt money market funds with the ability to use
a fifteen percent basket. DERA staff's review of data suggests that the
effect of our twenty-five percent basket amendment on tax-exempt money
market funds would thus also have little impact on the majority of tax-
exempt money market funds.
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\1724\ See infra note 1660.
\1725\ 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 conduit 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 conduit 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 1726.
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Based on the data analyzed in the DERA Guarantor Diversification
Memo, our staff found that approximately 131 funds, or 21.9% of all
funds submitting Form N-MFP for November 2012, 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). Thus, although a minority
does use the twenty-five percent basket, the majority of money market
funds do not. Furthermore, money market funds as of February 28, 2014,
had invested 16.5% of their assets in ABS 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. The 131 funds that used the twenty-five percent basket had,
on average, $31.4 billion of their assets invested in excess of the 10%
diversification limitation we are adopting today (i.e., in the twenty-
five percent basket) as of November 2012.\1726\ Furthermore, data as of
November 2012, shows that 98.9% of total money market fund assets are
not in funds' twenty-five percent baskets. Thus, because most money
market funds are not using the twenty-five percent basket to gain high
levels of exposure to any one particular guarantor or demand feature
provider and because a very high percentage of money market fund assets
are not in a twenty-five percent basket, we believe any negative
effects for these non-tax-exempt money market funds will generally be
minimal.
[[Page 47887]]
In addition, we believe that, if today's amendments cause non-tax-
exempt money market funds to include additional guarantors or demand
feature providers in the funds' portfolios, there exists a sufficient
supply of guarantors and demand feature providers.
---------------------------------------------------------------------------
\1726\ This estimate likely overstates the number of funds and
the amount of money market funds' assets that could be affected by
our ABS amendments 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 amendments, 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 ABS
guaranteed those ABS 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
will not be permitted under our 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 will be permitted under our 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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As discussed above, and as addressed by certain commenters, we
recognize that tax-exempt money market funds, and in particular, single
state tax-exempt money market funds, use the twenty-five percent basket
to a greater degree than other types of money market funds. DERA staff
found that approximately 128 tax-exempt funds, or 67.7% of all tax-
exempt funds submitting Form N-MFP for November 2012, made use of the
twenty-five percent basket. For single state funds, our staff found
that approximately 89 single state funds, or 80.2% of single state
funds submitting Form N-MFP for November 2012 made use of the twenty-
five percent basket. However, tax-exempt money market funds, including
single state funds, that do use the twenty-five percent basket
generally do not make significant use of it. The 128 tax-exempt money
market funds that used the twenty-five percent basket had, on average,
2.4% of their assets invested in excess of the 10% diversification
limitation we are adopting today (i.e., in the twenty-five percent
basket), and the 89 single state money market funds that used the
twenty-five percent basket had, on average, 0.5% of their assets
invested in access of the 15% diversification limitation as of November
2012.\1727\ In addition, the 128 tax-exempt money market funds that
used the twenty-five percent basket had, on average, 0.3% of their
assets invested in excess of the 15% diversification limitation we are
adopting today, and the 89 single state money market funds that used
the twenty-five percent basket had, on average, 0.5% of their assets
invested in excess of the 15% diversification limitation as of November
2012.\1728\
---------------------------------------------------------------------------
\1727\ Id.
\1728\ Id.
---------------------------------------------------------------------------
Although we understand that non-tax-exempt money market funds, and
tax-exempt money market funds in particular, may have made greater use
of the twenty-five percent basket in the past (and might do so in the
future if we fully retained the twenty-five percent basket), we are
concerned that funds were previously exposed to concentrated risks
inconsistent with the purposes of rule 2a-7's diversification
requirements as discussed above. We continue to believe that amending
rule 2a-7 to tighten diversification limits for securities subject to
guarantees or demand features from a single institution for both non-
tax-exempt money market funds and tax-exempt money market funds will
mitigate some of the risk that a money market fund faces by limiting a
fund's exposure to any one guarantor or demand feature provider.
The principal effect of the ABS amendment and twenty-five percent
basket amendment we are adopting today may be to restrain some managers
of money market funds from being heavily exposed to an individual ABS
sponsor and from making use of the twenty-five percent basket in the
future, under perhaps different market conditions.\1729\ Our
diversification amendments may deny fund managers some flexibility in
managing fund portfolios and could decrease fund yields. To assess our
amendment's effect on yield, our staff 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.\1730\ Our
staff found: (i) For other tax-exempt funds, the average yield for
funds using the twenty-five percent basket was 0.0893% as compared to
the average yield for other tax-exempt funds that did not use the
twenty-five percent basket of 0.0987% and the average yield for funds
using the twenty-five percent basket above the 15% threshold was
0.0736% as compared to the average yield for other tax-exempt funds
that either did not use the twenty-five percent basket or used the
twenty-five percent basket below the 15% threshold of 0.0951%; (ii) for
single state funds, the average yield for funds using the twenty-five
percent basket was 0.0886% as compared to the average yield for single
state funds that did not use the twenty-five percent basket of 0.0754%
and the average yield for single state funds using the twenty-five
percent basket above the 15% threshold was 0.1075% as compared to the
average yield for singe state funds that either did not use the twenty-
five percent basket or used the twenty-five percent basket below the
15% threshold of 0.0790%; and (iii) for prime money market funds, the
average yield for funds using the twenty-five percent basket was
0.1740% as compared to the average yield for prime money market funds
that did not use the twenty-five percent basket of 0.1875%.\1731\ 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. In addition, we acknowledge that the
current low interest-rate environment may cause the yield spread in
each comparison above to be less than if we were measuring the yield
spreads in a higher interest rate environment.
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\1729\ One commenter suggested that compliance with our
amendments would require it to reallocate or sell its money market
fund portfolio securities. See Fidelity Comment Letter (also
suggesting that we extend our nine-month implementation period for
modifying the twenty-five percent basket due to the need for
additional time for transactions). However, funds with investments
in excess of those permitted under the revised rule are not required
to sell the excess investments to come into compliance. The
amendments 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 rules 2a-7(d)(3)(i)
and (iii).
\1730\ We assumed that any fully or partially supported ABCP
owned by a fund would result in the sponsor guaranteeing the ABCP.
See supra note 1726.
\1731\ These averages are derived from Form N-MFP data as of
February 28, 2014, weighted by money market funds' assets under
management.
---------------------------------------------------------------------------
We requested comment as to whether there would be a significant
impact on fund yield, and if so, how significant. Although commenters
did not address the specific impact on fund yield, one commenter stated
that our staff's analysis assumed that funds could replace securities
guaranteed or subject to a demand feature in a twenty-five percent
basket with the same securities that were held by the funds that do not
use the twenty-five percent basket, and suggested that the elimination
of the basket might therefore decrease both yield and liquidity of tax-
exempt funds.\1732\ We recognize that it is possible that one money
market fund may not be able to obtain the exact securities of another
money market fund that is not currently relying on the basket. However,
as discussed above, our staff's analysis shows that there exists a
sufficient supply of first tier guarantors in the market for funds to
invest. Therefore, after further consideration, we believe that the
effect on yield, given the 7-day gross yields of funds that use the
twenty-five percent basket versus the 7-day gross yields for those
funds that do not, will be minimal.
---------------------------------------------------------------------------
\1732\ Federated VII Comment Letter.
---------------------------------------------------------------------------
Our twenty-five percent basket amendment requires non-tax-exempt
money market funds that use the twenty-five percent basket, and tax-
exempt money market funds that use the twenty-five percent basket at
levels above the fifteen percent threshold, or that would use it in the
future, to either not acquire certain demand features or guarantees (if
the fund could not assume
[[Page 47888]]
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, reducing the twenty-
five percent basket to a fifteen percent basket for tax-exempt money
market funds, and removing the twenty-five percent basket for all other
money market funds, could result in money market funds acquiring
guarantees and demand features from lower quality providers than those
the funds use today, although, as discussed above, we expect such
potential effect to be mitigated due to the available supply of first-
tier guarantors and demand feature providers that have similar credit
quality as the top guarantors that are used by funds. 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 amendments.
Our ABS amendment and twenty-five percent basket amendment 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 amendments 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. Although we cannot
provide a point estimate of these costs, and commenters did not provide
us with any data that would assist us with a point estimate, we expect
that these costs would be included in our broader cost estimates as
discussed above in section III.I.1. A money market fund that could not
acquire a particular guarantee or demand feature under our amendments
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.
Issuers also could incur costs if they were required to engage
different providers of demand features or guarantees under our
amendments, 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 amendments, which
could make their offering process less efficient or more costly.
As discussed above, some commenters argued that single state funds
in particular would be negatively affected by the removal of the
twenty-five percent basket.\1733\ We believe that providing single
state funds a fifteen percent basket retains much of the flexibility
for single state funds to invest in securities subject to guarantees or
demand features while also limiting the extent to which a single state
fund can become exposed to any one guarantor or demand feature
provider. Although our amendments reduce the twenty-five percent basket
for all single state funds, we are not changing 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.\1734\ 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.'' \1735\ The market for demand features and guarantees, in
contrast, is national for most single state funds and therefore may not
be subject to the same supply constraints as is the market for issuers
in which single state funds may directly invest. However, the market
for demand features and guarantees for some single state funds is not
national. For example, the state of California through the California
State Teachers Retirement System is a guarantor for securities held in
California municipal money market fund portfolios as reported on Form
N-MFP. Additional analysis of the data in the DERA Guarantor
Diversification Memo shows that 74% of the single state fund's excess
guarantees above the 15% threshold on average come from California
municipal money market funds (39%), New York municipal money market
funds (24%), and Massachusetts municipal money market funds (11%). All
other state municipal money market funds account for 5% or less of the
excess guarantees dollars above the 15% threshold. As such, we would
expect that in terms of the amount of assets, California, New York, and
Massachusetts may be affected more than other states. However, as we
discussed earlier, we expect the impact to be minimal since the amount
of excess guarantee dollars above the 15% threshold is less than 0.5%
of the single state guarantee dollars.\1736\ This may be reduced
further if other single state funds with guarantees below the 10% and
15% threshold choose to increase their percent exposures to those
guarantors with excess exposure in other funds.
---------------------------------------------------------------------------
\1733\ See, e.g. BlackRock II Comment Letter; Schwab Comment
Letter; Federated VII Comment Letter; Dreyfus Comment Letter.
\1734\ See current rule 2a-7(c)(4)(i)(B) and rule 2a-
7(d)(3)(i)(B).
\1735\ See Revisions to Rules Regulating Money Market Funds,
Investment Company Act Release No. 21837 (Mar. 21, 1996) [61 FR
13956 (Mar. 28, 1996)] (``1996 Adopting Release''), at text
following n.38.
\1736\ See DERA Guarantor Diversification Memo, supra note 1665.
---------------------------------------------------------------------------
We do not expect that our ABS and twenty-five percent basket
diversification amendments will 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
amendments 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 twenty-five percent basket diversification amendments, we expect
that the money market fund would make those modifications when
modifying its systems in response to our amendments 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.\1737\
[[Page 47889]]
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
twenty-five percent basket diversification amendments.
---------------------------------------------------------------------------
\1737\ See supra note 1625 and accompanying text.
---------------------------------------------------------------------------
In the Paperwork Reduction Act analysis in section IV.A.1 below, we
identified certain initial and ongoing hour burdens and associated time
costs related to our diversification amendments. Specifically, our ABS
amendment requires that the board of directors adopt written procedures
requiring periodic evaluation of any determinations made regarding
instances in which the fund is not relying on the ABS sponsor's
financial strength or its ability or willingness to provide quality or
liquidity. 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. These requirements are a collection of information
under the Paperwork Reduction Act, and are designed to help ensure that
the objectives of the diversification limitations are achieved. We
estimate the one-time burden to prepare and adopt these procedures will
be 1,368 hours at $1,130,880 in total time costs for all money market
funds and we estimate that the annual burden would be approximately 608
burden hours and $842,080 in total time costs for all money market
funds. We also note that a board can delegate its responsibility to
determine whether the fund is relying on the ABS sponsor's financial
strength or its ability or willingness to provide quality or liquidity
pursuant to rule 2a-7.\1738\ To the extent that a board delegates this
responsibility, it may incur additional costs related to its oversight
of such a delegate, although we expect that any such additional costs
would be minimal.
---------------------------------------------------------------------------
\1738\ See rule 2a-7(j).
---------------------------------------------------------------------------
J. Amendments to Stress Testing Requirements
We are adopting amendments to the stress testing requirements under
rule 2a-7, with modifications from the proposal in response to
comments. Specifically, we are adopting reforms to the current stress
testing provisions that will require funds periodically to test their
ability to maintain weekly liquid assets of at least 10% and to
minimize principal volatility \1739\ in response to specified
hypothetical events that include (i) increases in the level of short-
term interest rates, (ii) the downgrade or default of particular
portfolio security positions, each representing various exposures in a
fund's portfolio, and (iii) the widening of spreads in various sectors
to which the fund's portfolio is exposed, each in combination with
various increases in shareholder redemptions.\1740\ The fund adviser
must report the results of such stress testing to the board, including
such information as may be reasonably necessary for the board of
directors to evaluate the stress testing results.\1741\ We discuss
these requirements and the modifications from the proposal in further
detail below.
---------------------------------------------------------------------------
\1739\ Stable NAV funds will continue to be required to test
their ability to maintain a stable NAV. See rule 2a-7(g)(8)(i).
Additionally, as discussed below, we recognize that fund advisers
and boards are more likely to be concerned with, and the
hypothetical events are focused on, downside volatility.
\1740\ Id.
\1741\ See rule 2a-7(g)(8)(ii).
---------------------------------------------------------------------------
1. Overview of Current Stress Testing Requirements and Proposed
Amendments
The current stress testing requirements, adopted in 2010, require
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. 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 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. As we discussed in the Proposing Release, we have monitored the
stress testing requirement and how different fund groups have
approached 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 fund managers to explain the
stress testing results to boards. For example, some funds test for
combinations of events, as well as for correlations between events and
between portfolio holdings, whereas others do not. As discussed in the
proposal, we believe that an evaluation of combinations of events and
correlations among portfolio holdings is an important part of a fund's
stress testing.\1742\
---------------------------------------------------------------------------
\1742\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------
We also noted in the proposal that we have had several
opportunities to assess the effectiveness of the stress testing
requirements during periods of market stress, including the 2011
Eurozone debt crisis and the 2011 U.S. debt ceiling impasses. We
further assessed the role of stress testing in fund boards' assessment
of fund risks during the 2013 U.S. debt ceiling impasse. Our staff has
observed that funds that had strong stress testing procedures were able
to use the results of those tests to better manage their portfolios and
better understand and minimize the risks associated with these
events.\1743\
---------------------------------------------------------------------------
\1743\ Id.
---------------------------------------------------------------------------
Finally, we also noted that, both with stable NAV and floating NAV
funds, we believe that stress testing the liquidity of money market
funds could enhance a fund board's understanding of the risks to the
fund related to periods of heavy shareholder redemptions and could help
the fund manage those risks. We also noted that from the staff's review
of stress testing by funds, some funds already incorporate an analysis
of their ability to maintain liquidity in their stress tests.\1744\
---------------------------------------------------------------------------
\1744\ Id.
---------------------------------------------------------------------------
Considering this information and experience, the Commission
proposed certain modifications, enhancements, and clarifications to the
current stress testing requirements in rule 2a-7 to strengthen the
stress testing requirements. First, we added a proposed requirement for
each fund to stress test its ability to avoid having its weekly liquid
assets fall below 15% of all fund assets. Under the floating NAV
alternative, we also proposed removing the requirement that floating
NAV funds test their ability to maintain a stable share price.
Additionally, we proposed certain enhancements and clarifications to
the list of hypothetical events that funds were required to include in
their stress testing. Finally, we proposed to modify the requirements
to report results to the board, proposing an additional requirement
that the fund adviser include such information as may be reasonably
necessary for the board of directors to evaluate the stress
testing.\1745\
---------------------------------------------------------------------------
\1745\ Id.
---------------------------------------------------------------------------
Comments on the proposed changes to the stress testing requirement
were mixed. Some commenters supported the proposed reforms to varying
degrees.\1746\
[[Page 47890]]
Others opposed them.\1747\ Commenters who supported the reforms
suggested that they will enable better management of money market fund
risk and help address run incentives by heightening board awareness of
how events can affect liquidity and share price.\1748\ Commenters who
opposed the reforms indicated that they believed the current stress
testing requirements were sufficient, and that the reforms might be
costly, difficult to implement, and provide unnecessary information to
boards.\1749\ Two commenters believed that stress testing should not be
required for floating NAV funds.\1750\ Other commenters believed that
stress testing requirements should continue to apply to floating NAV
funds.\1751\ These comments are discussed in more detail below.
---------------------------------------------------------------------------
\1746\ See, e.g., TIAA-CREF Comment Letter; BlackRock II Comment
Letter; MFDF Comment Letter; Comment Letter of Treasurer, State of
Connecticut (Sept. 17, 2013) (``Conn. Treasurer Comment Letter'');
Barnard Comment Letter; Santoro Comment Letter.
\1747\ See, e.g., Federated VIII Comment Letter; ICI Comment
Letter; Schwab Comment Letter; Legg Mason & Western Asset Comment
Letter; Dreyfus Comment Letter.
\1748\ See, e.g., BlackRock II Comment Letter (noting that
stress testing plays a critical role in a board's understanding of
money market fund risks).
\1749\ See, e.g., ICI Comment Letter (noting that there are
limitations to stress testing and of fund directors' capacity to
review and interpret stress tests, which could lead to diminishing
returns as the number and complexity of stress tests increase).
\1750\ See Deutsche Comment Letter; Legg Mason & Western Asset
Comment Letter.
\1751\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter; MSCI Comment Letter.
---------------------------------------------------------------------------
2. Stress Testing Metrics
a. Liquidity
As proposed, we are requiring money market funds to test their
liquidity, but have modified the threshold to require funds to test
their ability to maintain 10% weekly liquid assets from the 15%
proposed.\1752\ This change is consistent with the modification from
the proposal regarding the threshold of weekly liquid assets that will
trigger a default liquidity fee.\1753\ Several commenters generally
supported the proposed requirement that funds test their
liquidity.\1754\ One commenter supported the proposal that funds test
against the 15% threshold, and added that the commenter already tests
against multiple liquidity thresholds and will continue to do so.\1755\
Another commenter argued that funds should be required to test against
a more conservative threshold, such as 20%, to allow funds to manage
liquidity with ``an eye toward a significant buffer'' against the
liquidity threshold that would trigger fees and gates.\1756\ Finally,
one commenter, although generally supportive of testing liquidity,
suggested that rather than requiring funds to test against a specific
liquidity threshold, funds should analyze the impact of specific
hypothetical event scenarios on weekly liquidity and the fund's NAV,
even if such events fall short of triggering a specific liquidity
threshold.\1757\
---------------------------------------------------------------------------
\1752\ See rule 2a-7(g)(8)(i).
\1753\ See rule 2a-7(c)(2(ii).
\1754\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter; MSCI Comment Letter; Dreyfus Comment Letter (but expressing
objection to the stress tests as proposed as vague, qualitative, and
onerous).
\1755\ See BlackRock II Comment Letter.
\1756\ See MSCI Comment Letter.
\1757\ See Fidelity Comment Letter.
---------------------------------------------------------------------------
Several commenters, however, opposed the proposed requirement to
have funds stress test their liquidity.\1758\ One commenter noted that
it believed that testing liquidity would not be particularly meaningful
for funds, as it is not possible to predict what assets a fund would
sell to meet redemptions.\1759\ This commenter also believed that
testing liquidity in floating NAV funds would serve no useful purpose
because any losses on sales of securities to meet redemptions would be
reflected in the fund's NAV.\1760\ Several commenters believed that it
was not feasible for a fund to test ``the magnitude of each
hypothetical event that would cause'' the fund to cross the liquidity
threshold,\1761\ as the proposed rule would have required for reporting
to the board.\1762\ These commenters noted that, unlike stable share
price, there was not a direct relationship between a fund's liquidity
levels and the hypothetical events listed in the proposed rule, other
than shareholder redemptions.\1763\ They believed that conducting such
stress tests would therefore require funds to make complex assumptions
about how hypothetical events, such as an interest rate increase, would
affect the level of shareholder redemptions or a portfolio manager's
decision to sell securities.\1764\ As an alternative, commenters
suggested that funds could calculate the level of shareholder
redemptions that, if satisfied using only weekly liquid assets, would
reduce the fund's weekly liquid assets to 15%.\1765\ Additionally, one
commenter, although not objecting to having funds stress test for
liquidity maintenance generally, believed that the stress tests as
proposed were vague and qualitative in nature.\1766\
---------------------------------------------------------------------------
\1758\ See ICI Comment Letter; Federated II Comment Letter;
Federated VIII Comment Letter; Legg Mason & Western Asset Comment
Letter; Invesco Comment Letter; IDC Comment Letter.
\1759\ See Legg Mason & Western Asset Comment Letter.
\1760\ Id.
\1761\ See ICI Comment Letter; Federated VIII Comment Letter.
See also IDC Comment Letter (noting that testing when a hypothetical
event may impact a fund's ability to maintain weekly liquid assets
of 15% may not be feasible).
\1762\ See proposed rule 2a-7(g)(7)(ii) (Floating NAV
Alternative or Fees and Gates Alternative).
\1763\ See ICI Comment Letter (arguing that there is no
practical means of testing when a hypothetical event, other than
redemptions, would cause a money market fund to cross the 15%
liquidity threshold); Federated II Comment Letter (same); Federated
VIII Comment Letter (same). See also Invesco Comment Letter
(objecting to the testing of scenarios in which a fund falls below
the 15% liquidity threshold because the only reasonable scenario in
which this would occur is shareholder redemptions).
\1764\ See ICI Comment Letter (noting that funds do not have a
basis for determining the amount of redemptions might indirectly
result from significant changes in interest rates, spreads or a
downgrade or default on portfolio securities); Federated VIII
Comment Letter (arguing that the proposed test on liquidity levels
would have to be based on a behavioral relationship between changes
in interest rates and decisions by the fund's portfolio manager to
sell portfolio securities); Schwab Comment Letter (noting that
testing liquidity requires estimation of data that is not directly
observable, such as redemption contagion and security level price
correlations).
\1765\ Id.
\1766\ See Dreyfus Comment Letter.
---------------------------------------------------------------------------
We continue to believe that funds should assess their liquidity as
part of the stress testing process. As one commenter noted, investors
are likely to monitor their funds' liquidity levels, and the
deterioration of liquidity could spark redemptions.\1767\ We agree. We
also believe that the benefits to testing liquidity will apply to
floating NAV funds as well as stable NAV funds. We believe that
floating NAV funds need to understand what can place stress on
liquidity, regardless of the fact that losses from the sales of
securities are reflected in a market-based NAV, particularly in light
of the potential for triggering a fee or gate.\1768\ It is important
for boards to understand and be aware of what could cause a fund's
liquidity to deteriorate below certain thresholds (or below a
regulatory threshold) as this renders the fund less able to satisfy
redemptions through internal liquidity and thus increases the
likelihood that satisfying future redemptions will generate liquidity
costs.
---------------------------------------------------------------------------
\1767\ See MSCI Comment Letter.
\1768\ See Legg Mason & Western Asset Comment Letter.
---------------------------------------------------------------------------
We disagree with the commenter that indicated that testing
liquidity would not be meaningful because it is not possible to predict
what assets would be sold to meet redemptions.\1769\ As discussed
below, we have made several modifications to the proposed rule in
response to comments to reduce the number and complexity of assumptions
that funds will need to make. We
[[Page 47891]]
recognize that funds still need to make certain assumptions in their
stress testing. In particular, when testing the effect of an increase
in shareholder redemptions, funds will have to make assumptions
regarding which assets are sold to meet such redemptions. We believe,
however, that the stress testing requirements that we are adopting
today will still be helpful to a board's understanding of a fund's
liquidity and the events that can make it deteriorate, even when it
includes some assumptions. In support of this belief that such testing
can be useful to funds, we note that some commenters indicated that
they already stress test liquidity, even though it is not currently
required.\1770\ Additionally, as we discuss below, we believe that a
disclosure and discussion of the assumptions that fund managers made
when developing stress testing can increase the board's understanding
of the stress testing results, and how the results might differ if
different assumptions are used.
---------------------------------------------------------------------------
\1769\ Id.
\1770\ See BlackRock II Comment Letter; Dreyfus Comment Letter.
---------------------------------------------------------------------------
Regarding the commenters that noted that there was not a direct
relationship between a fund's liquidity levels and the hypothetical
events listed in the rule, we recognize that many of the hypothetical
events in the rule do not have a direct effect on liquidity. We did not
intend to require funds to make complex assumptions regarding how the
hypothetical events listed in the proposed rule would affect redemption
levels and therefore liquidity. In response to the concerns that these
commenters raised, and as discussed further below, we have modified the
stress testing requirements so that each hypothetical event listed in
the amendments is tested assuming varying levels of shareholder
redemptions. We are not requiring the fund to test, for example, how a
change in interest rates or credit spreads by itself affects a fund's
level of weekly liquid assets, but rather how increases in redemptions
combined with the effect of specific hypothetical events, like a change
in interest rates or credit spreads, may affect fund liquidity. It
should also simplify the implementation of the requirement by not
requiring the fund to make potentially complex or speculative
assumptions about how an increase in interest rates or deterioration in
portfolio credit quality will affect shareholder redemptions, and
thereby affect liquidity, a concern that was raised by
commenters.\1771\ We believe this measure, in addition to modifications
to the proposed hypothetical events discussed below, addresses the
concern of the commenter that did not object to testing liquidity in
principle but believed that the proposed hypothetical events made the
stress testing requirements vague and qualitative in nature. Finally,
as discussed further below, we are eliminating the proposed requirement
that funds report the ``magnitude of each hypothetical event'' that
would cause the fund to fall below the liquidity threshold. This change
from the proposal responds to commenters' concerns that making such a
determination is not feasible.\1772\
---------------------------------------------------------------------------
\1771\ See Federated VIII Comment Letter; ICI Comment Letter.
\1772\ Id.
---------------------------------------------------------------------------
As noted above, we are requiring funds to test against a 10% weekly
liquid assets threshold. We have chosen the 10% weekly liquid assets
threshold because it is the same threshold that will trigger a default
liquidity fee absent board action under the final amendments. Much like
the inability to maintain a stable price, the triggering of a default
fee absent board action under our fees and gates reform may result in
consequences for a fund and its shareholders. Requiring funds to stress
test their ability to avoid falling below this threshold should help
inform boards and fund managers of the circumstances that could cause a
fund to trigger a default liquidity fee and provide them a tool to help
avoid doing so. We considered setting the required threshold at a more
conservative level, in particular 30%, because this threshold is the
level of weekly liquid assets that funds are required to maintain and
the level below which fund directors will be permitted to impose a
discretionary fee or gate. We believe, however, that fund directors
would benefit most from understanding the events that could place such
stress on a fund's liquidity that it would trigger a liquidity fee,
absent board action. Although we believe funds would also benefit from
testing the ability to maintain higher liquidity thresholds,\1773\ we
are sensitive to the potential costs of requiring funds to stress test
against multiple liquidity thresholds, and have therefore chosen to set
the liquidity threshold for required testing at the lower 10%
threshold. Nonetheless, we encourage funds to consider testing multiple
liquidity thresholds, particularly up to and including the 30%
threshold, and to consider more generally the effects of hypothetical
events and combinations of those events on liquidity.
---------------------------------------------------------------------------
\1773\ See BlackRock II Comment Letter (noting that it stress
tests against other weekly thresholds it deems appropriate);
Fidelity Comment Letter (noting that testing the effects of events
on liquidity and share price can be useful to boards even if the
event ``is not of sufficient magnitude to cause the MFF to violate''
a threshold).
---------------------------------------------------------------------------
b. Principal Volatility
In addition to requiring funds to test their liquidity against, at
minimum, specified hypothetical events, we are requiring funds to test
their ability to minimize principal volatility.\1774\ Funds are
currently required to test their ability to maintain a stable NAV. In
the Proposing Release, we proposed replacing this requirement for
floating NAV funds with a requirement to test their ability to maintain
weekly liquid assets, and proposed requiring stable NAV funds to test
their ability to maintain both a certain level of liquidity and a
stable share price.\1775\ In the Proposing Release, however, we
recognized that there might be other metrics that could be used in
stress testing. Specifically, we requested comment on whether to
require floating NAV funds to test their ability to meet an investment
objective, avoid losses or minimize principal volatility.\1776\
---------------------------------------------------------------------------
\1774\ See rule 2a-7(g)(8)(i).
\1775\ See Proposing Release, supra note 25, at section III.L.
\1776\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------
In response, several commenters argued that floating NAV funds
should continue to test their NAV stability.\1777\ These commenters
pointed out investors in floating NAV funds will continue to expect a
relatively stable NAV.\1778\ Additionally, commenters argued that the
stress testing requirements should not differ between floating NAV and
fixed NAV funds.\1779\ As we noted above, two commenters did not
believe that stress testing requirements should apply to floating NAV
funds.\1780\ One such commenter argued that testing for floating NAV
funds was not necessary because a floating NAV already provides optimal
price transparency.\1781\
---------------------------------------------------------------------------
\1777\ See BlackRock II Comment Letter (noting that investors in
floating NAV funds expect a relatively stable NAV); Fidelity Comment
Letter (same); MSCI Comment Letter (noting that even with a floating
NAV, there will still be a valuation ``tipping point'').
\1778\ Id.
\1779\ See BlackRock II Comment Letter; Fidelity Comment Letter.
\1780\ See Deutsche Comment Letter; Legg Mason & Western Asset
Comment Letter (commenting that no stress testing should be required
for Floating NAV funds, and arguing that having a floating NAV fund
test for liquidity would serve no useful purpose). The argument
raised in the Legg Mason & Western Asset Comment Letter is discussed
above in the discussion regarding the use of liquidity as a metric
in stress testing.
\1781\ See Deutsche Comment Letter.
---------------------------------------------------------------------------
[[Page 47892]]
We agree with commenters that believed floating NAV funds should
test their NAV stability. We believe that money market funds,
regardless of whether they have a floating NAV or maintain a stable
NAV, will continue to strive to minimize principal volatility to
maintain a stable share price. In times of market stress, funds could
face challenges in limiting principal volatility, and we believe that
funds and fund boards would benefit from stress testing to help them
understand the potential pressures on principal stability, as the
current requirements do today. We have therefore modified the proposed
rule to require a fund to test both its ability to maintain liquidity
and its ability to minimize principal volatility based on specified
hypothetical events. We have determined not to set specific limitations
or thresholds against which funds should test principal volatility.
Unlike stable NAV funds, which have a clear threshold, we do not
believe that there is single measure of what level of volatility
investors in floating NAV funds will tolerate. This measure might
differ among floating NAV funds, depending on, for example, investor
composition. Accordingly, we believe that funds and fund boards are
best suited to determining the amount of principal volatility that
investors in their floating NAV funds will likely tolerate and,
accordingly, what volatility threshold or thresholds should be used in
their stress testing.
We have chosen to use the term ``minimize principal volatility''
rather than ``maintain a stable share price'' to clarify this
requirement applies regardless of whether the fund has a floating or a
stable NAV, and believe that this metric is consistent with the
comments submitted.\1782\ We believe, based on comments, that funds
would generally approach this requirement similar to how they today
test the ability to maintain a stable share price although, as
discussed above, funds will need to determine what volatility threshold
or thresholds they believe are appropriate to test against.\1783\ We
have chosen to use the metric of minimizing volatility, rather than
avoiding losses because certain investors in floating NAV funds might
demand overall price stability, and therefore some floating NAV funds
might determine that it is appropriate to consider both upward and
downward price pressures when developing stress tests.\1784\
---------------------------------------------------------------------------
\1782\ See BlackRock II Comment Letter (noting that it believes
that investors in a floating NAV fund will expect the fund to have a
``relatively stable NAV''); MSCI Comment Letter (noting that it is
unlikely that investors in floating NAV funds will accept NAV
fluctuations outside of a very small band, and that there will be
some form of a ``valuation tipping point'').
\1783\ See State Street Comment Letter (noting that it currently
offers stress testing to liquidity funds with a floating NAV,
including the ability for a floating NAV to avoid losses greater
than 25 or 50 basis points, and that these tests are ``relatively
simple'' modifications to the stable NAV tests).
\1784\ Although we recognize that upward price pressures might
be a relevant metric to stress test for some funds, we also
recognize that funds will generally be more concerned with downward
price pressures. Accordingly, we do not interpret the requirement to
test the ability to minimize principal volatility to require funds,
as a matter of course, to test against upward price movements. This
is consistent with staff's clarification of the stress testing rules
adopted in 2010 that funds did not have to stress test against
``breaking the buck on the upside.'' See Staff Responses to
Questions about Money Market Fund Reform, August 7, 2012, available
at http://www.sec.gov/divisions/investment/guidance/mmfreform-imqa.htm.
---------------------------------------------------------------------------
We have retained the requirement that stable NAV funds test their
ability to maintain a stable share price. Although we do not anticipate
that stable NAV funds would approach this additional requirement in a
way that differs much, if at all, from a test to minimize principal
volatility, it clarifies that stable NAV funds are required to test the
ability of the fund to avoid breaking the buck.
The Commission believes that requiring funds to test against both
the level of weekly liquid assets and principal volatility is
appropriate. Several commenters similarly supported testing both
liquidity and principal stability.\1785\ Although we recognize that
requiring testing against both metrics could require more tests than
requiring testing against one metric, we believe that testing for both
metrics justifies the additional burden of more tests. As commenters
pointed out, principal stability and minimizing price volatility are
two primary objectives of money market funds.\1786\ Additionally, we
believe that principal stability and liquidity are interrelated. In
particular, we agree with a commenter that pointed out that, in times
of market stress, a fund could experience (i) less price stability,
resulting from a decline in liquidity or in an attempt to maintain
adequate liquidity, or (ii) less liquidity, resulting from a decline in
price stability or an attempt to maintain price stability.\1787\ We
therefore believe boards should understand the range of events that
could place stress on liquidity, principal stability or both, and that
stress testing both liquidity and volatility will increase such
understanding.
---------------------------------------------------------------------------
\1785\ See BlackRock II Comment Letter; Fidelity Comment Letter;
MSCI Comment Letter.
\1786\ Id.
\1787\ See Fidelity Comment Letter.
---------------------------------------------------------------------------
3. Hypothetical Events Used in Stress Testing
The Commission is also adopting modifications to the hypothetical
events that funds use in stress testing. As discussed further below, we
have modified these events from the Proposing Release to address
commenter concerns about the potential complexity of testing for some
of the proposed hypothetical events, while still enhancing stress tests
to incorporate correlations between securities and combinations of
events. In response to commenters' concerns, we have modified the rule
text to clarify the number and extent of tests that the rule requires.
As discussed above, we proposed improvements to stress testing in
the Proposing Release because we believed that certain enhancements and
clarifications to the hypothetical events currently used in stress
testing were necessary to improve the minimum quality of the stress
testing by some funds. The proposed enhancements included requiring the
funds to consider factors such as correlations among securities returns
and various combinations of events in their stress tests, an assessment
of how a fund would meet increasing shareholder redemptions (taking
into consideration assumptions regarding the liquidity and price of
portfolio securities), and both parallel and non-parallel shifts in the
yield curve.
Some commenters generally supported the proposed
enhancements.\1788\ Several commenters opposed or expressed concerns
about the proposed enhancements.\1789\ Specifically, some commenters
argued that the enhancements would not allow funds to retain
flexibility to tailor stress tests to the fund.\1790\ Some commenters
expressed concerns that the proposed enhancements would increase the
burden, expense, and complexity of stress testing.\1791\ Some
commenters believed that the proposed
[[Page 47893]]
enhancements were too vague.\1792\ Commenters expressed concerns that
the proposed requirements to test for combinations of events and other
events made the rule unclear about what events must be tested and the
extent of testing necessary to comply with the proposed requirements,
with some commenters arguing that the proposed rule required
potentially endless numbers of tests.\1793\
---------------------------------------------------------------------------
\1788\ See, e.g., MSCI Comment Letter; TIAA-CREF Comment Letter.
\1789\ See, e.g., Dreyfus Comment Letter; ICI Comment Letter;
Federated VIII Comment Letter; Schwab Comment Letter; Invesco
Comment Letter.
\1790\ See Legg Mason & Western Asset Comment Letter; Comment
Letter of Waddell & Reed Investment Management Company (Sept. 17,
2013) (``Waddell & Reed Comment Letter''); SIFMA Comment Letter.
\1791\ See, e.g., Federated II Comment Letter; Dreyfus Comment
Letter; Invesco Comment Letter; SSGA Comment Letter.
\1792\ See, e.g., ICI Comment Letter; Federated II Comment
Letter; Federated VIII Comment Letter; Dreyfus Comment Letter;
Schwab Comment Letter.
\1793\ See Federated II Comment Letter (noting that the rule is
unclear about the type and number of tests required); ICI Comment
Letter (noting that the requirement to incorporate combinations of
events causes the number of test results to grow geometrically with
each permutation of stress events).
---------------------------------------------------------------------------
In particular, some commenters believed that the proposed
enhancements would require funds to make unrealistic assessments about
the liquidity and price of securities that a fund might sell to meet
redemptions, and assessments about how an adverse event in one
portfolio security might affect other portfolio securities. Commenters
argued that these requirements might require significant assumptions
that would be difficult to make and that could render the results not
useful to boards.\1794\
---------------------------------------------------------------------------
\1794\ See, e.g., Schwab Comment Letter; ICI Comment Letter;
Federated VIII Comment Letter; Dreyfus Comment Letter; Invesco
Comment Letter.
---------------------------------------------------------------------------
The Commission disagrees with commenters who argued that
modifications to hypothetical events will reduce funds' flexibility in
developing stress tests.\1795\ First, the requirements we are adopting
today still leave the specific parameters of the hypothetical events to
the fund's discretion. Furthermore, the hypothetical events specified
in the rule are not a comprehensive list of the hypothetical events
that funds may stress test, but a minimum set. As discussed below, the
rule requires a fund adviser to include additional combinations of
events that the fund adviser deems relevant.
---------------------------------------------------------------------------
\1795\ See Legg Mason & Western Asset Comment Letter; Waddell &
Reed Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------
We are, however, persuaded by commenters that some of the proposed
enhancements might require funds to make complex behavioral assumptions
that might not be realistic and that might ultimately reduce the
utility of stress testing to fund boards. We also recognize that, as
proposed, some of the hypothetical events were vague and might be
difficult to implement. Finally, we also are sensitive to the potential
burdens that administering a large number of stress tests with complex
assumptions can place on funds and their boards, a point raised by
commenters. To address these concerns, and as discussed below, we have
modified the proposed enhancements to specify certain minimum
hypothetical events that funds are required to incorporate in their
testing. We believe that the proposed requirements reflected four
primary areas of risk that can place stress on funds. Those are (i) an
increase in the general level of short-term interest rates, (ii) a
downgrade or default of a portfolio security position, (iii) a
correlated increase in the credit spreads for certain portfolio
securities, and (iv) an increase in shareholder redemptions.\1796\ We
have therefore modified the hypothetical events that funds must use in
stress testing so that they focus on these risks and eliminated several
of the elements in the proposed rule within those areas of risk that
commenters argued would require the most complex and unrealistic
assumptions. As discussed further below, each fund is required to test
each of the first three events in combination with increasing
shareholder redemptions, which we believe will allow funds to focus on
the most important combination of events that will provide the most
meaningful results to boards, while reducing the number of combinations
of events that the rule requires as a minimum set for stress testing.
---------------------------------------------------------------------------
\1796\ See ICI Comment Letter (noting that the rule should only
require tests for spreads in the yield curve; an increase in the
spread of non-Treasury securities over the yield curve, redemptions,
and a downgrade or default of a significant issuer and/or provider
of demand features and guarantees); Fidelity Comment Letter
(suggesting standardized scenarios with combinations of interest
rate increases, yield spread shocks across a sector of portfolio
securities, a credit event of an issuer of a portfolio securities,
and shareholder redemptions).
---------------------------------------------------------------------------
a. Interest Rate Increases
Funds are currently required to stress test for a change in short-
term interest rates. We proposed modifying this requirement so that
funds would only need to test for increases in the general level of
short-term interest rates, making clear that funds did not have to test
for decreases in short-term interest rates. We received no comments on
this aspect of the proposal, and we are adopting the modifications as
proposed.\1797\
---------------------------------------------------------------------------
\1797\ See rule 2a-7(g)(8)(i)(A).
---------------------------------------------------------------------------
Second, we proposed to add a 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.'' Commenters expressed concerns with this requirement.
First, commenters noted that testing for non-parallel shifts in the
yield curve would be unlikely to yield results that are any more
informative than carefully chosen parallel shifts in the yield curve,
yet incorporating this factor into stress testing would require
significantly more effort. \1798\ Another commenter noted that this
requirement was vague and open-ended, as there are an infinite number
of non-parallel interest rate movements.\1799\
---------------------------------------------------------------------------
\1798\ See ICI Comment Letter; Fidelity Comment Letter.
\1799\ See ICI Comment Letter.
---------------------------------------------------------------------------
We are not adopting the proposed requirement to test for ``[o]ther
movements in interest rates that may affect fund portfolio securities,
such as parallel and non-parallel shifts in the yield curve.'' We are
persuaded by commenters' concerns that incorporating non-parallel
shifts in the yield curve will require funds to expend effort
determining the types of shifts to test for, with little more benefit
than testing for parallel shifts in the yield curve, and that testing
for parallel shifts in the yield curve is encompassed by the
requirement to test for general increases in the level of short-term
interest rates.\1800\
---------------------------------------------------------------------------
\1800\ See ICI Comment Letter (noting that a test for a parallel
increase in the Treasury yield curve corresponds to test for general
increases in short-term interest rates).
---------------------------------------------------------------------------
b. Credit Events
Funds currently are required to test for a downgrade of or default
on portfolio securities.\1801\ We proposed to enhance this requirement
by requiring that funds test for a ``downgrade or default of portfolio
securities and the effects these events could have on other securities
held by the fund.'' As discussed in the Proposing Release, we had
proposed this requirement to ensure that funds consider portfolio
correlations when stress testing. Commenters expressed concerns about
the proposed enhancement, arguing that the requirement was vague and
qualitative in nature because the fund would have to make assumptions
about the event that led to the downgrade or default, resulting in
stress testing results that might not be meaningful to its board.\1802\
We were persuaded by commenters of the potentially
[[Page 47894]]
speculative nature of the proposed requirement and that, as a result,
the proposed requirement might not provide meaningful information to
boards about the correlation of portfolio securities, which was the
intent of the proposed requirement. We have therefore determined not to
require funds to incorporate in their testing the effect of a downgrade
or default of one security on the price of other securities in the
portfolio. We also believe that eliminating this proposed requirement
will reduce the burden of the stress testing requirements relative to
the proposed requirements.\1803\
---------------------------------------------------------------------------
\1801\ See current rule 2a-7(c)(10)(v).
\1802\ See, e.g., Dreyfus Comment Letter; see also ICI Comment
Letter (noting that a stress test can assume a downgrade or default
without making any assumptions about what caused it, but cannot
assess what other portfolio securities might be correlated to the
downgrade or default without some basis for assuming the adverse
event that led to the downgrade or default).
\1803\ See ICI Comment Letter (noting the time and cost that
would need to be incurred in developing highly sophisticated stress
tests that the commenter believed would be required to incorporate
this requirement).
---------------------------------------------------------------------------
After reviewing the comments, we have modified the requirement from
what was proposed. Specifically, we are requiring that funds test for
``a downgrade or default of particular portfolio security positions,
each representing various portions of the fund's portfolio (with
varying assumptions about the resulting loss in the value of the
security). . . .'' The current rule requires, and the proposed rule
would have continued to require, that funds stress test for the
downgrade or default on more than one portfolio security (i.e., they
are required to test for a downgrade or default of portfolio
securities). Commenters suggested that the rule could require funds to
stress test a particular portfolio security, such as the most
significant individual credit risk to the fund, measured by the size of
the holding, the likelihood of default or both,\1804\ or the ``median''
portfolio security.\1805\
---------------------------------------------------------------------------
\1804\ Id.
\1805\ See Fidelity Comment Letter.
---------------------------------------------------------------------------
Rather than have the rule define which securities in the portfolio
to test, we believe that it is appropriate for the adviser to make a
determination of which security positions, representing different
portions of the portfolio, would be most informative to the board to
test for a downgrade or default of an issuer. We believe the most
appropriate security to test for a hypothetical default will vary among
funds depending on several factors, including the composition of the
fund's portfolio and contemporaneous market events. The fund could
determine that it should test a security that represents the single
biggest credit risk in the portfolio and a security that represents a
``median'' exposure, like commenters suggested, or it could include
securities representing different levels of exposure.
Although the rule we are adopting gives funds general discretion
when making the determination of which securities to test, we do
believe it is appropriate to require funds to select particular
security positions representing varying, i.e., different, portions of
the portfolio when making such determinations, so that the fund's
adviser and its board can better compare the differing results to the
fund depending on the security that is tested. Tests of the
hypothetical downgrade or default of a portfolio security representing
the largest credit risk to the fund and of a portfolio security
representing a median exposure, for example, allows a board to see how
the results from these stress tests differ, and therefore better
understand that a downgrade or default of different securities will
have different impacts on the fund.
Finally, although we are not requiring funds to assume that any
particular event is causing the hypothetical downgrade or default,
funds may want to consider incorporating in this stress test, as
appropriate, a deterioration in the credit quality of a guarantor (or
provider of demand features) of portfolio securities, as suggested by
one commenter.\1806\ This type of scenario might be particularly
relevant for funds in which a single entity is a guarantor or provider
of a demand feature for a high concentration of portfolio securities.
---------------------------------------------------------------------------
\1806\ See ICI Comment Letter (arguing that funds should be
required to stress test a ``downgrade or default of a significant
issuer and/or provider of demand feature and guarantees).
---------------------------------------------------------------------------
After reviewing the comments, the Commission is also modifying the
rule to require that funds make varying assumptions about the resulting
loss in the value of the security when testing for a downgrade or
default of a portfolio security. The Commission notes that a downgrade
or default of a portfolio security does not always have a uniform
effect on the price of a security. In some cases, the downgrade or
default could cause almost a complete loss on that portfolio
security.\1807\ In other cases, the loss on the security might be less,
potentially even substantially less.\1808\
---------------------------------------------------------------------------
\1807\ For example, according to filings submitted to us
pursuant to temporary rule 30b1-6T, money market funds' holdings of
securities issued by Lehman Brothers Holdings Inc. or its affiliates
were typically valued at approximately 17% of their amortized cost
value in 2009.
\1808\ For example, according to filings submitted to us
pursuant to temporary rule 30b1-6T, money market funds' holdings of
securities issued by structured investment vehicle were typically
valued at approximately 50% of their amortized cost value in 2009.
---------------------------------------------------------------------------
As with the size of the portfolio position of an issuer that has a
downgrade or default, the impact on a fund of a downgrade or default of
a portfolio security may vary substantially depending on the size of
the loss that the downgrade or default causes.\1809\ Accordingly, we
believe that it is appropriate to require stress testing to include
varying assumptions on the amount of loss on a security as a result of
a downgrade or default so that boards better understand how the amount
of loss of a portfolio security will affect the fund overall.\1810\ It
can also help boards understand when pricing pressures on certain
securities are unlikely to have a significant impact on the fund. For
example, during the debt ceiling impasse of 2013, staff observed
through discussions with fund advisers that although yields on certain
Treasury bills increased and some funds holding these Treasury bills
experienced some increase in redemptions, there was very little effect
on the shadow price of Treasury or government money market funds.
Stress testing can illustrate these effects.
---------------------------------------------------------------------------
\1809\ A comparison of commenters' discussion of stress testing
a downgrade or default of a portfolio security illustrates that the
effect of a downgrade or default can differ substantially, and
thereby have substantially different effects on the fund. Compare
Dreyfus Comment Letter (``We also know that a single default of a 1%
position . . . in a MMF can break the buck.'') with Fidelity Comment
Letter (showing the results of stress testing the effect on a
hypothetical fund of a credit event resulting in a 10% loss on the
portfolio security, which does not cause the hypothetical fund's NAV
per share to drop below $0.9950).
\1810\ As with the requirement that funds test for a downgrade
or default of particular portfolio security positions representing
various portions of the fund's portfolio, we believe it is efficient
for funds to make the determination of the appropriate magnitudes of
loss to incorporate in stress testing, as that decision will vary
depending on several factors, including, for example, historical
information on losses on similar securities following a downgrade or
default.
---------------------------------------------------------------------------
c. Credit Spread Increase in Portfolio Sectors
We proposed requiring that funds test for the ``widening or
narrowing of spreads among the indexes to which interest rates of
portfolio securities are tied'' in order to require funds to test for
changes in spreads that may affect specific asset classes. One
commenter supported the proposed requirement, noting that testing for
asset class spreads can provide information about a fund's exposure to
investor flights that have occurred in the past, such as in asset-
backed commercial paper and European financials.\1811\ One commenter
suggested that funds be required to test for a change in spreads by
testing for a parallel increase in the spread of non-Treasury
securities over the Treasury
[[Page 47895]]
yield curve, assuming a perfect correlation in the price movement,
regardless of issuer or maturity, which would show the board the
``worst case scenario'' for yield spread changes.\1812\ Another
commenter suggested that a test for changes in yield spreads that would
require the fund to test for a yield spread shift in a ``typical
portfolio sector,'' which it described as a sector (i.e., a logically
related subset of holdings) representing the median exposure in the
portfolio among all defined sectors.\1813\ This commenter also noted
that its suggested approach would incorporate into stress testing a
test for correlated price movements among portfolio securities.
---------------------------------------------------------------------------
\1811\ See MSCI Comment Letter.
\1812\ See ICI Comment Letter.
\1813\ See Fidelity Comment Letter.
---------------------------------------------------------------------------
In response to these comments, we are modifying the proposed
requirement to require funds to test for ``a widening of spreads
compared to the indexes to which portfolio securities are tied in
various sectors of a fund portfolio (in which a `sector' is a logically
related subset of portfolio securities, such as securities of issuers
in similar or related industries or geographic region, or securities of
a similar security type).'' \1814\ As discussed above and in the
Proposing Release, the Commission believes that it is important for
funds to stress test for potential correlations in the price movements
of related securities. That is because an event that affects the price
of one security may also affect the prices of securities of similarly
situated issuers or asset classes. We believe, as one commenter
suggested, that testing for a correlated shift in the yield spread
among logically related securities (i.e., sectors) will illustrate the
impact on funds of a concurrent price shift among portfolio securities
representing, for example, a similar industry, similar geographic
region, or security type.\1815\ We understand that some money market
funds today use such assumed sectors in their stress testing.
---------------------------------------------------------------------------
\1814\ See rule 2a-7(g)(8)(i)(C).
\1815\ See Fidelity Comment Letter (suggesting that the stress
testing requirements include standardized yield shift spreads of a
logically related subset of holdings); MSCI Comment Letter
(supporting stress testing requirements that focus on, among other
things, stresses on spreads in asset classes, such as asset-backed
commercial paper or European financials).
---------------------------------------------------------------------------
To implement this requirement, funds should generally group
securities into logically related categories, or sectors, such as
securities of a similar industry, similar geographic region or security
type (such as asset-backed commercial paper or variable rate demand
notes), and then test for the impact of yield spread changes on various
sectors. For example, a fund with concentrations of securities in a
particular geographic region, such as Europe, could test a correlated
spread shift among those securities, and perhaps even test a correlated
shift of securities from a single country or group of countries that
are experiencing or have experienced stress, such as during the 2011
Eurozone debt crisis. We also believe that it could be helpful to
boards to include in the required report, discussed below, a summary of
the sector composition and the concentration of that sector within the
portfolio as part of the assessment of stress testing.
We are not further specifying how funds should define sectors or
which sectors funds should test for a yield spread change, such as
requiring funds to test a ``typical'' or ``median'' sector, as
suggested by one commenter.\1816\ We believe that such determinations
are appropriate to leave to the fund's discretion because such
determinations will vary among funds depending on several factors,
including the composition of the fund's portfolio and contemporaneous
market events. We are not adopting the suggestion of one commenter that
funds test for a perfect correlation of spreads in all non-Treasury
securities to show funds the ``worst case scenario'' of a spread
shift.\1817\ This suggested test would not provide information about
potential correlations among similarly situated securities. For
example, the suggested test would not provide any information about how
an adverse event in a particular industry in which the fund held
portfolio securities might affect the fund. We believe that testing a
spread of different sectors of a portfolio, will help the board better
understand the composition of the fund portfolio and potential
correlations among portfolio securities.
---------------------------------------------------------------------------
\1816\ See Fidelity Comment Letter.
\1817\ See ICI Comment Letter.
---------------------------------------------------------------------------
Additionally, in the Proposing Release, we proposed to require
funds to test for combinations of events that the adviser deemed
relevant, ``assuming a positive correlation of risk factors . . . and
taking into consideration the extent to which 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).'' This proposed
requirement was intended to have stress testing include an evaluation
of the effect that hypothetical events on issuers that operate in a
similar industry, are based in a similar geographic region, or have
other related attributes. Commenters expressed concerns about this
proposed requirement, arguing that it would be difficult to implement
because it required complex or speculative assumptions about the
effects of adverse events.\1818\
---------------------------------------------------------------------------
\1818\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------
We believe that the requirement that we are adopting of an assumed
correlated yield shift in specific sectors of portfolio securities
provides funds and boards information about the effect of correlated
price movements among similar securities in a simpler and less
burdensome way than the proposed requirement of taking into
consideration correlations among securities. Because the requirement
allows funds to assume a perfectly correlated change in spreads among
similarly situated securities, funds will not be required to make
assumptions about how adverse events affect prices of these securities.
Accordingly, although we are requiring some combinations of events, as
discussed below, we are not adopting the requirement that fund advisers
``assum[e] a positive correlation of risk factors . . . and ``tak[e]
into consideration the extent to which the fund's portfolio securities
are correlated. . . . '' when considering whether to test for
additional events.
d. Shareholder Redemptions
The fourth hypothetical event identified by the Commission and
commenters that is important to include in stress testing is
shareholder redemption levels. As noted above, however, rather than
requiring funds to consider shareholder redemptions in isolation, as is
currently required and would have been required under the proposed
rule, we are requiring that funds test for various levels of
shareholder redemptions in combination with each of the three other
required hypothetical events, i.e., an increase in interest rates, a
downgrade or default of various portfolio securities, and a yield
spread change in various sectors of portfolio securities.
As discussed in the Proposing Release, the Commission believes that
testing for combinations of events can help funds better understand
risks to the fund, and therefore included in the proposed rule a
requirement that the fund test for combinations of events that the
adviser deems relevant. Although
[[Page 47896]]
the Commission did not include in the proposed rule any specific
combinations of events, the Commission requested comment on whether
specific combinations of events should be required in the rule, noting
in particular the possibility of combining an increase in shareholder
redemptions with an increase in interest rates or a downgrade of a
portfolio security.\1819\
---------------------------------------------------------------------------
\1819\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------
Generally, redemptions, by themselves, are unlikely to create
stress on a fund as long as the market for the fund's portfolio
securities is liquid and interest rates remain unchanged.\1820\
Similarly, an increase in interest rates, if no shareholders redeem
from the fund until the securities affected by the interest rate shift
mature, should have no price impact on the fund.\1821\ It is the
combination of events--and particularly an interest rate or credit
event combined with redemptions--that most typically can create fund
stress.\1822\ We also believe combinations of events are more likely to
be realistic scenarios than market events or increases in redemptions
in isolation (e.g., it is reasonable to expect that a money market fund
that experiences a significant credit event may also experience a
subsequent increase in redemptions).\1823\ We are not including in the
rule the redemption levels that funds must include in stress
testing.\1824\ We believe that the appropriate level of redemptions to
test will vary among funds, and will depend, for example, on the
composition of funds' investor bases and shareholder redemption
preferences, as well as historical redemption activity in the fund.
---------------------------------------------------------------------------
\1820\ Prices of fixed income securities typically remain stable
if interest rates do not change. Thus, shareholder redemptions that
require funds to sell securities should have no effect on funds'
NAVs as long as interest rates have not changed. We note that
redemptions from a stable value money market fund have no impact on
the fund's market-based NAV per share as long as the NAV per share
is $1.00.
\1821\ Prices of fixed income securities typically fall when
interest rates rise. Thus funds that must sell fixed income
securities before maturity are likely to realize capital losses if
interest rates have risen. If instead funds hold securities to
maturity, they receive securities' par value and should realize no
losses. Thus, interest rates increases that are not accompanied by
securities sales to meet redemption requests should not cause funds
to incur capital losses.
\1822\ See Fidelity Comment Letter (illustrating the effect on
liquidity and NAV on increasing shareholder redemptions in
combination with each of an (i) interest rate increase, (ii) a
credit event, and (iii) a spread shift).
\1823\ See State Street Comment Letter (noting that stress
testing combinations of events is important because stress events do
not typically happen in isolation, and suggesting the Commission
consider the combination of shareholder redemptions in combination
with increases in interest rates, a downgrade or default, and credit
spreads).
\1824\ See Fidelity Comment Letter (suggesting standard
scenarios including redemption levels of 0%, 25%, and 50%).
---------------------------------------------------------------------------
We also proposed to require that funds incorporate in stress
testing an assessment of how a fund would meet redemptions, taking into
consideration factors such as the liquidity and pricing of the fund's
portfolio securities. One commenter supported this proposed
requirement, but noted that liquidity data regarding fund portfolio
securities transactions was scarce.\1825\ Other commenters expressed
concerns that this requirement was vague and qualitative, and would
require detailed and sophisticated assumptions.\1826\ We were persuaded
by commenters' concerns that the proposed requirement could require
complex assumptions to implement for which data might not be readily
available, particularly the requirement that the fund take into account
the liquidity and pricing of the fund's portfolio securities. We have
therefore not adopted this requirement to simplify, and thereby reduce
the potential burden of, the stress testing requirements relative to
the proposal.
---------------------------------------------------------------------------
\1825\ See MSCI Comment Letter.
\1826\ See, e.g., ICI Comment Letter (expressing concerns about
how to fulfill this requirement); Dreyfus Comment Letter (same).
---------------------------------------------------------------------------
We note, however, that funds need to make some basic assumptions
about how a fund obtains cash for redemptions to satisfy the new stress
testing requirements relating to the fund's level of weekly liquid
assets. In doing so, a fund could use a variety of assumptions. For
example, some commenters suggested that funds assume that all
redemptions are satisfied first using weekly liquid assets.\1827\ This
assumption would provide conservative stress test results given that it
would have the most dramatic effect on a fund's level of weekly liquid
assets. On the other hand, some funds may prefer to assume in their
stress tests other methods of meeting shareholder redemptions (or may
prefer to show how the stress tests results would differ if this
assumption were varied). For example, a fund might assume that
redemptions are met with a combination of weekly liquid assets and
sales of portfolio securities.\1828\ The rule does not specify what
assumptions the fund must make, leaving that to the discretion of fund
advisers because we believe the determination of which assumptions are
most appropriate will vary among funds, depending on, for example, how
funds have satisfied redemptions historically, and the composition of
the fund's portfolio. The rule requires, however, that the fund's
adviser include a summary of the significant assumptions made when
performing the stress test. For example, such assumptions may include
how redemptions are satisfied and the size of any ``haircut'' that the
fund assumed in the sale of portfolio securities in order to meet
redemptions.
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\1827\ See ICI Comment Letter; Federated VIII Comment Letter.
\1828\ See Fidelity Letter (illustrating a stress test that
includes the assumption that sales of non-liquid assets to meet
redemptions incur a cost); MSCI Comment Letter (noting that to the
extent that a redemption scenario would require the fund to sell
securities, then the fund should make some assumption regarding a
liquidity haircut, but that only simple assumptions can be
reasonably expected).
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e. Other Combinations of Events
The proposed rule would have required funds to test for
``combinations of these and any other events that the adviser deems
relevant . . .'' \1829\ We have made clarifying edits to the rule we
are adopting today in response to some commenters who expressed
concerns that the proposed rule was open-ended and could be read to
require that funds test for combinations of every event listed in the
rule.\1830\ Specifically, we are requiring funds to test for ``[a]ny
additional combinations of events that the adviser deems relevant.'' We
believe that the modified language clarifies that the fund is only
required to test for additional combinations as the fund adviser deems
relevant, not for combinations of every permutation of the events
listed in the rule.
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\1829\ See proposed rule 2a-7(g)(7)(i)(F) (Floating NAV
Alternative or Fees and Gates Alternative). The full proposed
requirement was ``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).'' We discuss above why we are
not adopting the proposed requirement that follows the clause
``Combinations of these any other events the adviser deems
relevant.''
\1830\ See ICI Comment Letter; Federated VIII Comment Letter.
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The rule requires that fund advisers test for combinations of
events that they deem relevant. Although a fund adviser might determine
that the three combinations of events included in the rule are
sufficient, there might be circumstances when a fund adviser believes
it is necessary to incorporate additional scenarios. For example, a
fund adviser might believe that it would be relevant for the board to
understand
[[Page 47897]]
the effect of a yield spread increase in a sector, in combination with
a downgrade of a portfolio security in that sector, particularly if
that sector, or an issuer within that sector, has historically
experienced stress.
One commenter also argued that the requirement could be interpreted
to mean that all special risk assessments take the form of stress
tests.\1831\ This is not a requirement of the rule. We agree with the
commenters that stress tests are not the only method to communicate
fund risks to the board and that not every risk can be incorporated
into a stress test.\1832\ The rule does not require the adviser to
develop a stress test for every risk the fund faces, but requires the
adviser to consider whether stress testing for combinations of events
not explicitly listed in the rule might be relevant to the fund's
board. We believe stress testing should be used to help the board
understand the principal risks of the particular fund and the risks
that reasonably foreseeable stress events may place on the fund.
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\1831\ See Federated VIII Comment Letter.
\1832\ See ICI Comment Letter; Federated VIII Comment Letter.
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4. Board Reporting Requirements
Funds are currently required to provide the board with a report of
the results of stress testing, which must include the dates of testing,
the magnitude of each hypothetical event that would cause a fund to
``break the buck,'' and an assessment of the fund's ability to
withstand events that are reasonably likely to occur within the
following year. We proposed modifications to these reporting
requirements. First, we proposed adding a requirement that the fund
report to the board the magnitude of each hypothetical event that would
cause the fund to have invested less than 15% of its total assets in
weekly liquid assets. Second, we proposed requiring funds to include in
their assessment ``such information as may reasonably be necessary for
the board of directors to evaluate the stress testing . . . and the
results of the testing.''
We are adopting modifications to the proposed reporting
requirements to boards regarding stress testing in response to comments
we received on the proposal. Specifically, we are adopting a
requirement that the board of directors be provided at its next annual
meeting, or sooner if appropriate, a report that includes the dates on
which the testing was performed and an assessment of the fund's ability
to maintain at least 10% in weekly liquid assets and to limit principal
volatility.\1833\ As discussed above, some commenters had concerns that
the proposed requirement that funds report to the board the magnitude
of each hypothetical event that would cause the fund to have invested
less than 15% in weekly liquid assets was not feasible.\1834\ We
believe that requiring funds to provide an assessment of the fund's
ability to maintain liquidity, rather than requiring the funds report a
specific value for each hypothetical event, addresses such concerns. We
have also added the requirement for an assessment of the fund's ability
to minimize principal volatility because, as discussed above, we have
added this metric to the stress testing requirements in response to
comments. We believe that requiring funds to provide an assessment of
their ability to maintain liquidity and minimize principal volatility
(and in the case of stable NAV funds, to maintain a stable share
price), rather than the more prescriptive requirements proposed and
that are in the rule currently, is also appropriate because we have
modified the rule so that each ``hypothetical event'' is a combination
of two events. We want to clarify that funds are not required to
separately test for interest rate increases, a downgrade or default, a
spread shift, or shareholder redemptions in isolation.\1835\
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\1833\ See rule 2a-7(g)(8)(ii).
\1834\ See, e.g., ICI Comment Letter; Federated II Comment
Letter; Federated VIII Comment Letter.
\1835\ See ICI Comment Letter (noting that the stress testing
requirements adopted in 2010, by requiring funds to report the
``magnitude of each hypothetical event'' that would cause a fund to
``break the buck,'' required funds to perform and report stress
tests of each event in isolation, and noting that changing this
requirement would make it easier for boards to include combinations
tests in the fund's procedures).
---------------------------------------------------------------------------
We understand that under the current requirements, many funds, in
addition to reporting the magnitude of each event that would cause the
fund to ``break the buck,'' provide a table showing how the fund's
shadow NAV is affected by different combinations of events and
different values. Some funds include information regarding, for
example, the concentrations of several of the funds' largest portfolio
holdings, both by individual issuer and by sector, and of historical
redemptions rates, as points of reference. Several funds also include
narratives to help explain the results. In some instances, for example,
fund advisers used the narrative to compare results among funds or to
explain results that they considered to be unusual. Some narratives
also assessed the likelihood of the hypothetical events. We are not
including requirements for any of these specific items in the rule
because we recognize that there is no one set of factors that will be
relevant for all funds, but we believe these are examples of items that
we encourage fund advisers to consider when developing the required
report assessing stress test results.
We are adopting as proposed the requirement that a fund's adviser
provide ``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.'' One commenter supported this
requirement, noting that it is a common practice to provide directors
with information that helps to place stress-testing results in
context.\1836\ Some commenters opposed this requirement, arguing that
the provision of additional information could be burdensome for boards
and would not provide useful information to fund boards.\1837\ We
disagree. As we noted in the Proposing Release, the staff's examination
of stress testing reports revealed disparities in the quality of
information regarding stress testing provided to fund boards. We
believe that this requirement will allow boards of directors to receive
information that is useful for understanding and interpreting stress
testing results. We note that this requirement does not require a fund
adviser to provide the details and supporting information for every
stress test that the fund administered. To the contrary, a thoughtful
summary of stress testing results with sufficient context for
understanding the results may be preferable to providing details of
every test. For example, information about historical redemption
activities, as mentioned above, and the fund's investor base could help
boards evaluate the potential for shareholder redemptions at the levels
that are being tested. Additionally, information regarding any
contemporaneous market stresses to particular portfolio sectors could
be helpful to a board's consideration of stress testing results.
---------------------------------------------------------------------------
\1836\ See ICI Comment Letter.
\1837\ See Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------
Finally, after considering comments regarding the assumptions that
funds will need to make in administering stress tests,\1838\ the
Commission has
[[Page 47898]]
added a requirement that the adviser include in the report a summary of
the significant assumptions made when performing the stress tests. As
discussed above, we have, in response to comments, modified the
required hypothetical events from the proposal to reduce the number and
complexity of the assumptions funds are required to make. We recognize,
however, that funds will need to make some basic assumptions when
conducting the stress tests. These assumptions would include, for
example, how the fund would satisfy shareholder redemptions (e.g.,
through weekly liquid assets or by selling certain portfolio
securities, including any assumption of haircuts such securities can be
sold at) and the amount of loss in value of a downgraded or defaulted
portfolio security. We believe that having a summary of such
assumptions will help the board better understand the stress testing
results, and particularly the sensitivity of those results to given
assumptions. We believe this information will allow the board to better
understand money market fund risk exposures, and thus allow it to
provide more effective oversight of the fund and its adviser.
---------------------------------------------------------------------------
\1838\ See, e.g., Fidelity Comment Letter (including in its
suggested stress testing an assumption regarding the size of the
loss on the sales of securities to meet redemption and the size of
the loss on a portfolio security when testing a hypothetical credit
event); ICI Comment Letter (suggesting funds use an assumption that
redemptions are satisfied using weekly liquid assets).
---------------------------------------------------------------------------
5. Dodd-Frank Mandated Stress Testing
In the Proposing Release, we requested 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 nonbank financial companies that have total
consolidated assets of more than $10 billion and are regulated by a
primary federal financial regulatory agency.\1839\ 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.\1840\ Two commenters responded, noting that they
did not believe that the scenarios currently published by the Federal
Reserve Board for stress testing under Dodd-Frank Act Section 165(i)
would be an effective means of stress testing for money market funds,
because the Federal Reserve's scenarios are focused on long-term
horizons, which do not have a direct causal link to foreseeable changes
in money market funds.\1841\ Another commenter, however, expressed some
support for incorporating macroeconomic factors in money market fund
stress tests.\1842\ One commenter made recommendations regarding the
stress testing scenarios required under section 165(i), including
scenarios involving the four hypothetical events in the stress testing
rule amendments we are adopting today, and stated that its
recommendations would be an effective means to evaluate risk in a money
market fund portfolio.\1843\
---------------------------------------------------------------------------
\1839\ 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 (April 5, 2013)].
\1840\ 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.
\1841\ See Fidelity Comment Letter (noting that the Federal
Reserve scenarios have at best an indirect causal link to changes in
a money market fund); MSCI Comment Letter (noting that the horizon
for the Federal Reserve's stress scenarios is between one and two
years, while the scenarios that are of concern to money market funds
are short-term, such as valuation shocks and rapid shareholder
redemptions).
\1842\ See Santoro Comment Letter (noting that stress testing
should align with existing stress testing methodologies, and
specifically macro market stress scenarios).
\1843\ Fidelity Comment Letter (noting that the standardized
scenario that it proposed could serve as the ``severely adverse''
conditions required by Section 165(i)(2)(C)(2) of the Dodd-Frank
Act).
---------------------------------------------------------------------------
As discussed in the Proposing Release, we intend to engage in a
separate rulemaking to implement the requirements of Section 165(i) of
the Dodd-Frank Act, including determining appropriate baseline,
adverse, and severely adverse scenarios for money market funds and
other funds and advisers with more than $10 billion in consolidated
assets.\1844\ In proposing such stress testing for money market funds
subject to these requirements, we expect to consider the efficiencies
that funds subject to these additional requirements will achieve if the
scenarios broadly are built off of the parameters set forth today.
---------------------------------------------------------------------------
\1844\ Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------
6. Economic Analysis
Our baseline for the economic analysis we discuss below is 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, as well as the costs, of the stress
test requirements will depend in part on the extent to which funds
already engage in stress tests that are similar to the requirements.
For example, although we are now requiring funds to test for increases
in the general level of short-term interest rates in combination with
various levels of an increase in shareholder redemptions, we understand
that many funds already tested for increases in interest rates in
combination with shareholder redemptions.
The additional information generated from the amendments to the
stress testing requirements should provide several qualitative benefits
to funds. Specifically, they 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 from falling below the 10% weekly liquid assets threshold or
failing to minimize principal volatility (or, in the case of stable NAV
funds, a stable share price). The magnitude of these qualitative
benefits are not easily quantified and will vary from fund to fund
based on the extent to which funds are already voluntarily conducting
stress testing that meet the new requirements, as well as the investor
base and portfolios of each fund. We received no comments regarding how
to quantify such benefits.
In the Proposing Release, we stated that because funds are
currently required to meet a stress testing requirement, we did not
anticipate significant additional costs to funds under the proposed
rule. Several commenters responded that they expected to incur
increased costs as a result of the changes.\1845\ One commenter noted
that it believed a majority of funds will need to change their stress
testing procedures to some degree, specifically with respect to stress
testing liquidity levels.\1846\ One commenter provided a quantitative
estimate for some of the proposed changes, estimating that required
software changes to implement two of the proposed requirements, not
including costs to load data, run the tests, and analyze the results,
would
[[Page 47899]]
range from $250,000 to $750,000.\1847\ We note, however, that the
estimate was based on an evaluation of two of the hypothetical stress
tests that we proposed, one of which the Commission has determined not
to adopt and the other which the Commission has modified and simplified
substantially.
---------------------------------------------------------------------------
\1845\ See, e.g., SSGA Comment Letter (generally supporting
stress testing by funds, but asking the Commission to consider the
benefits of the enhancements against the ``substantial increase in
costs'' associated with the proposed changes); State Street Comment
Letter (noting that there will be both a development cost and on-
going operational costs); Schwab Comment Letter (noting that the
proposal is costly); TIAA-CREF Comment Letter (supporting the
proposed requirement and acknowledging that they would require
operational changes that would require time and resources to
implement).
\1846\ See State Street Comment Letter.
\1847\ Federated VIII Comment Letter (noting that it contacted a
third-party service provider regarding the costs of implementing
proposed rule 2a-7(g)(7)(i)(E), concerning testing for parallel and
non-parallel shifts in the yield curve, and rule 2a-7(g)(7)(i)(F),
concerning testing for ``combinations of these and any other events
that the adviser deems relevant, assuming a positive correlation of
risk factors . . . and taking into consideration the extent to which
the fund's portfolio securities are correlated . . .'').
---------------------------------------------------------------------------
We stated in the Proposing Release that we expected funds would use
similar hypothetical events when testing their ability to avoid falling
below a liquidity threshold to those events they use when stress
testing their ability to maintain a stable price. We also understand
many funds already test for their ability to avoid falling below a 15%
weekly liquid asset threshold as part of their current stress tests.
One commenter noted that it already tests against the 15% liquidity
threshold and other liquidity thresholds, and one commenter stated
generally that it already tests for liquidity maintenance, and neither
commenter discussed the costs of including liquidity metric in stress
testing.\1848\ Two commenters indicated that requiring funds to add
this liquidity metric to the stress testing requirements would impose
new costs, but did not provide quantitative estimates of the costs of
adding a liquidity metric to the stress testing requirements.\1849\ One
commenter, which provides stress testing services to funds, noted that
it currently provides liquidity-related stress tests, but it did not
currently provide a stress test that tests a fund's ability to avoid
falling below a 15% liquidity asset threshold.\1850\
---------------------------------------------------------------------------
\1848\ See BlackRock Comment Letter; Dreyfus Comment Letter.
\1849\ See Federated VIII Comment Letter; State Street Comment
Letter (noting that the new requirement would imposed both a
development cost and on-going operational costs).
\1850\ See State Street Comment Letter. See also Federated VIII
Comment Letter (noting that it contacted a service provider of a
risk management system, who indicated that the provider's system
could not test for an ability to maintain weekly liquid assets at or
above 15% of its total assets).
---------------------------------------------------------------------------
After reviewing the comments, we believe that the amendments to the
stress testing requirements will impose some development and ongoing
costs to funds, particularly the requirement to test against a
liquidity threshold. We believe that the costs will be lower for funds
that already include liquidity and combinations of events as part of
their stress testing, as some funds do. We understand from commenters,
however, that even funds that currently incorporate liquidity metric in
their stress testing might need to modify their procedures to test
against the 10% threshold.\1851\ We also recognize that funds, which
currently are required to test their ability to maintain a stable share
price, will now be required to test the ability to minimize principal
volatility. We believe, based on our review of comments, that the costs
of modifying stress testing from the metric of maintaining a stable
share price to the metric of minimizing principal volatility will not
be substantial.\1852\ We recognize, however, that funds might incur
some costs in analyzing and determining the appropriate level of
volatility against which to test.
---------------------------------------------------------------------------
\1851\ See State Street Comment Letter (noting that it currently
provides a range of liquidity related stress tests).
\1852\ See State Street Comment Letter (noting that it currently
provides stress testing services to floating NAV liquidity funds
that include testing a fund's ability to avoid losses of greater
than 25 or 50 basis points, and that this would entail ``relatively
simple modifications,'' with no associated development costs).
---------------------------------------------------------------------------
Additionally, we believe there will be costs associated with stress
testing the effect of the hypothetical events that we are adopting. The
extent of those costs will depend upon the extent to which a fund
currently tests for the requirements or would need to modify their
stress testing procedures and systems to add such tests. We understand
that many funds already test for events such as interest rate increases
and credit events in combination with hypothetical increases in
shareholder redemptions. We also note that we have determined not to
adopt several of the hypothetical events that commenters indicated
would require the most estimation or modeling.\1853\ Finally, as the
rule requires that a fund test for ``any additional combinations of
events that the adviser deems relevant,'' a fund might incur periodic
costs for making such an assessment and, if necessary, incorporating
such additional tests in its stress testing.
---------------------------------------------------------------------------
\1853\ See, e.g., Fidelity Comment Letter (noting that the
proposed requirement to test for non-parallel shifts in the yield
curve would require significantly more effort and analysis than
testing for non-parallel shifts with little benefit); ICI Comment
Letter (noting that the proposed requirement to include assumptions
as to how the fund would sell portfolio securities to meet
redemptions were sophisticated and complex assumptions).
---------------------------------------------------------------------------
In the Paperwork Reduction Act analysis in section IV.A.5 below, we
identified certain initial and ongoing hour burdens and associated time
costs related to the collection of information requirements for our
stress testing amendments. As we discuss there in more detail, our
staff estimates that the amendments to stress testing associated with
the requirement that money market funds maintain a written copy of
their stress testing procedures, and any modifications thereto, and
preserve 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, would involve 51,428 burden hours, at an
average one-time cost of $24.52 million for all money market funds. In
addition, our staff estimates that the amendments to stress testing
associated with the requirement that money market funds have written
procedures that provide for a report of the stress testing results to
be presented to the board of directors at its next regularly scheduled
meeting (or sooner, if appropriate in light of the results) would
create a total annual burden for all money market funds of an
additional 25,155 burden hours at a total time cost of approximately
$7.28 million.
We believe the new costs for stress testing will be so small as
compared to the fund's overall operating expenses that any effect on
competition would be insignificant. Although some commenters believed
the proposed requirements would impose new costs, commenters did not
indicate that such costs would have competitive effects. The new stress
testing requirements may increase allocative efficiency if the
information it provides to the fund adviser, and board of directors
improves the fund adviser's ability to manage the fund's risk and the
board's oversight of fund risk management. Some money market fund
investors also may view the enhanced stress testing requirements
positively, which could marginally increase those investors' demand for
money market funds and correspondingly the level of the funds'
investment in the short-term financing markets. This in turn positively
affects capital formation. We do not have the information necessary to
provide a reasonable estimate of the effects the amendments might have
on capital formation, because we do not know to what extent these
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. No commenters provided
such information or discussed the potential effects of the proposed
stress testing rule on efficiency or capital formation.
[[Page 47900]]
K. Certain Macroeconomic Consequences of the New Amendments
In this section, as well as in sections III.A and III.B above, we
analyze the macroeconomic consequences of the primary reform amendments
that require fees and gates for all non-government funds and an
additional floating NAV requirement for institutional prime funds. We
also examine, in conjunction with analyses in these preceding sections,
the effects that the amendments may have on efficiency, competition,
and capital formation and discuss the potential implications of the
changes for money market fund investors, funds, and the short-term
financing markets. We note that we presented extensive economic
analyses of the specific benefits and costs associated with the amended
rules in sections III.A.5 and III.B.8 above, as well as examined
commenters' specific evaluations of the proposed fees and gates and
floating NAV requirements. As such, we focus here on the specific
macroeconomic effects of the reforms on current money market funds and
the impact of the reforms on efficiency, competition, and capital
formation. It is important to note that although a large number of
commenters supported our proposed fees and gates requirement for non-
government funds,\1854\ and some commenters supported our floating NAV
requirement for institutional prime funds,\1855\ many commenters
opposed the combination of alternatives.\1856\ 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.
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\1854\ See, e.g., Form Letter Type A [1], Type C [2], and Type D
[2]; Page Comment Letter; Federated V Comment Letter; J.P. Morgan
Comment Letter; TIAA-CREF Comment Letter; ICI Comment Letter; Reich
& Tang Comment Letter; Northern Trust Comment Letter.
\1855\ See, e.g., BlackRock II Comment Letter; Goldman Sachs
Comment Letter; Schwab Comment Letter; Vanguard Comment Letter; CFA
Institute Comment Letter; Comm. Cap. Mkt. Reg. Comment Letter.
\1856\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter; Federated X Comment Letter; Goldman Sachs Comment Letter;
Vanguard Comment Letter; American Benefits Council Comment Letter.
---------------------------------------------------------------------------
In earlier sections we discussed the specific benefits and costs
associated with other reforms adopted today, including the amended
rules that increase portfolio and guarantor diversification, enhance
disclosure, and mandate stress testing. We discuss in these sections
the macroeconomic effects of the amendments, as well as their effects
on efficiency, competition, and capital formation. The specific
operational costs of implementing the reforms are discussed in each
respective section.
We note that the reforms adopted today will affect the economy in a
number of ways, many of which are difficult, if not impossible to
quantify. The effect of the reforms will depend on investors' choices
among many investment alternatives, funds' and competitors' responses
to the reforms and to each other's strategies, and many other factors
in the larger economy. For these reasons, many of the macroeconomic
effects discussed here are unquantifiable. We provide, however, ranges
of possible outcomes where we can without being speculative and we
discuss effects qualitatively, as well. Much of the qualitative
analysis of the reforms remains similar to that presented in the
Proposing Release. We note, however, that the magnitude of the
macroeconomic effects, both positive and negative, may be greater for
funds that are subject to both a floating NAV and fees and gates than
the funds subject to just one type of reform. Many commenters noted
that the combination of reforms would have a greater impact than either
alternative alone.\1857\
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\1857\ See, e.g., Fidelity Comment Letter; Invesco Comment
Letter; Northern Trust Comment Letter; State Street Comment Letter;
SunGard Comment Letter; Wells Fargo Comment Letter; Government
Finance Officers Association, et al. (Sept. 17, 2013) (``GFOA II'').
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In the remaining portion of this section, we discuss in detail the
likely macroeconomic effects of our primary reforms and the effects
that these amendments may have on efficiency, competition, and capital
formation. We first examine the effect of our amendments on investors
in money market funds. We then analyze the effect on the money market
fund industry and the short-term financing markets.
1. Effect on Current Investors in Money Market Funds
As of February 28, 2014, money market funds had approximately $3.0
trillion in assets under management. Of this $3.0 trillion, government
money market funds had approximately $959 billion in assets under
management.\1858\ Government money market funds will not be required to
comply with either fees and gates or floating NAV requirements. Because
the regulatory landscape for these funds will remain largely unchanged,
we anticipate current investors will likely remain invested in the
funds.
---------------------------------------------------------------------------
\1858\ Based on Form N-MFP data as of February 28, 2014.
---------------------------------------------------------------------------
Non-government funds, however, will be subject to fees and gates,
and some investors may shift their assets to government funds or other
investment alternatives. Non-government funds, which include prime and
tax-exempt funds, held approximately $2.1 trillion in assets as of
February 28, 2014. Of this approximately $2.1 trillion, we estimate
retail prime funds managed approximately 33% of prime fund assets (not
including tax-exempt funds) or $593 billion, whereas retail tax-exempt
funds managed 71% of tax-exempt fund assets or $197 billion of assets,
or $790 billion in total retail fund assets.\1859\ The remaining funds
are institutional prime funds, which will be subject to an additional
floating NAV requirement. We estimate that institutional prime funds,
other than tax-exempt funds, managed approximately 67% of prime fund
assets (not including tax-exempt fund assets) or $1.2 trillion in
assets and institutional tax-exempt funds managed 29% of tax-exempt
funds assets or $82 billion, for a total of $1.269 trillion.\1860\
Consistent with these estimates, commenters noted that approximately
30% of tax-exempt funds currently self-report as institutional
funds.\1861\
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\1859\ Based on data from Form N-MFP and iMoneyNet data as of
February 28, 2014. To estimate retail and institutional segments for
non-government funds, we used self-reported fund data from iMoneyNet
as of February 28, 2014 to estimate percentages for retail and
institutional segments for each fund type. We then multiplied the
percentages times the total market size segments, as provided by
Form N-MFP as of February 28, 2014. We note the retail designation
is self-reported and omnibus accounts in these funds may include
both individual and institutional beneficial owners. For these
reasons, our estimates may underestimate the number of funds with
retail investors.
\1860\ Our staff's analysis, based on iMoneyNet data, shows that
the amount of municipal money market fund assets held by
institutional investors varied between 25% to 43% between 2001 to
2013.
\1861\ See, e.g., BlackRock II Comment Letter; Federated VII
Comment Letter; J.P. Morgan Comment Letter; Dreyfus II Comment
Letter.
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As noted in the Proposing Release, the Commission recognizes that
imposing fees and gates on non-government money market funds and an
additional floating NAV requirement on institutional prime funds will
likely affect the willingness of investors to commit capital to certain
money market funds. On the one hand, the fees and gates requirements
will have little effect on funds and their investors except during
times of fund distress. During such exceptional times, investors,
especially investors who are unlikely to redeem shares, may view the
fees and gates requirements as protecting them from incurring costs
from heavy shareholder redemptions and improving their funds' ability
to manage and mitigate potential contagion from such
[[Page 47901]]
redemptions. Likewise, some, but not all, investors in institutional
prime funds may view the floating NAV requirement as reducing their
funds' susceptibility to heavy investor redemptions and minimizing
shareholder dilution. We believe the amendments more generally will
increase funds' resiliency and treat investors more equitably than the
rules do today. Further, one commenter pointed out that floating NAV
money market funds will likely offer higher returns than stable NAV
government money market funds, and thus will continue to attract
investment.\1862\ This commenter argued that institutional investors
are unlikely to reallocate assets from floating NAV institutional prime
funds because they will continue to be one of the most conservative and
flexible investment alternatives, even with a floating NAV.\1863\
Finally, this commenter contended that investor education may improve
investor confidence in floating NAV money market funds, which could
attract capital.\1864\
---------------------------------------------------------------------------
\1862\ See Thrivent Comment Letter.
\1863\ Id.
\1864\ Id.
---------------------------------------------------------------------------
On the other hand, we recognize many current investors in non-
government funds, especially institutions, may prefer products that
offer guaranteed liquidity and a stable NAV rather than non-government
funds that will be subject to fees and gates and a floating NAV
requirement after the reforms. As we noted in the Proposing Release and
in this Release, we anticipate these investors will consider the
tradeoffs involved with continuing to invest in the money market funds
that are subject to the new requirements. As discussed in section
III.A.1.c.iv above, several commenters noted and we concur that fees
and gates might force some investors to either abandon or severely
restrict investment in affected money market funds.\1865\ Likewise,
commenters expressed concern that investors would migrate away from
institutional prime funds because a floating NAV would eliminate the
stable value feature that currently makes money market funds attractive
to many shareholders.\1866\ As discussed in detail in section III.B.1
above, and noted by commenters,\1867\ unlike most investment products,
money market funds are generally used as cash management tools, and a
floating NAV may curtail the ability of some investors to use money
market funds for cash management purposes. Investors also may be
prohibited by board-approved guidelines, internal policies, or other
restrictions from investing in products that do not have a stable value
per share.\1868\ A floating NAV also could drive investors with a more
limited loss tolerance away from money market funds.\1869\
---------------------------------------------------------------------------
\1865\ Ky. Inv. Comm'n Comment Letter; Boeing Comment Letter;
Schwab Comment Letter; American Bankers Ass'n Comment Letter; State
Street Comment Letter; GFOA II Comment Letter; 42 Members of U.S.
Congress Comment Letter.
\1866\ Fidelity Comment Letter; Legg Mason & Western Asset
Comment Letter; SunGard Comment Letter; U.S. Bancorp Comment Letter;
Association for Financial Professionals, et al. (Sept. 17, 2013)
(``Ass'n Fin. Profs. II Comment Letter''); Defined Contribution
Institutional Investment Association (Sept. 17, 2013) (``Def.
Contrib. Inst. Inv. Ass'n Comment Letter''); GFOA II Comment Letter.
\1867\ See, e.g., Form Letter Type E [1]; Federated IV Comment
Letter; Invesco Comment Letter; State Street Comment Letter; Chamber
II Comment Letter; GFOA II Comment Letter; National Association of
State Auditors, Comptrollers and Treasurers (Sept. 17, 2013).
\1868\ Form Letter Type B [2], Type D [1-2], and Type F [1];
Federated IV Comment Letter; J.P. Morgan Comment Letter; American
Benefits Council Comment Letter; Ass'n Fin. Profs. II Comment
Letter; National Association of College and University Business
Officers (Sept. 17, 2013) (``Nat'l Ass'n of College & Univ. Bus.
Officers Comment Letter''); Chamber II Comment Letter; State
Treasurer, State of Utah (Aug. 26, 2013) (``Utah Treasurer Comment
Letter'').
\1869\ BlackRock II Comment Letter; SunGard Comment Letter;
Treasury Strategies Comment Letter; American Bankers Ass'n Comment
Letter; ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------
The Commission acknowledges, and many commenters concur,\1870\
that, as a result of our reforms, some investors may reallocate assets
to either government money market funds or other investment
alternatives. We do not anticipate our reforms will have a substantial
effect on the total amount of capital invested, although investors may
reallocate assets among investment alternatives, potentially affecting
issuers and the short-term financing markets, which we discuss below.
---------------------------------------------------------------------------
\1870\ See Dreyfus DERA Comment Letter, Federated DERA I Comment
Letter, Fidelity DERA Comment Letter, Invesco DERA Comment Letter,
and Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------
As noted earlier in this section, retail investors owned
approximately $790 billion of assets in non-government money market
funds as of February 28, 2014. Under the reforms, money market funds
that qualify as retail funds may continue to offer a stable value as
they do today--and facilitate their stable price by use of amortized
cost valuation and/or penny-rounding pricing of their portfolios. We
anticipate few investors in retail funds will reallocate assets to
other investment choices, given that retail funds will continue to
offer price stability, yield, and liquidity in all but exceptional
circumstances. We are defining a retail money market fund to mean a
money market fund that has policies and procedures reasonably designed
to limit all beneficial owners of the fund to natural persons.\1871\ We
expect, however, that at least some investors who are natural persons
that currently are invested in non-government funds that are not
designated retail may reallocate their assets to retail funds. We
anticipate these investors will likely move to retail funds that have
investment objectives that are similar to the objectives of their
current funds.
---------------------------------------------------------------------------
\1871\ See rule 2a-7(a)(25). ``Beneficial ownership'' typically
means having voting and/or investment power. See supra note 679.
---------------------------------------------------------------------------
Institutions invested approximately $1.27 trillion in non-
government money market funds as of February 28, 2014. Of this $1.27
trillion, institutional prime funds, other than tax-exempt funds,
managed approximately $1.19 trillion in assets and institutional tax-
exempt funds managed $82 billion. Under the reforms, these funds will
be subject not only to fees and gates, but also to an additional
floating NAV requirement. As such, we believe as much as $1.269
trillion in assets could be at risk for being reallocated to government
funds and other investment alternatives.
But as discussed below, neither the Commission nor most commenters
believe that all institutional investors in non-government funds will
reallocate their assets. Institutional prime funds typically offer
higher yields than government funds, and certain investors receive tax
advantages from investing in tax-exempt funds. In addition, we have
been informed that, today, the Treasury Department and the IRS will
propose new regulations and issue a revenue procedure that we believe
should remove the most significant tax-related impediments associated
with our floating NAV reform.\1872\ Additionally, the Commission, which
has authority to set accounting standards, has clarified that an
investment in a floating NAV money market fund generally meets the
definition of a ``cash equivalent.'' \1873\ And according to one
commenter, more than half of survey respondents indicated the
likelihood of using a floating NAV money market fund would increase if
such a fund's shares are considered cash equivalents for accounting
purposes.\1874\ Thus, we believe these factors and actions taken by the
Commission and other regulatory agencies should help preserve the
[[Page 47902]]
attractiveness of institutional prime funds to investors, perhaps
reducing the assets reallocated to alternatives.
---------------------------------------------------------------------------
\1872\ See supra section III.B.6.
\1873\ As discussed in detail in section III.B.6.b, many
investors questioned whether an investment in a floating NAV money
market fund would meet the definition of a ``cash equivalent.''
\1874\ See Deutsche Comment Letter.
---------------------------------------------------------------------------
As noted by several commenters, it is difficult to estimate the
amount of assets that institutional investors might reallocate from
non-government funds to either government funds or other investment
alternatives.\1875\ One commenter estimated that 64% or $806 billion
could shift from prime funds to government funds,\1876\ whereas another
commenter estimated that 25% of assets in its institutional prime funds
would transfer permanently into government funds.\1877\ A third
commenter estimated a shift in assets of between $500 billion and $1
trillion.\1878\ In an earlier letter, this commenter cited a survey of
institutional investors that estimates investors may withdraw between
$660 and $750 billion from money market funds if the Commission adopts
a floating NAV requirement because they cannot tolerate principal
volatility.\1879\ As with much of the survey evidence provided by
commenters,\1880\ however, we note that this survey was administered
before the Proposing Release and before the tax and accounting relief
that we are discussing today was known. For example, the survey, which
was administered between February 13, 2012 and March 6, 2012, did not
consider that government funds might not be subject to the fees, gates,
and floating NAV requirements,\1881\ and retail money market funds
might continue to maintain a stable price. Similarly, the survey
designers did not present to survey participants the possibility that
the Treasury Department and IRS would propose new regulations and issue
a revenue procedure that we believe will remove the most significant
tax-related impediments associated with a floating NAV reform.\1882\
Moreover, survey designers were not able to anticipate that the
Commission, which has authority to set accounting standards, would
clarify that an investment in a floating NAV money market fund would
meet the definition of a ``cash equivalent.'' For these and other
reasons herein, 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
overstate how investors are likely to actually behave under the final
amendments that we are adopting today.\1883\
---------------------------------------------------------------------------
\1875\ See Federated DERA I Comment Letter; Invesco DERA Comment
Letter.
\1876\ See Fidelity DERA Comment Letter.
\1877\ See Dreyfus DERA Comment Letter; Federated DERA I Comment
Letter. The commenter did not provide a basis for the estimate in
this letter. We note, however, the commenter presented similar
estimates using survey data in a previous letter. See Federated X
Comment Letter.
\1878\ See Federated DERA I Comment Letter.
\1879\ See Federated X Comment Letter and Treasury Strategies,
Money Market Fund Regulations: The Voice of the Treasurer (Apr. 19,
2012) http://www.ici.org/pdf/rpt_12_tsi_voice_treasurer.pdf,
which is cited in Federated X Comment Letter. Federated concludes,
``. . . at a minimum, $660 to $750 billion would be driven from
institutional prime funds . . .'' We note, however, the cited survey
queries institutional respondents about money market funds generally
and does not reflect that government funds are not be subject to the
floating NAV requirement. In addition, the survey did not address
fees and gates.
\1880\ A number of commenters cited survey data indicating that
organizations would reduce their use of money market funds under
either our floating NAV or liquidity fees and gates reform. See,
e.g., ICI Comment Letter (citing the 2013 AFP Liquidity Survey,
Association of Financial Professionals, 2013 AFP Liquidity Survey:
Report of Survey Results (June 2013)); Wells Fargo Comment Letter;
Northern Trust Comment Letter; Invesco Comment Letter; BlackRock II
Comment Letter; Sungard Comment Letter.
\1881\ See Treasury Strategies, Money Market Fund Regulations:
The Voice of the Treasurer (Apr. 19, 2012), available at http://www.ici.org/pdf/rpt_12_tsi_voice_treasurer.pdf.
\1882\ See supra section III.B.6.a.
\1883\ See, e.g., Better Markets FSOC Comment Letter, supra note
59 (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 money market funds with respect to the
type, quality, and liquidity of the investments in the fund. [. . .
.] It is therefore unrealistic to think that money market funds . .
. will become extinct solely as a result of a move to a more
accurate and transparent valuation methodology.''); Comment Letter
of John M. Winters (Dec. 18, 2012) (available in File No. FSOC-2012-
0003) (``[T]he feared migration to unregulated funds has not been
quantified and is probably overstated.'').
---------------------------------------------------------------------------
The Commission recognizes, however, that some assets will likely
flow out of non-government funds as a result of the reforms, and that
the greatest effect will likely be on institutional prime funds.
Commenters specifically noted that a combination of proposals would
force most money market fund sponsors to exit the prime space,\1884\
and would cause many investors to invest their cash assets in
government money market funds, direct investments, bank deposits, or
other investment alternatives.\1885\ As discussed in the DERA
Study,\1886\ the Proposing Release,\1887\ and below, there are a range
of investment alternatives that currently compete with money market
funds. Each of these choices involves different tradeoffs, and money
market fund investors that are unwilling or unable to invest in their
current option under the reforms would need to analyze the various
tradeoffs associated with each alternative. Specifically, investors
could choose from among at least the following alternatives: Direct
investments in money market instruments; money market funds that are
not subject to the reforms; bank deposit accounts; bank certificates of
deposit; bank collective trust funds; LGIPs; U.S. private funds;
offshore money market funds; short-term investment funds (``STIFs'');
separately managed accounts; ultra-short bond funds; and short-duration
exchange-traded funds (``ETFs'').\1888\ The following table, taken from
the DERA Study and Proposing Release, outlines the principal features
of various cash alternatives to money market funds that exist today.
---------------------------------------------------------------------------
\1884\ See, e.g., Dreyfus Comment Letter; Invesco Comment
Letter; PFM Asset Mgmt. Comment Letter; ICI Comment Letter; SIFMA
Comment Letter.
\1885\ See, e.g., Blackrock II Comment Letter; Dreyfus Comment
Letter; Legg Mason & Western Asset Comment Letter; Northern Trust
Comment Letter; PFM Asset Mgmt. Comment Letter; SunGard Comment
Letter.
\1886\ See DERA Study, supra note 24, Table 6.
\1887\ See Proposing Release, supra note 25, Table 2.
\1888\ See, e.g., Comment Letter of Investment Company Institute
(Feb. 16, 2012) (available in File No 4-619.) (``ICI Feb 2012 PWG
Comment Letter''); Comment Letter of the Association for Financial
Professionals et al. (Apr. 4, 2012) (available in File No. 4-619)
(``AFP Comment Letter'').
Table 1--Cash Investment Alternatives
--------------------------------------------------------------------------------------------------------------------------------------------------------
Investment risks Redemption Restrictions on
Product Valuation \A\ restrictions Yield \B\ Regulated investor base
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bank demand deposits............ Stable............ Below benchmark up No................ Below benchmark... Yes............... No.
to depository
insurance
(``DI'') limit;
above benchmark
above DI limit
\C\.
[[Page 47903]]
Time deposits (CDs)............. Stable............ Bank counterparty Yes \D\........... Below benchmark... Yes............... No.
risk above DI
limit.
Offshore money funds (European Stable or Floating Comparable to Some \F\.......... Comparable to Yes............... Yes.\G\
short-term MMFs) \E\. NAV. benchmark. benchmark.
Offshore money funds (European Floating NAV...... Above benchmark... Some.............. Above benchmark... Yes............... Yes.
MMFs) \H\.
Enhanced cash funds (private Stable NAV Above benchmark... By contract....... Above benchmark... No \I\............ Yes.\J\
funds). (generally).
Ultra-short bond funds.......... Floating NAV...... Above benchmark... Some.............. Above benchmark... Yes............... No.
Collective investment funds \K\. Not stable........ Above benchmark... No................ Above benchmark... Yes............... Tax-exempt bank
clients.\L\
Short-term investment funds Stable............ Above benchmark... No................ Above benchmark... Yes \M\........... Tax-exempt bank
(``STIFs''). clients.
Local government investment Stable (generally) Benchmark......... No................ Benchmark......... Yes............... Local government
pools (``LGIPs''). \N\. and public
entities.
Short-duration ETFs............. Floating NAV; Above benchmark... No................ Above benchmark... Yes............... No.
Market price \O\.
Separately managed accounts Not stable........ Above benchmark... No................ Above benchmark... No................ Investment
(including wrap accounts). minimum.\P\
Direct investment in MMF Not stable........ Comparable to No................ Comparable to No................ Some.\R\
instruments. benchmark but may benchmark but may
vary depending on vary depending on
investment mix investment mix.
\Q\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 http://www.fdic.gov/deposit/deposits/.
\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, Sec. Sec. 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 Sec. Sec. 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.
\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.
[[Page 47904]]
\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 tax-
qualified 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 http://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 http://www.treasurer.sc.gov/media/4755/The-South-Carolina-Local-Government-Investment-Pool-Participant-Procedures-Manual.pdf.
\O\ Although the performance of an 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)).
These investment options offer different combinations of price
stability, risk exposure, return, investor protections, and disclosure.
For example, some current money market fund investors, in particular
bank trust departments and corporate trusts, may choose to manage their
cash themselves and, based on our understanding of institutional
investor cash management practices, many of these investors will invest
directly in securities similar to those held by money market funds
today. According to one commenter, however, this strategy may create
additional burdens and risks for these investors, including having to
acquire, retain, and monitor the maturity of short-term
investments.\1889\ Any desire to self-manage cash will 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 will be lost when each
investor has to conduct credit analysis itself for each investment (in
contrast to money market funds which are able to spread their credit
analysis costs for each security across their entire shareholder
base).\1890\ As such, we anticipate that direct investment in
securities similar to those held by money market funds today will be
limited to investors with large cash management requirements and active
Treasury functions.
---------------------------------------------------------------------------
\1889\ See, e.g., M&T Bank Comment Letter.
\1890\ See, e.g., Comment Letter of U.S. Chamber (Jan. 23, 2013)
(available in File No. FSOC-2012-0003) (``U.S. Chamber FSOC Comment
Letter'') (``Quite simply, it is more efficient and economical to
pay the management fee for a money market funds than to hire the
internal staff to manage the investment of cash.'').
---------------------------------------------------------------------------
Alternatively, commenters suggested that some investors, especially
investors in institutional prime funds, will reallocate assets to
government funds.\1891\ Investors that shift their assets from
institutional prime funds to government money market funds will likely
sacrifice yield,\1892\ but they will retain the principal stability and
liquidity of their assets. To the extent that assets under management
in government funds increase, we anticipate investors will have more
government funds from which to choose than they do today. This expected
increase in the number government funds could be because complexes that
currently offer government funds will offer additional government funds
or because other complexes will offer new government funds. In either
case, competition among government funds should increase although the
impact on competition likely should, at the margin, be larger if new
complexes enter the government fund market.
---------------------------------------------------------------------------
\1891\ Federated IV Comment Letter; TRACS Financial Comment
Letter; Wells Fargo Comment Letter; Boeing Comment Letter; American
Bankers Ass'n Comment Letter; Def. Contrib. Inst. Inv. Ass'n Comment
Letter; ICI Comment Letter; see also supra section III.C.
\1892\ See, e.g., Federated X Comment Letter; Angel Comment
Letter. Commenters noted that investors that shift assets from prime
funds to government funds will earn lower rates on their investments
because government funds are less risky and offer lower yields than
prime funds.
---------------------------------------------------------------------------
In addition, a reallocation of assets to government funds could
lower the yields received by both investors in government funds and
direct purchasers of government securities. If an increase in demand
for government funds, which must largely invest in eligible government
securities, subsequently increases the demand for these
securities,\1893\ the rates on eligible
[[Page 47905]]
government securities and hence yields on government funds might
fall.\1894\ Several commenters argued that absorbing assets from non-
government funds into government funds could reduce yields on eligible
government securities in what is already a low yield environment.\1895\
The extent to which asset reallocation affects yields on government
funds, however, will depend on the amount of capital that shifts into
government funds and on the supply of eligible government securities to
meet heightened demand for these securities by government funds. We
discuss these issues in further detail below.
---------------------------------------------------------------------------
\1893\ Government money market funds must invest at least 99.5
percent of their portfolio in cash, ``government securities'' as
defined in section 2(a)(16) of the Act, and repurchase agreements
collateralized with government securities. See rule 2a-7(a)(16).
Allowable securities 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. It excludes, however,
securities issued by state and municipal governments, which do not
generally share the same credit and liquidity traits as U.S.
government securities.
\1894\ See, e.g., Federated X Comment Letter.
\1895\ See Dreyfus DERA Comment Letter; Federated DERA I Comment
Letter; Invesco DERA Comment Letter; Wells Fargo DERA Comment
Letter.
---------------------------------------------------------------------------
As noted above, commenters indicated that some investors that
currently invest in non-government funds may shift assets into demand
deposits or short-maturity certificates of deposit. FDIC insurance that
covers deposit accounts (which include checking and savings accounts,
money market deposit accounts, and certificates of deposit) guarantees
principal stability within the insurance limits and in certain
instances liquidity irrespective of market conditions.\1896\ We noted
in the Proposing Release that some institutions may be deterred from
moving their investments from money market funds to banks, because
their assets in many cases may be above the current depository
insurance limits; assets above the limits would be exposed to
counterparty and sector-specific risks that are different and less
attractive than the risk profiles of diversified non-government money
market funds today.\1897\ Nevertheless, these investors may gain full
insurance coverage if they are willing and able to break their cash
holdings into sufficiently small pieces and spread them across banks,
but doing so may impose an administrative burden on investors.\1898\
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\1896\ FDIC insurance covers all deposit accounts, including
checking and savings accounts, money market deposit accounts and
certificates of deposit. FDIC insurance does not cover other
financial products and services that banks may offer, such as
stocks, bonds, mutual fund shares, life insurance policies,
annuities, or securities. The standard insurance amount is $250,000
per depositor, per insured bank, for each account ownership
category. See http://www.fdic.gov/deposit/deposits/.
\1897\ 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 money market funds and
carry inherent counterparty risk.''); Comment Letter of Investment
Company Institute (Jan. 10, 2011) (available in File No 4-619)
(``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.''). See also Federated X Comment Letter.
\1898\ 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).
---------------------------------------------------------------------------
It is important to note that investors will likely earn lower
yields on deposit accounts than what they currently receive on non-
government funds.\1899\ One commenter even suggested flows of capital
into banks may create additional downward pressure on the yields paid
to depositors, further lowering investor returns.\1900\ If the
additional capital that flows from non-government funds is more than
banks can profitably lend, then banks might reduce the interest rates
that they pay to depositors. If, however, banks have sufficient
opportunities to invest the additional capital, interest rates would
likely not fall.
---------------------------------------------------------------------------
\1899\ See, e.g., Federated X Comment Letter; Angel Comment
Letter.
\1900\ See Angel Comment Letter.
---------------------------------------------------------------------------
In addition, as discussed above, investors in non-government funds
may not reallocate assets in a significant way, and if they do, may not
reallocate large amounts of capital to banks. Given that deposit
accounts held over $8 trillion as of February 28, 2014,\1901\ we do not
anticipate that additional flows from non-government funds will have a
sufficient impact to materially push down interest rates at banks. Even
if investors reallocate capital to demand deposits, recent history
indicates demand deposits can successfully absorb large flows of
capital from investors. As discussed in the DERA Study, individual and
business holdings in checking deposits and currency have significantly
increased in recent years relative to their holdings of money market
fund shares.\1902\ 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.\1903\ 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.\1904\
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\1901\ From Board of Governors, Federal Reserve System, as of
February 28, 2014. Demand deposits at domestically chartered
commercial banks, U.S. branches, and agencies of foreign banks, and
Edge Act corporations (excluding those amounts held by depository
institutions, the U.S. government, and foreign banks and official
institutions) less cash items in the process of collection and
Federal Reserve float held $1.069 trillion. Savings deposits, which
include money market deposit accounts, totaled $7.221 trillion. See
http://www.federalreserve.gov/Releases/h6/current/default.htm.
\1902\ See DERA Study, supra note 24, at figure 18.
\1903\ See 2012 AFP Liquidity Survey, supra note 64.
\1904\ See id., 2008 AFP Liquidity Survey, supra note 64.
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We discussed in the Proposing Release and commenters who addressed
this issue agreed that one practical constraint for many money market
fund investors is that they may be precluded from investing in certain
alternatives outside of funds regulated under rule 2a-7, such as STIFs,
offshore money market funds, LGIPs, separately managed accounts, and
direct investments in money market instruments, due to significant
restrictions on participation.\1905\ 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.\1906\ 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.\1907\ Similarly, European
money market funds can take on more risk than U.S. money market funds
because they are not currently subject to regulatory restrictions as
stringent as rule 2a-7 on their credit quality, liquidity, maturity,
and diversification.\1908\ If investment
[[Page 47906]]
alternatives are less stringently regulated than non-government funds,
then they could pose greater risk than money market funds and thus may
not be viable or attractive alternatives to investors that highly value
principal stability. Offshore money market funds, which are investment
pools domiciled and authorized outside the United States, generally
sell shares to U.S. investors only in private offerings, limiting their
availability to investors at large.\1909\ Further, few offshore money
market funds offer their shares to U.S. investors in part because doing
so could create adverse tax consequences.\1910\
---------------------------------------------------------------------------
\1905\ See, e.g., Form Letter Type B [2], Type D [1-2], and Type
F [1]; Federated IV Comment Letter; J.P. Morgan Comment Letter;
Treasury Strategies Comment Letter; American Benefits Council
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Nat'l Ass'n of
College & Univ. Bus. Officers Comment Letter.
\1906\ See, e.g., American Bankers Ass'n Comment Letter. 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, available at
http://www.ici.org/pdf/12_senate_pss_mmf_written.pdf.
\1907\ For a discussion of the regulation of STIFs by the Office
of the Comptroller of the Currency (OCC), see Proposing Release,
supra note 25, Table 2, explanatory n.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)].
\1908\ For a discussion of the regulation of European money
market funds, see Proposing Release, supra note 25, Table 2,
explanatory nn.E and H; Common Definition of European Money Market
Funds (Ref. CESR/10-049). See also supra section II.B.3.
\1909\ See Proposing Release, supra note 25, Table 2,
explanatory n.I.
\1910\ See Proposing Release, supra note 25, Table 2,
explanatory n.G.
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In the Proposing Release and sections III.A and III.B of this
Release, we recognize, and commenters concurred,\1911\ that 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 may 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 U.S. securities regulations.\1912\ Likewise, we recognized in
the Proposing Release that 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). In addition, 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 redemption fees or
suspending redemptions.\1913\ Other investment alternatives, such as
bank CDs, also impose redemption restrictions.
---------------------------------------------------------------------------
\1911\ See, e.g., Form Letter Type B [2], Type D [1-2], and Type
F [1]; Federated IV Comment Letter; J.P. Morgan Comment Letter;
Treasury Strategies Comment Letter; American Benefits Council
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Nat'l Ass'n of
College & Univ. Bus. Officers Comment Letter.
\1912\ According to the 2012 AFP Liquidity Survey, supra note
64, 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.
\1913\ See, e.g., Proposing Release, supra note 25, Table 2,
explanatory n.F.
---------------------------------------------------------------------------
The Commission recognizes that not every cash investment
alternative presented here will be available and attractive to each
investor, which may leave investors with fewer investment options than
those enumerated above. Investors, however, have available a range of
investment options, with each choice offering different tradeoffs.
Money market fund investors that are unwilling or unable to invest in
their current option after the reforms will need to analyze the various
tradeoffs associated with each alternative. We anticipate the money
market fund industry may also innovate in various ways to meet
investors' needs. For example, some managers may try to stabilize their
funds' NAVs by choosing low principal-risk portfolio investment
strategies, whereas other funds may seek to offer higher yields within
the restrictions of rule 2a-7.
We also recognize the reforms adopted today may cause investors to
reallocate assets to investment alternatives that offer different
combinations of yield, risk, and features than those of the funds in
which they are invested today. The fact that investors have bought non-
government funds rather than these other investment alternatives
reveals that they almost certainly prefer these funds to the
alternatives. We, and a number of commenters,\1914\ acknowledge that it
is doubtful that any of the non-money market fund investment
alternatives provide the identical combination of price stability,
transparency, risk, liquidity, yield, and level of regulation provided
by past money market funds. However, with today's adopted amendments,
the Commission addresses certain concerns inherent in the current
structure of non-government money market funds that create incentives
for shareholders to redeem shares ahead of other investors and thus
contribute to the likelihood of heavy share redemptions and shareholder
dilution. Specifically and as pointed out in the DERA study, although
the 2010 reforms made the funds more resilient to both portfolio losses
and investor redemptions, no fund would have been able to withstand the
losses that the Reserve Primary Fund incurred in 2008 without breaking
the buck, and nothing in the 2010 reforms would have prevented the
Reserve Primary Fund's holding of Lehman Brothers debt. We therefore
believe that the relative costs to investors from losing certain
features of some of today's money market funds should be acceptable in
light of the significant benefits stemming from advancing our goals of
reducing money market funds' susceptibility to heavy redemptions,
improving their ability to manage and mitigate potential contagion from
redemptions, and increasing the transparency of their risks.
---------------------------------------------------------------------------
\1914\ Form Letter Type A [1], Type B [2], Type C [1], Type D
[1], and Type F [1]; Federated II Comment Letter; PFM Asset Mgmt.
Comment Letter; Comment Letter of Square 1 Asset Management (Sept.
17, 2013) (``Square 1 Comment Letter''); Comment Letter of Farmers
Trust Company (July 23, 2013) (Farmers Trust Comment Letter'');
Comment Letter of City of Chicago, Office of the City Treasurer
(Sept. 24, 2013) (``Chicago Treasurer Comment Letter''); Comment
Letter of United States Conference of Mayors (July 18, 2013) (``U.S.
Conference of Mayors Comment Letter'').
---------------------------------------------------------------------------
2. Efficiency, Competition and Capital Formation Effects on the Money
Market Fund Industry
In this section, we consider certain effects on the money market
fund industry of investors reallocating money away from certain money
market funds as a result of our reforms. As discussed in section III.A,
our primary reforms will not apply to government money market
funds.\1915\ As such, we anticipate current investors in government
funds will likely remain invested in these funds, as they will offer
the price stability, liquidity, and yield to which these investors are
accustomed.\1916\ As discussed further in section III.K.3 below, in
fact we expect some non-government money market fund shareholders will
likely reallocate their investments to government money market funds.
Accordingly, to the extent investors reallocate funds between these two
alternatives, we expect that our primary reforms will affect the short-
term funding market and capital allocation at least in the short-run as
discussed further below. We also expect to have an increase in
allocative efficiency because investors will be making choices best
suited to their investment risk profiles. Furthermore, to the extent
that new government funds will be offered because of an increased
demand for government funds,
[[Page 47907]]
competition among government funds will also increase.
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\1915\ Government money market funds are permitted to opt in to
the fees and gates reforms if they disclose they are doing so in
advance. Because government funds hold assets with little credit
risk, we believe it is unlikely that these funds will ever choose to
impose fees or gates.
\1916\ If government funds experience heavy inflows, the yields
on eligible government securities, in which government funds largely
invest, might fall. If the yields on portfolio assets fall, the
yields on the fund will decline as well. We discuss this possibility
and its impact in greater detail below.
---------------------------------------------------------------------------
Like government funds, money market funds that qualify as retail
funds will also be able to continue transacting at a stable value and
will not be subject to the floating NAV reform. Retail funds will be
required to consider imposing a fee or gate if their liquidity comes
under stress. As such, retail funds will be competing with government
and floating NAV funds based on their structure. Although some
investors may reallocate their investments away from retail money
market funds because they could impose a fee or gate, we expect many
investors will remain in these funds because their investment
experience under normal market conditions is unlikely to change. Some
investors may move into retail money market funds in response to our
reforms, as there are likely some natural persons currently invested in
funds that are categorized as institutional prime or institutional tax-
exempt money market funds that would prefer to stay in a money market
fund that maintains a stable NAV per share and that has a similar
investment risk profile as their current fund. Funds with both retail
and institutional investors also may create new retail-only non-
government funds with the same investment objective. Although we do not
have a basis for estimating the amount of assets that might be
reallocated to retail non-government funds because we do not know what
fraction of the shareholder base of these funds today categorized as
institutional would qualify as natural persons, we anticipate the
number of retail funds and competition among these funds to increase as
they compete to attract new investors and thus increase their
allocative efficiency. The impact on competition likely should, at the
margin, be larger if the increase in the number retail funds stems from
new complexes offering additional retail funds as opposed to current
complexes offering additional retail funds.
Today's fees and gates amendments are designed to moderate
redemption requests by allocating liquidity costs to those shareholders
who impose such costs on funds through their redemptions and, in
certain cases, stop heavy redemptions in times of market stress by
providing fund boards with additional tools to manage heavy redemptions
and improve risk transparency. As such, the fees and gates amendments
should increase allocational efficiency in the non-government money
market fund industry by making liquidity risk more apparent to
shareholders in these funds through enhanced disclosure and by
allocating the costs of redeeming shares when liquidity is costly to
shareholders that redeem shares.\1917\ If investors make better
informed investment decisions given the liquidity risk inherent in
these money market funds as a result of the fees and gates amendments,
allocational efficiency will be enhanced.
---------------------------------------------------------------------------
\1917\ Allocational efficiency refers to investors efficiently
allocating their funds to available investments, taking all relevant
factors into account.
---------------------------------------------------------------------------
In addition to the impacts discussed above, the combination of our
floating NAV and fees and gates reforms may have a number of effects on
efficiency, competition, and capital formation in the institutional
prime money market fund industry. First, by allocating market-based
gains and losses on portfolio securities in institutional prime funds
to each shareholder on a proportionate basis, the floating NAV should
increase allocational efficiency in this industry, as investors are
allocating their investment capital based on true returns.\1918\ Doing
so will further increase the allocative efficiency discussed above in
institutional prime money market funds attributable to the fees and
gates reform and its effect on shareholders' understanding of money
market funds' liquidity risk.
---------------------------------------------------------------------------
\1918\ Some commenters noted the potential for inequitable
treatment of shareholders under the stable NAV model. See, e.g.,
Better Markets FSOC Comment Letter (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.
---------------------------------------------------------------------------
Our primary reforms also may affect how different kinds of money
market funds compete in the industry, and thus affect efficiency,
competition, and capital formation in the industry. For example, we
anticipate that some institutional investors will continue to demand a
combination of relative price stability, liquidity, and yields that are
higher than the yields offered by government funds. Managers of
floating NAV money market funds may respond to these investors in one
of several ways. Some managers may respond by altering their portfolio
management and preferentially investing portfolio holdings in shorter-
maturity, lower-risk securities than they do today. They would do so to
reduce NAV fluctuations and lessen the probability the fund's weekly
liquid assets decline sufficiently for a fee or gate to be possible.
These portfolio management changes may affect competition within the
institutional prime money market fund industry (or broader money market
fund industry) if these funds more favorably compete with other less
conservatively managed funds. They also could affect capital formation
to the extent they shift portfolio investment away from certain issuers
or certain maturities or lessen the yields passed through to investors
from their money market fund investments. In addition, an increase in
these types of funds could encourage issuers to fund themselves with
shorter term debt.
Other portfolio managers of institutional prime funds could respond
by using affiliate financial support to minimize principal volatility
or avoid declines in weekly liquid assets that could lead to the
imposition of a fee or gate.\1919\ The emergence of these types of
money market funds also could have competitive effects within the
institutional prime money market fund industry (or broader money market
fund industry), depending on how favorably they compete with money
market funds that are managed differently. These funds could reduce
allocational efficiency to the extent shareholders invest in money
market funds based on the assumption that principal volatility and
liquidity risk will be borne by the fund's sponsor or other affiliate
rather than on the risk-return profile of the fund's portfolio
(although this impact could be tempered to the extent any of these
costs are passed on to investors through higher management fees). They
also could affect capital formation if affiliate sponsor support leads
to higher investment in riskier or longer-term debt securities than
otherwise would occur if investors had to bear the principal volatility
or liquidity risk accompanying those money market fund investments.
---------------------------------------------------------------------------
\1919\ Fund affiliates could avoid declines in weekly liquid
assets, for example by purchasing non-weekly liquid assets or
directly purchasing fund shares. Under the reforms we are adopting
today, we are requiring increased disclosure of any affiliate
financial support of money market funds. These reforms, and their
effects on efficiency, competition, and capital formation, are
discussed above in sections III.E and III.F.
---------------------------------------------------------------------------
Finally, some portfolio managers of institutional prime money
market funds may seek to competitively distinguish their funds post-
reform by altering their portfolio management and investing in
relatively longer-term or riskier securities than they do today. These
funds may seek to appeal to investors that, if investing in a floating
NAV
[[Page 47908]]
money market fund that could be subject to fees or gates, now may be
willing to sacrifice liquidity in times of stress or some principal
stability for greater yield. The emergence of these types of money
market funds may enhance competition in the money market fund industry
among different types of institutional prime money market funds along
the risk-return spectrum. It also would affect changes in capital
formation post-reform to the extent that it shifts investment to
issuers of longer-term or riskier securities or increases yields paid
to investors (or increases management fees paid to certain types of
fund complexes). Thus, depending on the magnitude of the primary
reforms' effect on the assets managed by different types of money
market funds, the type and number of institutional prime funds may
contract overall, potentially limiting investors' choices among them,
or may expand, potentially enhancing investors' choices among them.
Accordingly, competition among institutional prime funds may increase
or decrease with an impact that will likely be stronger if the number
of complexes offering institutional prime funds changes.
Finally, as discussed above, we recognize investors in
institutional prime funds may reallocate assets to investment
alternatives. In addition to the potential effects on investors
described above and the short-term funding markets described below, a
reallocation of assets out of these funds may affect the profitability
of the money market fund industry, and thus have incremental effects on
efficiency, competition, and capital formation. For example, fund
complexes that, on net, experience a decline in managed money market
fund assets as a result of our primary reforms, will likely earn lower
fund advisers' management and other fees than they do today.\1920\ It
is important to note, however, that fees for managing these assets will
still be earned, but by the asset managers to which assets are
reallocated. To the extent investors shift assets within a fund complex
(e.g., to a government fund), at least some of the fees may be retained
by the fund complex. If, however, investors instead reallocate assets
to non-money market fund alternatives, the managers of these other
options will benefit. This shift may have competitive implications
within the money market fund industry as not all fund complexes are
likely to be equally affected by a movement in money market fund assets
as a result of the primary reforms. For example, fund complexes that
primarily advise government money market funds may benefit
competitively as these funds are generally not affected by our primary
reforms and may experience inflows, which would raise these fund
advisers' management fee income. Similarly, fund complexes that manage
mostly retail money market funds may be competitively advantaged post-
reform over those that primarily manage institutional prime funds.
These latter funds will be subject to both our floating NAV and fees
and gates reforms and thus may experience a greater decline in assets
than retail money market funds as a result of our primary reforms. We
thus anticipate our primary reforms may significantly alter the
competitive makeup of the money market fund industry, producing related
effects on efficiency and capital formation. We believe, however, that
these changes are necessary to accomplish our policy goals.
---------------------------------------------------------------------------
\1920\ See Federated X Comment Letter.
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3. Effect of Reforms on Investment Alternatives, and the Short-Term
Financing Markets
In this section, we consider the effects of the reforms on
investment alternatives, issuers, and the short-term financing markets.
We have presented extensive economic analysis relating to our final
policy choices and discussed commenters' views in earlier sections of
the Release. As such, we focus here on the specific macroeconomic
effects of the reforms on investment alternatives, as well as the
short-term financing markets and the impact of the reforms on
efficiency, competition, and capital formation on issuers in the short-
term financing market and the short-term financing market.
We recognized in the Proposing Release that the amendments we are
adopting today could create incentives for investors to shift assets
out of non-government money market funds, which could lead to changes
in the funding of and other effects on the short-term financing
markets. Many commenters agreed with our views.\1921\ Some commenters,
for example, cautioned that a decrease in investor demand for money
market funds could limit the availability and raise the cost of short-
term funding for businesses, as well as federal, state, and local
governments, and that it is currently unclear whether these entities
would be able to find and use alternative efficient sources of
credit.\1922\ Since government funds are not subject to the fees and
gates and floating NAV requirements, we disagree that today's adopted
amendments have a negative impact on the availability and cost of
short-term funding for the federal government. As discussed in the
Proposing Release and herein, we believe the effects of a shift,
including any effects on efficiency, competition, and capital
formation, will depend on the amount of capital reallocated to specific
investment alternatives and the nature of the alternatives. More
specifically, the extent to which money market fund investors choose to
reallocate their assets to investment alternatives, including other
money market fund types, as a result of these reforms will drive the
effect on the short-term financing markets. We discuss the potential
impact of these shifts in investment below.
---------------------------------------------------------------------------
\1921\ See, e.g., MFDF Comment Letter; Ariz. Ass'n of County
Treasurers Comment Letter; Utah Treasurer Comment Letter; Northern
Trust Comment Letter; Fidelity Comment Letter.
\1922\ Form Letter Type E [1] and Type F [1]; Fidelity Comment
Letter; Invesco Comment Letter; iMoneyNet Comment Letter; KeyBank
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Fin. Svcs.
Inst. Comment Letter.
---------------------------------------------------------------------------
As discussed in the Proposing Release, because non-government money
market funds' investment strategies differ from a number of the
investment alternatives enumerated, a shift by investors from non-
government money market funds to these alternatives could affect the
markets for short-term securities. Commenters warned that movement of
invested assets from prime money market funds to, for example,
government money market funds could skew short-term funding away from
private markets to the public sector.\1923\ 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 non-government
money market funds and the chosen investment alternatives. As discussed
in the DERA Study, for example, even a modest shift from prime funds to
other types of money market funds could represent a sizeable increase
in certain investments.\1924\ If instead investors in institutional
prime funds choose to manage their cash directly rather than invest in
alternative cash management products, they may invest in securities
that are similar to those currently held by prime funds, in which the
effects on issuers and the short-term financing markets will likely be
minimal.\1925\
---------------------------------------------------------------------------
\1923\ Blackrock II Comment Letter; Invesco Comment Letter;
Wells Fargo Comment Letter; U.S. Bancorp Comment Letter; ICI Comment
Letter.
\1924\ See DERA Study, supra 24, Table 7.
\1925\ 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 580 and accompanying text.
---------------------------------------------------------------------------
[[Page 47909]]
We believe, and a number of commenters agreed,\1926\ that some
capital will be reallocated from non-government funds, especially
institutional prime funds, to government money market funds. If the
magnitude of the flows is large, we anticipate the shift in investment
could affect not only the government securities market, but also
issuers, including companies and municipalities, that previously sold
securities to non-government funds. It is important to note that
although investors may reallocate assets to government funds, it is
also possible and even likely that some will reallocate assets to bank
demand deposits and other investment vehicles, which would mitigate the
negative impact of the reforms on the short-term funding market in
general and bank issuers of short-term papers in particular.\1927\
---------------------------------------------------------------------------
\1926\ See, e.g., Federated IV Comment Letter; TRACS Financial
Comment Letter; Wells Fargo Comment Letter; Boeing Comment Letter;
American Bankers Ass'n Comment Letter; Def. Contrib. Inst. Inv.
Ass'n Comment Letter. See also Dreyfus DERA Comment Letter,
Federated DERA I Comment Letter, Fidelity DERA Comment Letter,
Invesco DERA Comment Letter, and Wells Fargo DERA Comment Letter.
\1927\ See supra section III.K.1 of this Release.
---------------------------------------------------------------------------
Commenters cautioned that there is limited market capacity if
investors reallocate their assets from non-government money market
funds into government money market funds.\1928\ Commenters noted a
specific concern that reallocating assets from non-government funds to
government funds would increase the demand for eligible government
securities,\1929\ which could reduce these securities' yields in what
is already a low-yield environment. Low yields on eligible government
securities would not only affect investors in government funds, but
also those investors who directly purchase government securities.\1930\
Commenters noted heavy flows to government funds during the financial
crisis caused several government funds to close to new investors to
prevent additional net inflows,\1931\ while yields fell close to
zero.\1932\ These problems arose even with large issuances of
government securities during the financial crisis.\1933\ One commenter
specifically stated that negative yields would be problematic for the
competitiveness of government funds and investors, as well as for
parties holding government securities for regulatory capital and
collateral purposes.\1934\
---------------------------------------------------------------------------
\1928\ See, e.g., Blackrock II Comment Letter; Dreyfus Comment
Letter; Federated II Comment Letter; Invesco Comment Letter;
Northern Trust Comment Letter; Schwab Comment Letter.
\1929\ See supra section III.C.1.
\1930\ See, e.g., Federated X Comment Letter; Dreyfus DERA
Comment Letter; Federated DERA I Comment Letter; Invesco DERA
Comment Letter; Wells Fargo DERA Comment Letter.
\1931\ See Dreyfus DERA Comment Letter; Invesco DERA Comment
Letter. The commenters did not address where the potential new
investors ultimately invested their assets.
\1932\ See Dreyfus DERA Comment Letter; Federated DERA I Comment
Letter.
\1933\ See BlackRock DERA Comment Letter; Invesco DERA Comment
Letter; ICI DERA Comment Letter.
\1934\ See Federated DERA I Comment Letter.
---------------------------------------------------------------------------
Evidence from the financial crisis also indicates, however, that
government funds absorbed large inflows of assets. Specifically,
approximately $498 billion or 24% of assets flowed out of prime funds,
whereas $409 billion or 44% of assets flowed into government funds
between September 2, 2008 and October 7, 2008,\1935\ and even with
these unprecedented reallocations of assets, Treasury-bill rates
approached or fell below zero for only a relatively short period during
the crisis.\1936\ One commenter also noted the supply of Treasury bills
has declined by more than $250 billion on three separate occasions
between January 31, 2009 and March 31, 2014 without apparent market
dislocation.\1937\ We recognize that any reallocation of assets from
non-government money market funds into government money market funds
may affect yields in the short-run. However, we believe that the two-
year period for funds to implement the fees and gates and floating NAV
reforms that we are adopting may help facilitate the market adjustment
process. For example, fund complexes with non-government funds that
have both institutional and retail investors as well as other fund
complexes will have time to originate retail funds not subject to the
floating NAV requirement to meet the needs of retail clients.
Similarly, retail investors in non-government funds that will be
subject to the floating NAV after the implementation period will have
time to reallocate assets to a retail fund. More generally, investors
will have time to identify investment alternatives and consider trade-
offs for alternatives other than government funds.
---------------------------------------------------------------------------
\1935\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. These investors would not be government money
market funds [5].
\1936\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. These investors would not be government money
market funds [6-7].
\1937\ See Fidelity DERA Comment Letter.
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Commenters, using data from July 2013 through March 2014, estimated
there are between $5.2-$6.8 trillion in eligible government
securities.\1938\ However, as noted by several commenters, it is
difficult to estimate the amount of assets that institutional investors
might reallocate from non-government funds to government funds.\1939\
Several commenters cautioned this supply of eligible government
securities would likely be insufficient if today's reforms were
adopted.\1940\ One commenter, however, argued that the supply would be
adequate.\1941\ This commenter estimated 64% or $806 billion could
shift from prime funds to government funds,\1942\ whereas a second
commenter estimated 25% of assets in its institutional prime funds
would transfer permanently into government funds.\1943\ A third
commenter estimated between $500 billion to $1 trillion.\1944\ The
first commenter noted, however, that prime funds invested 19.5% of
their assets on average in eligible government securities as of
February 28, 2014, explaining that prime funds hold eligible government
securities to meet the Daily Liquid Asset and Weekly Liquid Asset
requirements of Rule 2a-7.\1945\ As such, they would likely divest some
of these assets to meet investor redemption requests, thereby freeing
up eligible government securities for government fund purchase.
Applying this 19.5% estimate to prime funds at large and assuming
investors reallocated 64% of prime fund assets to government
funds,\1946\ the commenter then estimated the demand for eligible
government securities would increase
[[Page 47910]]
``approximately $806 billion, which is only about 8% of current total
available eligible government securities.'' \1947\ The commenter
concluded, ``the supply of eligible government securities is more than
adequate to meet anticipated demand.'' \1948\ We agree with this
commenter. Applying the 19.5% estimate to institutional prime funds at
large and assuming investors reallocated 25% of prime fund assets to
government funds,\1949\ the demand for eligible government securities
would increase about $239 billion, which is only about 4% of current
total available eligible government securities.\1950\ Therefore, we do
not anticipate the reallocation of fund assets will be large relative
to the market for eligible government securities.
---------------------------------------------------------------------------
\1938\ See Federated DERA I Comment Letter; Fidelity DERA
Comment Letter; ICI DERA Comment Letter; Wells Fargo DERA Comment
Letter. One commenter (see the Invesco DERA Comment Letter)
estimated eligible government assets were $2 trillion, which is
substantially lower than the other commenters' estimates. It appears
the estimate does not include repurchase agreements collateralized
by U.S. Treasuries or other government securities and may have other
assumptions, so we focus here on the estimates provided in the other
four letters.
\1939\ See Federated DERA I Comment Letter and Invesco DERA
Comment Letter. See also supra sections III.A-B.
\1940\ See BlackRock DERA Comment Letter; Dreyfus DERA Comment
Letter; Federated DERA I Comment Letter; Invesco DERA Comment
Letter.
\1941\ See Fidelity DERA Comment Letter.
\1942\ Id.
\1943\ See Dreyfus DERA Comment Letter.
\1944\ See Federated DERA I Comment Letter. The commenter did
not provide a basis for the estimate in this letter. We note,
however, the commenter presented similar estimates using survey data
in a previous letter. See Federated X Comment Letter. We address
limitations of inferences from the survey in section III.B.
\1945\ See Fidelity DERA Comment Letter. The Federated DERA I
Comment Letter estimated prime funds invested 27% of assets in
eligible government securities. More specifically, the letter stated
prime money market funds held $95 billion in Treasury securities,
$130 billion in agency securities, and $169 in fully collateralized
repurchase agreements. It cited year-end assets in prime money
market funds of $1.486 trillion.
\1946\ See Fidelity DERA Comment Letter.
\1947\ Id.
\1948\ Id.
\1949\ See Dreyfus DERA Comment Letter.
\1950\ See Dreyfus DERA Comment Letter. This estimate assumes
institutions invest about $1.187 trillion in prime funds. To
estimate assets managed by institutional prime funds, we used self-
reported fund data from iMoneyNet as of February 28, 2014 to
estimate the percentage of assets managed by institutional prime
funds. We then multiplied the percentage times the assets managed by
prime funds, as provided by Form N-MFP as of February 28, 2014.
Commenters, using data from July 2013 through March 2014, estimated
there are between $5.2-$6.8 trillion Eligible Government Securities.
See Federated DERA I Comment Letter; Fidelity DERA Comment Letter;
ICI DERA Comment Letter; Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------
It is also difficult to estimate the future supply of available
eligible government securities, given market forces and possible
changes in the supply and demand. Commenters, as well as the staff,
noted a number of factors that may affect the supply and demand of
eligible government securities.\1951\ Some factors would affect the net
supply negatively, whereas other factors would affect it positively.
Given the large number of possible factors and the range of possible
effects of each factor on both the supply of eligible government
securities and the economy overall, we cannot estimate the net
macroeconomic effect of the factors overall.\1952\ For this reason, we
discuss these factors qualitatively.
---------------------------------------------------------------------------
\1951\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf, pp. [4-5].
\1952\ We note commenters did not provide data to help the
Commission estimate the effects of these factors. See, e.g.,
BlackRock DERA Comment Letter; Dreyfus DERA Comment Letter;
Federated DERA I Comment Letter; Fidelity DERA Comment Letter;
Invesco DERA Comment Letter; Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------
Several factors could increase the future demand for and decrease
the future supply of eligible government securities. For example, one
commenter discussed the impact of rising interest rates on the demand
for money market funds generally and the concomitant increase in demand
for eligible government securities.\1953\ This commenter suggested, for
example, the ``eventual resolution of the Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation will reduce the
supply,'' \1954\ as will a reduction in the federal deficit.\1955\ The
same commenter noted several factors have increased the demand of
government securities, including the stockpiling of securities by the
Federal Reserve ``as a result of quantitative easing and other policy
initiatives.'' \1956\ The commenter further notes continued trade
deficits, structural and regulatory changes in the markets for
financial contracts, and regulatory capital and liquidity requirements
have increased and are likely to continue increasing the demand for
U.S. government securities.\1957\ We agree with the commenter that many
of these factors will increase the demand for U.S. government
securities.\1958\
---------------------------------------------------------------------------
\1953\ See Federated DERA I Comment Letter.
\1954\ Id.
\1955\ Id.
\1956\ See Federated DERA I Comment Letter; Invesco DERA Comment
Letter.
\1957\ See Federated DERA I Comment Letter; Invesco DERA Comment
Letter; Wells Fargo DERA Comment Letter.
\1958\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf.
---------------------------------------------------------------------------
On the other hand, several factors may decrease the future demand
for and increase the future supply of eligible government securities.
For example, one commenter hypothesized companies, seeking better
investment opportunities, may reduce their holdings of cash
equivalents, thereby reducing their holdings of government money market
funds and eligible government securities.\1959\ This commenter further
suggested that central banks might wind down their open market bond
purchases, which could cause investors to sell short-term and purchase
long-term government securities to earn higher yields. In addition, the
commenter suggested that the Federal Reserve Bank of New York through
its Overnight Reverse Repo Program might increase government repurchase
agreements as part of its quantitative easing exit strategy,\1960\ and
the Treasury could increase the supply of Treasury Floating Rate Notes
designed to be attractive to money market funds and their
investors.\1961\ Because we cannot foresee all of the ways markets will
evolve, we cannot predict the macroeconomic effects of these
changes.\1962\ Nevertheless, we acknowledge changes in the market
arising from the reforms may have macroeconomic effects in the future.
---------------------------------------------------------------------------
\1959\ See Fidelity DERA Comment Letter.
\1960\ See Fidelity DERA Comment Letter; Federated DERA I
Comment Letter. The Federated DERA I Comment Letter notes, however,
using the Program to counteract ``the unintended consequences of the
Commission's reforms may not be an appropriate use, however, of a
monetary policy tool,'' and it may be an unreliable source of
supply.
\1961\ See Fidelity DERA Comment Letter.
\1962\ It is important to also note that arguments supporting
the idea of a shortfall typically ignore the ability of market
participants to adapt to a changing landscape. See SEC Staff
Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf.
---------------------------------------------------------------------------
In a separate analysis, the staff noted that some investors that
currently own eligible government securities might choose to reallocate
these assets to other global safe assets,\1963\ which could free up
eligible government securities for government fund purchase.\1964\ A
number of commenters argued the Commission should focus solely on the
supply of eligible government securities, given that government funds
are largely restricted to investing in eligible government
securities.\1965\ Several commenters also argued investors other than
government funds may be restricted from holding assets other than
eligible government securities, which would preclude them from buying
other assets.\1966\ One commenter pointed out certain global safe
assets can present risks, such as foreign exchange risk,\1967\ credit
risk (securitized assets and investment grade corporate debt),\1968\
and commodity risk (gold),\1969\ and
[[Page 47911]]
suggested investors either may not choose to or cannot hold them.\1970\
Moreover, this commenter suggested that using global safe assets for
regulatory and counterparty purposes may be more expensive than using
eligible government securities.\1971\
---------------------------------------------------------------------------
\1963\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. A ``safe asset'' is defined as any debt asset
that promises a fixed amount of money in the future with virtually
no default risk. Safe assets are generally considered to be
information insensitive: Investors' concerns about asymmetric
information or adverse selection are ameliorated when trading
because the asset's creditworthiness is known with near certainty,
reducing the need for investors to collect information. The safety
of a given asset does not depend on the creditworthiness of the
issuer alone but also is determined by the liquidity of the market
in which the asset trades and by guarantees. Any asset can be
rendered safe by an implicit or explicit promise from a central bank
or credit-worthy institution to buy it if its price falls below a
certain level.
\1964\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. We note government money market funds are largely
precluded from investing in securities other than government
securities. The market for global safe assets may provide investment
alternatives for current investors in government funds and
institutional investors invested in non-government funds that are
willing to reallocate assets.
\1965\ See Dreyfus DERA Comment Letter; Federated DERA I Comment
Letter; Fidelity DERA Comment Letter; ICI DERA Comment Letter;
Invesco DERA Comment Letter; Wells Fargo DERA Comment Letter.
\1966\ See Federated DERA I Comment Letter; Wells Fargo DERA
Comment Letter.
\1967\ Id.
\1968\ See Federated DERA I Comment Letter.
\1969\ Id.
\1970\ Id.
\1971\ Id.
---------------------------------------------------------------------------
We recognize that government funds and certain other investors are
restricted from investing in assets other than eligible government
securities and that other investors may prefer to invest in eligible
government securities. As discussed above, commenters estimated there
are between $5.2-$6.8 trillion of eligible government securities.\1972\
Of these, government money market funds today hold about $959 billion
or 16%, which leaves over $5 trillion or 84% of eligible government
securities in the hands of investors that may be able to reallocate
their investments in eligible government securities to other
assets.\1973\ The staff's analysis, which we credit, suggests any shift
in demand from eligible government securities to global safe assets
more generally would be small relative to the overall supply of global
safe assets, which is estimated to be $74 trillion.\1974\ Consistent
with this argument, a commenter notes that the entire market for
eligible government securities is less than 10% of the market for
global safe assets.\1975\ Based on these comments and the staff's
analysis, we continue to believe that some investors and market
participants may reallocate assets from eligible government securities
to other safe assets, which would free up eligible government
securities for government fund purchase.
---------------------------------------------------------------------------
\1972\ See Federated DERA I Comment Letter; Fidelity DERA
Comment Letter; ICI DERA Comment Letter; Wells Fargo DERA Comment
Letter. One commenter (see the Invesco DERA Comment Letter)
estimated eligible government assets were $2 trillion, which is
substantially lower than the other commenters' estimates. It appears
the estimate does not include repurchase agreements collateralized
by U.S. Treasuries or other government securities and may have other
assumptions, so we focus here on the estimates provided in the other
four letters.
\1973\ Based on Form N-MFP data as of February 28, 2014,
government money market funds had approximately $959 billion in
assets under management.
\1974\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf [3].
\1975\ See Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------
If significant capital flows from institutional prime funds to
demand deposits, issuers and the short-term capital markets may be
affected. If banks invest the additional capital in the short-term
financing markets, we do not anticipate a large impact on issuers or
the short-term capital markets. But if they do not, less capital will
be available to issuers, which could negatively impact capital
formation in the short-term financing market and perhaps increase the
cost of short-term financing. In this scenario, however, banks, which
tend to fund longer-term lending and capital investments, will have
additional monies to invest in the long-term financing market, which
could lower the cost of capital for long-term financing and aid capital
formation in that market.
Several commenters noted that shifts in assets from institutional
prime funds to banks, although reducing systemic risk in money market
funds, might increase systemic risk in the banking system.\1976\ Some
commenters, for example, noted that a shift of assets from money market
funds to bank deposits would increase the size of the banking sector
and investors' reliance on FDIC-deposit insurance, possibly increasing
the concentration of risk in banks.\1977\ Several commenters also
observed that banks in this scenario would likely need to raise capital
to meet capital adequacy standards.\1978\ Several commenters discussed
the effects of evolving regulations (and related regulatory
uncertainty) on banks' willingness to accept large inflows. For
example, they noted that pending proposals to increase banks' leverage
ratios could limit banks' willingness to accept large cash deposits on
their balance sheets, because banks will need to raise large amounts of
new capital to reflect the growth in bank assets.\1979\ Finally,
commenters explained that state and municipal entities might not be
able to find banks willing to accept their large deposits due to the
high cost of collateralizing public bank deposits, a common requirement
among municipalities.\1980\
---------------------------------------------------------------------------
\1976\ See, e.g., Federated X DERA Comment Letter; Fidelity DERA
Comment Letter; Invesco DERA Comment Letter; PFM Asset Mgmt. DERA
Comment Letter; Reich & Tang DERA Comment Letter; UBS DERA Comment
Letter.
\1977\ See, e.g., Comment Letter of James Angel (Feb. 6, 2013)
(available in File No. FSOC-2012-0003) (``Angel FSOC Comment
Letter'') (stating that ``[m]any of the proposed reforms would
seriously reduce the attractiveness of money market funds,'' 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 money market fund 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.''); See, e.g.,
Comment Letter of Federated Investors, Inc. (Jan. 25, 2013)
(available in File No. FSOC-2012-0003) (``A floating NAV would
accelerate the flow of assets to ``Too Big to Fail'' banks, further
concentrating risk in that sector.'').
\1978\ See, e.g., Federated X Comment Letter; Angel Comment
Letter.
\1979\ See, e.g., Federated X Comment Letter; State Street
Comment Letter; American Bankers Ass'n Comment Letter.
\1980\ See, e.g., Ga. Treasurer Comment Letter; WV Bd. of Treas.
Invs. Comment Letter; Chicago Treasurer Comment Letter. The
commenters explained that many state and local governments have laws
that require their bank deposits to be collateralized by marketable
securities at a higher amount than the current $250,000 FDIC deposit
insurance limit (often over 100 percent of the deposits after the
deduction of the amount of deposit insurance).
---------------------------------------------------------------------------
As discussed above, although we are not able to estimate the flows
of capital from institutional prime funds, we do expect some outflow
when investors in institutional prime funds weigh the costs and
benefits of each investment alternative against the prime fund
investment and find an investment alternative a superior allocation.
Given the heterogeneity of investors' preferences and investment
objectives and constraints, we do not expect that all investors will
allocate assets to the same alternative. We expect, for example, that
some investors will allocate assets to government funds, some to demand
deposits, and others to various other alternatives. If, however,
significant capital flows from prime money market funds to demand
deposits, the size of the banking sector will increase. It is uncertain
to what extent an increase in the size of the banking sector is a
concern. First, banks are highly regulated and attuned to managing and
diversifying risks. Second, because the size of the remaining
institutional prime funds' portfolios will, in aggregate, be smaller,
these portfolios could contain a higher percentage of high-quality
prime assets, with improved diversification, and likely could be less
susceptible to heavy redemptions. Taken together, it is not clear what
the net effect on the resilience of the short-term funding markets will
be due to a shift of assets from institutional prime funds to the
banking sector.
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.\1981\
Analysis of Form
[[Page 47912]]
N-MFP data from November 2010 through March 2014 indicates that
financial company commercial paper and asset-backed commercial paper
comprise most of money market funds' commercial paper holdings.\1982\
Thus, we acknowledge that a shift by investors from non-government
money market funds to other investment alternatives could cause a
decline in demand for commercial paper and municipal debt, reducing
these firms and municipalities' access to capital from money market
funds and potentially creating a decline in short-term financing for
them.\1983\ 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 should
be small.
---------------------------------------------------------------------------
\1981\ 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 http://www.federalreserve.gov/releases/z1/Current/z1.pdf.
\1982\ In addition, according to the DERA Study, supra note 24,
``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.''
\1983\ 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 FSOC Comment Letter (stating that ``any
changes [that make money market funds] 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 money market funds .
. . would dampen investor demand for municipal securities and
therefore could deprive state and local governments and other
borrowers of much-needed capital.'').
---------------------------------------------------------------------------
As discussed in the DERA Study, the 2008-2012 increase in bank
deposits coupled with the contraction of money market funds provides
data 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.\1984\ The end result was a contraction of more than 40% or
$647.5 billion in the amount of commercial paper outstanding.
---------------------------------------------------------------------------
\1984\ 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).''
---------------------------------------------------------------------------
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.\1985\ 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 $1.1 trillion at the end of 2008 to
$449.2 billion at the end of 2012.\1986\ As such, we continue to
believe that financial institutions, as well as other firms, will be
able to identify alternate short-term financing sources if the amount
of capital available to purchase financial commercial paper declines in
response to our money market fund rule changes.
---------------------------------------------------------------------------
\1985\ 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.
\1986\ 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 http://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 http://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 Committee on Banking Supervision: Basel III: The Liquidity
Coverage Ratio and liquidity risk monitoring tools (Jan. 2013),
available at http://www.bis.org/publ/bcbs238.pdf (describing
revisions to the liquidity coverage ratio).
---------------------------------------------------------------------------
We recognize, however, that as part of this shift there is the
potential that commercial paper issuers may have to offer higher yields
to attract alternate investors, which would increase issuers' short-
term cost of capital.\1987\ Any increase in yield would likely increase
demand for these investments which in turn could to some extent
mitigate the potential adverse capital formation effects on the
commercial paper market. Issuers, facing higher short-term financing
costs, might consider the trade-offs of shifting into longer-term
sources of financing. To the extent issuers' funding costs rise,
whether short or long term, issuers will be less likely to raise
capital and invest in projects, possibly affecting capital formation
negatively. However, we also note that to the extent that fees and
gates slow capital from leaving money market funds during times of
stress, the fees and gates amendments adopted today should benefit the
short-term funding market. This is because money from maturing
portfolio assets may need to be reinvested in the short-term funding
market, which may help prevent that market from completely locking up
during times of stress as we have experienced during the financial
crisis. To that extent, fees and gates may allow issuers to continue
accessing the short-term capital market served by money market funds
while they identify alternate sources of short-term capital.
---------------------------------------------------------------------------
\1987\ See, e.g., Federated X Comment Letter.
---------------------------------------------------------------------------
Municipalities also could be affected if the new amendments cause
the size or number of municipal money market funds to contract.
Commenters expressed concern about a loss of funding or other adverse
impacts on state and local governments.\1988\ As discussed in detail in
section III.B, however, we anticipate the impact will likely be
relatively small. As of the last quarter of 2013, municipal funds held
approximately 7% of the municipal debt outstanding.\1989\ Of that 7%,
retail investors owned approximately 71% of the assets under
management. Even though municipal funds will be subject to our fees and
gates reforms, we do not anticipate that retail investors in
significant numbers will divest their assets in municipal funds because
these funds should continue to offer price stability,\1990\ yield, and
liquidity in all
[[Page 47913]]
but exceptional circumstances. We therefore anticipate that many retail
investors will continue to find municipal funds to be an attractive
cash management tool compared to other alternatives.
---------------------------------------------------------------------------
\1988\ A number of commenters argued that applying our floating
NAV reform to municipal funds would reduce demand for municipal
securities and raise the costs of financing. See, e.g., Fidelity
Comment Letter (noting that tax-exempt funds purchase approximately
65% of short-term municipal securities and that fewer institutional
investors in tax-exempt funds will lead to less purchasing of short-
term municipal securities by tax-exempt funds and a corresponding
higher yield paid by municipal issuers to attract new investors);
BlackRock II Comment Letter; Federated VII Comment Letter; ICI
Comment Letter; U.S. Mayors Comment Letter.
\1989\ Based on data from Form N-MFP and the Federal Reserve
Board ``Flow of Funds Accounts of the United States'' (Z.1), which
details the flows and levels of municipal securities and loans, to
estimate outstanding municipal debt, (March 6th, 2014), available at
http://www.federalreserve.gov/releases/z1/current/z1.pdf. This
estimate is consistent with a previous estimate presented in U.S.
Securities and Exchange Commission. 2012 Report on the Municipal
Securities Market. The estimate in the 2012 report was based on data
from Mergent's Municipal Bond Securities Database.
\1990\ Retail municipal funds are exempt from the floating NAV
requirement adopted today.
---------------------------------------------------------------------------
Of that 7% of municipal debt outstanding that municipal funds held,
institutional investors, who might divest their municipal fund assets
if they do not want to invest in a floating NAV fund, held
approximately 30% of assets.\1991\ Because we estimate that
institutional municipal funds held approximately 2% of the total
municipal debt outstanding, we believe at most approximately 2% is at
risk of leaving the municipal debt market.\1992\ Of this 2% of the
municipal debt market that institutions hold, we anticipate many
investors that currently invest in institutional municipal funds likely
value the tax benefits of the funds and should choose to continue
investing in municipal funds to take advantage of the tax benefits. In
addition, we anticipate that some investors who qualify as natural
persons and currently are invested in institutional prime funds may
reallocate their assets to retail municipal funds, thereby increasing
investment in retail municipal funds.
---------------------------------------------------------------------------
\1991\ See Dreyfus II Comment Letter indicated that based on
data from iMoneyNet institutional tax-exempt funds represent
``approximately $80 billion in assets,'' which ``constitute
approximately 30% of the current Municipal MMF industry.''
Commission staff estimates based on data from Form N-MFP and
iMoneyNet as of February 28, 2014 confirm these statistics. To
estimate the assets managed by the retail and institutional segments
of municipal funds, we used self-reported fund data from iMoneyNet
as of February 28, 2014 to estimate percentages. We then multiplied
the percentages times the total assets managed by municipal funds,
as provided by Form N-MFP as of February 28, 2014. We note the
retail designation is self-reported and omnibus accounts in these
funds may include both individual and institutional beneficial
owners. For these reasons, our estimates may underestimate the
number of funds with retail investors. In the Proposing Release, we
estimated that retail investors own close to all municipal fund
assets. We now recognize retail investors own approximately 71% of
municipal fund assets.
\1992\ This estimate is calculated as follows: Municipal funds
hold 7.5% of municipal debt outstanding x 29% of municipal assets
held by institutional investors = 2.2% of total municipal debt held
by institutions.
---------------------------------------------------------------------------
Even if municipal funds were to reduce their purchasing of
municipal securities, we expect that other investors may fill the gap.
Between the end of 2008 and the end of 2012, for example, money market
funds decreased their holdings of municipal debt by 34% or $172.8
billion.\1993\ 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. Because
historically other types of investors have increased their investment
in municipal debt when money market funds have decreased their
investment, the Commission expects that other investors may again
increase their investment in municipal debt if money market funds
reduce their funding of the municipal debt market in the future, though
we note that yields on municipal securities could rise. For these
reasons, we do not anticipate the amendments adopted today will
substantially affect capital formation in the municipal debt market.
---------------------------------------------------------------------------
\1993\ The statistics in this paragraph are based on the Federal
Reserve Board's Flow of Funds data.
---------------------------------------------------------------------------
The amendments we are adopting today, including the floating NAV
requirement and enhanced disclosure requirements should improve
informational efficiency in the capital markets by increasing
investors' ability to knowledgably allocate capital. We recognize,
however, that a fund's imposition of a liquidity fee increases the cost
of reallocating their assets while it is in place, whereas a gate
prevents investors from doing so. The additional costs of liquidity and
inability of investors to redeem shares may impede the efficient
allocation of capital and hence capital formation during periods of
market stress because investors will not be able to reallocate capital
as freely. We have tried to mitigate the magnitude of this effect by
reducing the time that gates are in place to at most 10 business days
in any 90-day period (down from the proposed 30 calendar days) and by
adopting a 1% default liquidity fee (down from the proposed 2% fee). We
also expect that funds will impose fees and gates infrequently.\1994\
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\1994\ As discussed in section III.E, the DERA study found that
2.7% of the funds had their monthly weekly liquid assets percentages
fall below 30% and 0.02% of the funds had their monthly weekly
liquid assets percentages fall below 10%.
---------------------------------------------------------------------------
Although we recognize that the reallocation of assets by money
market fund investors may affect efficiency, competition, and capital
formation within the short-term financing markets, the final amendments
reflect our efforts to moderate the amount of assets that may be
potentially redistributed by limiting our fees and gates requirement to
non-government funds and our floating NAV requirement to institutional
prime funds. If shareholders either remain in non-government money
market funds or move to alternatives that invest in similar underlying
assets, the competitive effects are likely to be small. If, however,
investors reallocate (whether directly or through intermediaries)
investments into substantively different assets, the effects may be
larger. In that case, issuers may have to access different investor
bases and perhaps offer higher yields to attract capital, whether from
the smaller money market fund industry or from other investors. Either
way, we recognize that issuers that are unable to offer the required
higher yield may have difficulties raising capital, at least in the
short-term financing markets. However, as discussed in detail earlier
in this section, we can neither precisely estimate the amount of
capital that will be reallocated nor its destination.
The Commission anticipates other competitive consequences and
effects on capital formation as well. For example, we expect managers
of non-government money market funds will have incentives to closely
manage weekly liquid assets and principal risk so as to avoid crossing
the threshold for triggering fees and gates or having a volatile
NAV.\1995\ To manage these risks, fund managers will have incentives to
hold short-maturity, low-risk securities, and as a result the overall
short-term financing markets may tilt toward these issuances. If so,
the prices of these securities are likely to rise and yields may fall.
We anticipate issuers that are able and willing to issue securities
that meet these criteria may gain a competitive advantage over other
issuers in the market. Alternatively, the new amendments may create a
competitive advantage for issuers of higher yielding and riskier assets
that are rule 2a-7-eligible securities if non-government funds pursue
more aggressive investment strategies within the confines of rule 2a-7
or if relatively less risk-averse investors avoid government funds and
instead invest in non-government funds. If so, issuers of higher-
yielding 2a-7-eligible assets may gain a competitive advantage.
---------------------------------------------------------------------------
\1995\ See, e.g., SIFMA Comment Letter; BlackRock II Comment
Letter; Wells Fargo Comment Letter; Peirce & Greene Comment Letter;
Dreyfus Comment Letter; Goldman Sachs Comment Letter.
---------------------------------------------------------------------------
The DERA study pointed out that although the 2010 reforms made
money
[[Page 47914]]
market funds more resilient to both portfolio losses and investor
redemptions, no fund would have been able to withstand the losses that
the Reserve Primary Fund incurred in 2008 without breaking the buck,
and nothing in the 2010 reforms would have prevented the Reserve
Primary Fund's holding of Lehman Brothers debt. We therefore believe
that the costs to participants in the short-term funding market are
acceptable relative to the benefits stemming from advancing our goals
of reducing money market funds' susceptibility to heavy redemptions,
improving their ability to manage and mitigate potential contagion from
redemptions, and increasing the transparency of their risks.
L. Certain Alternatives Considered
In this section, we discuss certain reasonable alternatives that we
considered as potential other methods for achieving our primary reform
goals, as well as a number of other alternatives suggested by
commenters, and discuss their benefits as well as their
limitations.\1996\ The goals of today's reforms include reducing money
market funds' susceptibility to heavy redemptions, improving their
ability to manage and mitigate potential contagion from such
redemptions, and increasing the transparency of their risks, while
preserving, as much as possible, the benefits of money market funds.
Having considered carefully the trade-offs of the alternatives
discussed below, we believe, based on our experience, observations, and
analysis, as well as careful consideration of comments received on the
adopted reforms and alternatives, that the amendments we are adopting
today best effectuate our policy goals.
---------------------------------------------------------------------------
\1996\ This section discusses reasonable alternatives to the
primary fees and gates and floating NAV reforms discussed above. We
also discuss reasonable alternatives to other rule amendments, as
well as more specific or distinct issues, throughout other parts of
the Release. For example, see supra section III.B.5 for a discussion
of alternatives related to decimal place rounding.
---------------------------------------------------------------------------
1. Liquidity Fees, Gates, and Floating NAV Alternatives
In the Proposing Release, we presented a number of reform options.
Among them were standalone floating NAV, standalone fees and gates, and
a combination of fees, gates, and a floating NAV requirement. Today we
are adopting an approach that includes fees and gates for all non-
government money market funds, as well as an additional targeted reform
of a floating NAV for the funds with investors most susceptible to
heavy redemptions, institutional prime funds.\1997\ We are adopting
this approach based on our evaluation, discussed both in other sections
of this Release and below, of our policy goals, experience,
observations, and analysis, as well as careful consideration of
comments received on the following reasonable alternatives.
---------------------------------------------------------------------------
\1997\ We did not propose to apply either the fees and gate or
floating NAV reforms to government money market funds, and
accordingly the final amendments do not apply to government funds,
for the policy reasons discussed in section III.C.1. The analysis of
reasonable alternatives below therefore does not focus on the
potential effects of these alternatives as applied to government
funds.
---------------------------------------------------------------------------
a. Standalone Liquidity Fees and Redemption Gates
One option outlined in the Proposing Release was for non-government
fund boards to be given discretion to impose liquidity fees and permit
imposition of redemption gates under certain conditions, but without
also requiring a floating NAV for institutional prime money market
funds.\1998\ We believe a standalone fee option would reduce money
market funds' susceptibility to heavy redemptions when liquidity costs
are high and fund liquidity is stressed and would allocate liquidity
costs to redeeming shareholders, making them pay for the liquidity that
they receive, rather than transferring such liquidity costs to
remaining shareholders. Gates, in addition to liquidity fees, would
help improve the ability of fund managers and boards to manage and
mitigate potential contagion from high levels of shareholder
redemptions.\1999\ A standalone fees and gates requirement would
eliminate some of the benefits of money market funds as they exist
today for investors, but retain others. Investors would face the
possibility of costly redemptions or the elimination of redemptions
temporarily when fund liquidity is stressed. On the other hand, fees
and gates, as discussed in section III.A and below, would retain the
advantages of a stable-price product, avoiding certain issues
associated with floating NAV funds. A large number of commenters
supported, to varying degrees and with varying caveats, our fees and
gates proposal.\2000\ Many other commenters, however, expressed their
opposition to fees and gates.\2001\ We discuss specific comments on
fees and gates in detail in section III.A.\2002\
---------------------------------------------------------------------------
\1998\ See Proposing Release, supra note 25, at section III.B.
We note that we have adopted this alternative for a certain subset
of funds-namely retail funds that limit their investors to natural
persons. We discuss the reasons why we adopted this alternative for
retail funds, and the tradeoffs involved, in section III.C.2.
\1999\ See section III.A for a detailed discussion of
commenters' responses.
\2000\ See, e.g., Form Letter Type A, Fidelity Comment Letter;
Federated V Comment Letter; Northern Trust Comment Letter.
\2001\ See, e.g., Capital Advisors Comment Letter; Boston
Federal Reserve Comment Letter; Americans for Fin. Reform Comment
Letter; Edward Jones Comment Letter.
\2002\ We discuss the trade-offs of standalone fees versus
standalone gates in section III.L.1.a below.
---------------------------------------------------------------------------
As discussed here and in the Proposing Release, liquidity fees are
designed to preserve the current benefits of principal stability,
liquidity, and a market yield, 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.'' \2003\ Even if a liquidity fee is imposed, fund
investors will continue to be able to access liquidity, although at a
cost. The ability of fund boards to impose liquidity fees when
liquidity costs are high would have many benefits, including reducing
the incentives for shareholders to redeem shares when the fees are in
effect. Liquidity fees will require redeeming shareholders to bear the
liquidity costs associated with their redemptions, rather than
transferring those costs to remaining shareholders. Likewise, fees
would help reduce investors' incentives to redeem shares ahead of other
investors, especially if fund managers deplete their funds' most liquid
assets first to meet redemptions, leaving later redemption requests to
be met by selling less liquid assets. Liquidity fees would protect fund
liquidity by requiring redeeming shareholders to repay funds for the
liquidity costs incurred. For these reasons, we believe liquidity fees
would reduce money market funds' susceptibility to heavy redemptions
when liquidity fees are high and would improve fund managers and
boards' ability to manage and mitigate potential contagion from such
redemptions.
---------------------------------------------------------------------------
\2003\ See Proposing Release, supra note 25, n.343.
---------------------------------------------------------------------------
We also recognize that the possibility of fees and gates being
imposed when a fund is under stress may make the risk of investing in
money market funds more salient and transparent to some investors,
which could sensitize them to the risks of investing in the funds. The
disclosure amendments we are adopting today will require funds to
provide disclosure to investors regarding the possibility of fees and
gates being imposed if a fund's liquidity is significantly stressed.
Funds' disclosures that shareholders may face liquidity fees and
redemption gates may help inform and could perhaps sensitize some of
those investors to some of the risks of investing in money market
funds.
[[Page 47915]]
Redemption gates would stop heavy redemptions in times of market or
fund stress.\2004\ Like liquidity fees, gates would preserve the
current benefits of money market funds under most market conditions.
Funds, however, would be able to use gates to respond to runs by
halting redemptions. Gates would provide a ``cooling off'' period,
which might temper the effects of short-term investor panic, possibly
reducing investors' incentives to redeem shares. In addition, gates
would allow funds to generate additional internal liquidity as assets
mature and would reduce or eliminate the likelihood that funds sell
otherwise desirable assets and engage in ``fire sales.'' They would
also provide time for funds to identify solutions in crises and
communicate the nature of any stresses to shareholders.
---------------------------------------------------------------------------
\2004\ See supra section III.A. We note, however, gates could
prompt pre-emptive runs if investors anticipate them. We believe,
however, that several aspects of today's amendments mitigate this
risk, and the effects of such pre-emptive runs should they occur.
For example, board discretion in imposing gates mitigates this risk.
We have also tried to mitigate the magnitude of this effect by
reducing the time that gates are in place to at most 10 business
days in any 90-day period (down from the proposed 30 days) and
adopted a 1% default liquidity fee (down from a 2% fee).
---------------------------------------------------------------------------
Standalone liquidity fees and gates would preserve many of the
current benefits of money market funds under normal market conditions.
As discussed in the Proposing Release, the ability of funds to impose
liquidity fees and redemption gates, had it been available during the
financial crisis, might have helped some funds manage the heavy
redemptions that occurred and may have helped limit the contagion
effects of such redemptions, though it is impossible to know what
exactly would have happened if money market funds had operated with
fees and gates at that time. Unlike a floating NAV, which affects day-
to-day fund pricing, fund boards would impose liquidity fees and gates
only when liquidity costs are high and fund liquidity is stressed. In
addition, a standalone liquidity fee and redemption gate structure
would preserve many of the benefits of stable price money market funds,
avoiding many of the costs associated with floating NAV funds.\2005\
---------------------------------------------------------------------------
\2005\ As discussed previously, the Commission acknowledges, for
example, some investors may reallocate assets from floating NAV
prime funds to either government money market fund or other stable-
price alternatives, which may impose costs on investors, funds, and
the short-term capital markets. We discuss these effects in more
detail in section III.K.
---------------------------------------------------------------------------
The Commission recognizes, however, that liquidity fees and
redemption gates address some of the risks associated with money market
funds, but cannot address all of the factors that might lead to heavy
redemptions in certain money market funds. As discussed previously, we
have found that certain money market funds (i.e., institutional prime
funds) pose particularly significant risks that fees and gate alone do
not fully address.\2006\ Specifically, fees and gates are intended to
enhance money market funds' ability to manage and mitigate potential
contagion from high levels of redemptions and make investors pay their
share of the costs of the liquidity that they receive. They do not,
however, eliminate the incremental incentive for certain investors to
redeem shares ahead of other shareholders when their money market
fund's shadow price falls below $1.00--a risk to which institutional
prime funds are particularly susceptible, and the potential resultant
dilution of remaining shareholders interests. Thus, we believe a
liquidity fee combined with a redemption gate--without a floating NAV--
will not adequately address this risk of heavy redemptions for
institutional prime funds. However, balanced with the competing goal of
retaining the benefits of money market funds for investors to the
extent possible, as discussed above, we believe that a standalone fees
and gates approach does meet our policy goals when applied to retail
funds.\2007\
---------------------------------------------------------------------------
\2006\ See supra section III.B.
\2007\ The tradeoffs of just a fee or gate (without a floating
NAV) are discussed in section III.A. We note that one commenter
suggested a ``penny rounding'' alternative that, if combined with
fees and gates, is very similar to the fees and gates alternative we
proposed (which included a requirement for penny-rounded pricing).
We discuss this alternative at notes 512-515 and accompanying text.
We are not adopting this suggested ``penny rounding'' alternative
combined with fees and gates for the reasons described in this
section III.L.1.a.
---------------------------------------------------------------------------
b. Standalone Floating NAV
Another option outlined in the Proposing Release was for
institutional prime funds to transact at a floating NAV with no
liquidity fees or gates.\2008\ Most commenters opposed requiring a
standalone floating NAV.\2009\ As we discuss in detail in section
III.B, we believe a floating NAV requirement reduces certain money
market funds' susceptibility to heavy redemptions and improves the
allocation of gains, losses, and costs among shareholders. It does not,
however, fully address the ability of fund managers and boards to
manage and mitigate potential contagion from high levels of shareholder
redemptions. A standalone floating NAV requirement would eliminate some
of the benefits of a stable-price fund for institutional investors,
while retaining other benefits that investors currently experience with
money market funds.
---------------------------------------------------------------------------
\2008\ See Proposing Release, supra note 25, at section III.A.
\2009\ See supra section III.B for a detailed discussion of
comments we received on this issue.
---------------------------------------------------------------------------
First and foremost, we believe a standalone floating NAV would help
reduce institutional prime money market funds' susceptibility to heavy
redemptions by reducing the incremental incentive for shareholders in
these funds to redeem shares ahead of other investors when a fund's
shadow NAV falls below $1.00.\2010\ As discussed in Section III.B, a
floating NAV requirement mandating that institutional prime money
market funds transact at share prices that reflect current market-based
factors (not amortized cost or penny rounding, as currently is
permitted) would lessen investors' incentives to redeem early to take
advantage of transacting at a stable value. As a result, the floating
NAV requirement by itself without an accompanying liquidity fee and/or
redemption gate would help mutualize potential losses and costs among
all investors, including redeeming shareholders.\2011\
---------------------------------------------------------------------------
\2010\ Although most commenters opposed requiring a floating
NAV, a number of commenters did agree that a floating NAV would
address this incremental incentive to redeem. See, e.g., Thrivent
Comment Letter; TIAA-CREF Comment Letter; Fin. Svcs. Roundtable
Comment Letter; SIFMA Comment Letter; Systemic Risk Council Comment
Letter. But see, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter; Federated IV Comment Letter; Ropes & Gray Comment Letter;
ICI Comment Letter; Chamber II Comment Letter.
\2011\ See, e.g., Deutsche Comment Letter; TIAA-CREF Comment
Letter; Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------
A standalone floating NAV, which many observers perceive to be more
equitable than a stable NAV,\2012\ may also minimize investor dilution.
A standalone floating NAV should result in redeeming investors
receiving only their fair share of the fund when there are embedded
losses in the portfolio, thereby avoiding dilution of remaining
shareholders. A standalone floating NAV requirement would also preserve
certain current benefits of money market funds, because investors would
continue to be able to redeem shares during times of market stress
without paying a liquidity fee or waiting for a redemption gate to be
lifted. A standalone floating NAV would also avoid certain costs
associated with liquidity fees and redemption gates.
---------------------------------------------------------------------------
\2012\ See supra section III.B; see also TIAA-CREF Comment
Letter.
---------------------------------------------------------------------------
We anticipate a standalone floating NAV would contribute to the
allocation of money market fund risks in the same ways that a floating
NAV does in a combination approach. As discussed in the Proposing
Release and in section
[[Page 47916]]
III.B, a floating NAV requirement is designed to increase the
allocation of the risks present in money market funds by causing
shareholders to experience gains and losses when a fund's value
fluctuates. Some money market fund investors, accustomed to a stable
NAV, may not appreciate the risks associated with money market funds
whose prices may remain stable, but whose underlying values may
fluctuate in times of market stress. As we have discussed previously,
transacting at prices based on current market values will help ensure
that institutional investors who invest in floating NAV funds do so
only if they are willing to tolerate small fluctuations in share price
in return for potentially higher yield.\2013\ And for those investors
who are unwilling to tolerate the risk that the price fluctuations
reflect, we anticipate they may reallocate their investments to other,
more appropriate alternatives, which may help reduce any redemption
pressure that these investors could have caused in times of stress had
they remained in the funds.\2014\
---------------------------------------------------------------------------
\2013\ See, e.g. Vanguard Comment Letter.
\2014\ See supra section III.B.
---------------------------------------------------------------------------
A standalone floating NAV would not necessarily eliminate, however,
shareholders' incentives to redeem shares from institutional prime
money market funds ahead of other investors when liquidity costs are
high. In times of severe market stress when the secondary markets for
funds' assets become illiquid and liquidity costs are high, investors
may still have an incentive to rapidly redeem shares before their
fund's liquidity dries up. A floating NAV may also not alter
institutional prime money market fund shareholders' incentives to
redeem shares in times of market stress when investors want to shift
from money market funds into securities with greater quality,
liquidity, and transparency. As such, when the situation develops, a
standalone floating NAV would not necessarily prevent heavy shareholder
redemptions in institutional prime money market funds and the related
effects on the short-term capital markets or help fund managers and
boards manage redemptions.\2015\ Thus, a standalone floating NAV would
likely be insufficient to satisfy these important policy goals of the
money market fund reform.
---------------------------------------------------------------------------
\2015\ We have discussed the particular risks posed by
institutional prime funds throughout this Release and especially in
section III.B.
---------------------------------------------------------------------------
We have therefore determined to adopt a floating NAV as a targeted
reform that is intended to supplement the broader liquidity fees and
gates reforms discussed above (as well as other reforms discussed in
sections III.E, III.I, and III.J) by addressing the incremental
incentive for institutional investors to redeem from prime funds. We
believe that an approach that includes both fees and gates for all non-
government money market funds as well as a floating NAV for a subset of
those funds (i.e., institutional prime money market funds) provides
fund managers and boards with targeted and additional tools to manage
heavy redemptions and help limit contagion.
c. Fund Choice of Standalone Floating NAV or Standalone Liquidity Fees
and Redemption Gates
We also considered providing institutional prime money market funds
a choice of either transacting with a floating NAV or being able to
impose liquidity fees and gates in times of stress--in other words,
each institutional prime money market fund would choose to apply either
the floating NAV alternative or the liquidity fees and gates
alternative.\2016\ In the Proposing Release, we discussed how providing
such a choice might allow each money market fund to select the reform
alternative that is most efficient, cost-effective, and preferable to
its shareholders. We suggested such a choice might enhance the
efficiency of our reforms and minimize costs and competitive impacts.
---------------------------------------------------------------------------
\2016\ We note that we did not propose to require retail or
government funds to adopt a floating NAV, and accordingly this
discussion focuses on the tradeoffs between allowing such a choice
for institutional prime funds. We discuss the reasons why we are not
mandating either a floating NAV or fees and gates for government
money market funds, but allowing them to opt in to fees and gates if
they choose in section III.C.1 and discuss why we believe that a
floating NAV is not necessary for retail funds in section III.C.2.
---------------------------------------------------------------------------
A number of commenters offered support for this ``choice'' reform
approach,\2017\ and one commenter specifically opposed it.\2018\ The
commenters who supported allowing funds to choose which reform
alternative to implement argued that this approach would allow the
market to decide which reform was most suitable rather than imposing a
top-down solution. They noted that each alternative offers a varying
set of benefits and drawbacks and that allowing funds to choose which
reform to implement would allow them to offer different kinds of funds
to clients who may have divergent priorities for either liquidity or a
stable NAV.\2019\ These commenters also suggested that letting each
fund choose would allow them to select the approach that they can
implement at lowest cost and with least disruption. The commenters who
supported allowing fund choice between the principal reforms we are
adopting today also emphasized they did not support imposing both
reforms in combination, only alternatively.\2020\ One commenter that
supported fund choice nonetheless suggested intermediaries may be
unwilling to accommodate funds that have two options as they would have
to bear the costs of dealing with both sets of reforms for different
funds.\2021\ The commenter that opposed allowing a choice of structural
reforms stated that having both primary structural reforms available
could be confusing for investors and may promote regulatory
arbitrage.\2022\ They argued that the Commission should adopt a
standardized structure that is simple for investors to
understand.\2023\
---------------------------------------------------------------------------
\2017\ Dreyfus Comment Letter; Legg Mason Comment Letter; ICI
Comment Letter; MFDF Comment Letter.
\2018\ Vanguard Comment Letter.
\2019\ See, e.g., ICI Comment Letter; MFDF Comment Letter; SPARK
Comment Letter.
\2020\ See, e.g., ICI Comment Letter; Dreyfus Comment Letter;
Goldman Sachs Comment Letter.
\2021\ See ICI Comment Letter.
\2022\ See Vanguard Comment Letter.
\2023\ Id.
---------------------------------------------------------------------------
We have carefully considered these comments. However, for the same
reasons that we believe a standalone approach with either fees and
gates or floating NAV would not fully address the risks inherent in
money market funds, we believe, based on our consideration of relevant
risks and policy objectives, allowing institutional prime money market
funds to choose between them also would not address the risks posed by
money market funds. As discussed above, the floating NAV alternative by
itself would not necessarily eliminate shareholders' incentives to
redeem shares from money market funds ahead of other investors when
liquidity costs are high. In times of severe market stress when the
secondary markets for funds' assets become illiquid and liquidity costs
are high, investors may still have an incentive to redeem shares before
their fund's liquidity dries up. A floating NAV also may not alter
money market fund shareholders' incentives to redeem shares in times of
market stress when investors want to shift from money market funds into
securities with greater quality, liquidity, and transparency. As such,
a floating NAV alternative by itself would not necessarily prevent
heavy shareholder redemptions and the related effects on the short-term
capital markets
[[Page 47917]]
or help fund managers and boards manage the rapid heavy redemptions to
which institutional prime funds can be susceptible. These funds would
lack the additional tools of fees and gates to help manage heavy
redemptions and limit contagion. Thus, providing institutional prime
funds an alternative and having some funds adopt a floating NAV would
prevent us from satisfying certain important policy goals of the money
market fund reform for those funds.
Some funds might instead choose to adopt the liquidity fees and
gates option. However, as discussed above, these funds, while having
certain tools to manage heavy redemptions, would have a diminished
ability to address an important factor that can lead to redemptions in
money market funds. Specifically, fees and gates would not eliminate
the incentive for institutional investors to redeem shares ahead of
other shareholders to avoid market-based losses embedded in their
fund's portfolio or mitigate shareholder dilution. Liquidity fees and
gates would not allocate day-to-day gains, losses, and costs to
investors on a proportionate basis, a risk that is particularly
relevant to institutional prime funds.
In addition, we note that today neither funds nor their investors
may necessarily internalize the full likely effects of their own
decisions on other funds and investors and the short-term financing
markets, and thus capital formation.\2024\ The approach that we are
adopting today, which subjects all non-government funds to the fees and
gates reform and only institutional prime funds to the additional
floating NAV requirement, is designed to address these externalities by
reducing money market funds' susceptibility to heavy redemptions and
improving their ability to manage and mitigate potential contagion from
such redemptions. Because allowing institutional prime funds to choose
between either a floating NAV or fees and gates would effectively
negate the combined effects of the reforms that we have found to be
necessary to address their risks, we believe that this is not the most
appropriate alternative, for the reasons discussed above. For these
reasons, we now believe neither liquidity fees and redemption gates nor
floating NAV, alone, addresses all of the factors that might lead to
heavy redemptions in institutional prime money market funds, and
thereby to allow them such a choice would not effectively mitigate all
of the risks that our reforms are designed to address.
---------------------------------------------------------------------------
\2024\ See generally MFDF Comment Letter (discussing, in the
context of fees and gates, that boards need not put significant
emphasis on the broader systemic effects of their decisions).
---------------------------------------------------------------------------
d. Standalone Fees or Standalone Gates
The amendments we are adopting today will allow funds to impose
liquidity fees and redemption gates.\2025\ Some commenters on the
proposal, however, expressed a preference for either just fees or just
gates. For example, some commenters noted a preference for fees over
gates.\2026\ One commenter argued that liquidity fees could slow runs,
as the price for liquidity would be factored into investors' redemption
decisions, whereas a gate could exacerbate the risk of pre-emptive runs
if investors expect gates to be imposed.\2027\ Another commenter stated
that although a liquidity fee might be acceptable to shareholders if it
reflected the cost of liquidity, gates that prevented investors from
accessing their cash would be the least attractive alternative for
institutional investors that use money market funds for cash management
purposes.\2028\
---------------------------------------------------------------------------
\2025\ As discussed in section III.C.1, government funds are not
required to impose fees or gates, but may opt to do so if they
choose. We believe that if a government fund were to choose to opt
into a fee and gate regime, for the same reasons discussed below,
such a fund should have the flexibility to use both tools, rather
than be limited to just one or the other. We further note that
gating is always entirely discretionary (once a fund goes below 30%
weekly liquid assets), and that if a board finds that a fee is not
in the best interests of the fund need not impose it, and thus a
government fund that opted into fees and gates could apply
effectively only a fee or only a gate if the boards finds that using
only one such tools is in the best interests of the fund.
\2026\ See, e.g., Deutsche Comment Letter; Capital Advisors
Comment Letter.
\2027\ See Deutsche Comment Letter.
\2028\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------
Conversely, other commenters expressed a preference for gates over
fees.\2029\ One commenter noted liquidity fees are unlikely to prevent
institutional investors from redeeming shares in a crisis, but that
gates would be more likely to achieve the Commission's goals.\2030\
Similarly, another commenter described gates as the ``most effective
option in addressing run risk,'' but was skeptical as to whether fees
``would deter shareholders from redeeming their shares in a time of
extreme market stress.'' \2031\ Finally, a commenter suggested
implementing only fully discretionary gates but no fees, noting in part
that, ``establishing appropriate triggers and setting properly sized
fees in advance are difficult and likely futile tasks.'' \2032\
---------------------------------------------------------------------------
\2029\ See, e.g., Fein Comment Letter; Peirce & Greene Comment
Letter.
\2030\ See Fein Comment Letter.
\2031\ See U.S. Bancorp Comment Letter.
\2032\ See Peirce & Greene Comment Letter.
---------------------------------------------------------------------------
We continue to believe that funds and their boards should be
permitted to choose between fees and gates but be capable of utilizing
both when determining the best way to address heavy redemptions. As
discussed in section III.1 above, fees and gates can accomplish similar
policy goals, but one may be better suited to one set of circumstances
or funds than the other.\2033\ The flexibility in today's amendments
should address many of the commenters' concerns in favoring one
approach over the other,\2034\ because it gives boards the option to
impose fees, gates, neither or both. The flexibility provided in
today's amendments will allow funds to tailor the redemption
restrictions they employ to market conditions, as well as the
preferences and behavior of their particular shareholder base and to
adapt restrictions over time as they and the industry gain experience
employing such restrictions. Of course, consideration of any such
factors would have to be made in the context of the fund's best
interests.\2035\ The flexibility provided by today's amendments also
allows funds to alter their approach as events unfold. For example, if
a board determines initially that a liquidity fee is in the best
interests of the fund, but the fee turns out to be ineffective in
reducing heavy redemptions, the board
[[Page 47918]]
may then choose to impose a redemption gate. Accordingly, we believe
that providing funds and their boards with the flexibility to choose on
an ongoing basis between fees and gates best meets our policy goals of
reducing money market funds' susceptibility to heavy redemptions and
helping funds manage and mitigate potential contagion from such
redemptions.
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\2033\ As discussed in the Proposing Release, shareholders
valuing principal preservation may prefer a redemption gate over 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 access to that investor's money market fund
shareholdings--it just imposes a greater cost for that liquidity if
the fund is under stress. 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 http://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''); 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 http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf (stating that it ``would not make sense
to restrict the redeemer willing to pay the price of liquidity'');
see also Capital Advisors Comment Letter.
\2034\ See supra section III.A.1.c.i addressing pre-emptive run
concerns and section III.A.2 addressing concerns with default
thresholds and fees. We also note that, to the extent an investor is
seeking to invest in a money market fund for cash management
purposes and views a fund with the ability to impose a fee or gate
as incompatible with cash management, it may alternatively invest in
a government money market fund that does not impose fees and gates.
\2035\ See rule 2a-7(c)(i) and (ii).
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e. Partial Gates
We are adopting amendments to rule 2a-7 that, like the proposal,
will allow a fund board to impose a gate on all redemptions, but that
will not allow for partial redemption gates.\2036\ A number of
commenters advocated allowing the board greater discretion to impose
partial gates.\2037\ For example, some commenters noted partial gates
would provide investors with some immediate liquidity, but allow funds
time to regenerate liquidity or service redemptions under improved
market conditions.\2038\ In addition, a commenter stated that partial
gates would, ``make it easier for a board to determine that a gate is
in the best interests of the fund because a partial gate would impose a
lesser hardship on investors.'' \2039\
---------------------------------------------------------------------------
\2036\ See rule 2a-7(c)(2)(i)(B).
\2037\ See, e.g., Wilmington Trustees Comment Letter; UBS
Comment Letter; Chamber II Comment Letter; ABA Business Law Section
Comment Letter; see also Comment Letter of HSBC Global Asset
Management on the European Commission's Green Paper on Shadow
Banking (May 28, 2012) (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).
\2038\ See, e.g., Wilmington Trustee Comment Letter; ABA
Business Law Section Comment Letter; Deutsche Comment Letter.
\2039\ See ABA Business Law Section Comment Letter.
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Commenters suggested a variety of approaches for imposing partial
gates. For example, a commenter proposed allowing shareholders to
redeem ``at least 50% of their remaining balance at the then basis-
point rounded NAV plus a 1% fee.'' \2040\ Others proposed imposing
partial gates with greater restrictions on shareholders making larger
redemptions and lower or no restrictions on shareholders making smaller
redemptions.\2041\ Another commenter suggested limiting redemptions to
10% of outstanding shares per day and applying this limitation pro rata
among all redeeming shareholders that day, with the balance of
unredeemed shares carried to the next day until all redemption requests
have been met.\2042\ In contrast, other commenters were opposed to the
idea of partial redemption gates, citing significant operational
challenges and costs,\2043\ as well as the potential for arbitrary and
inconsistent application among funds and inequitable treatment among
shareholders.\2044\
---------------------------------------------------------------------------
\2040\ See Capital Advisors Comment Letter.
\2041\ See UBS Comment Letter; Chamber II Comment Letter.
\2042\ See HSBC Comment Letter.
\2043\ See Fidelity Comment Letter; Fin. Info. Forum Comment
Letter; Federated V Comment Letter.
\2044\ See Fidelity Comment Letter.
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We have determined not to permit partial redemption gates under
amended rule 2a-7. An important policy goal of this reform is to
improve funds' ability to manage and mitigate potential contagion from
such redemptions. Partial gates do not fully stop runs, because
shareholders can continue to redeem shares. Although board discretion
to impose partial gates may be effective for individual funds, it may
not address our larger concerns about contagion resulting from rapid
heavy redemptions. There may exist times when full gates are required
to limit the contagion effects of heavy redemptions on remaining
investors and the short-term financing markets, but individual firms
may choose instead to impose partial gates. We also note that a number
of commenters opposed partial gates, noting significant operational
challenges and costs, which are not associated with full gates.\2045\
We also believe the benefits of allowing partial gating is further
diminished now that we are adopting only a 10 business day maximum gate
period, because 10 business days (rather than the 30-day gate under the
proposal) may be a more reasonably manageable period of time during
which investors may not need the safety valve that a partial gate might
afford.
---------------------------------------------------------------------------
\2045\ See, e.g., Fidelity Comment Letter; Fin. Info. Forum
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------
There are several additional potential issues with partial gates.
First, we understand it may be difficult for funds to achieve desired
outcomes with partial gates, and partial gates may create unintended
consequences. For example, when a Florida LGIP suspended redemptions in
2007 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 was subject to a 2% redemption fee.\2046\ We understand
that investors redeemed most of what was allowed under the partial gate
without triggering the redemption fee, which meant the partial gate not
only did not stop the run, but may have triggered redemptions up to
that limit.\2047\
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\2046\ See David Evans and Darrell Preston, Florida Investment
Chief Quits; Fund Rescue Approved, Bloomberg (Dec. 4, 2007).
\2047\ 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 withdrew assets subject to the redemption
fee).
---------------------------------------------------------------------------
Second, partial gates based on the size of redemptions may also be
easily manipulated unless appropriate, but costly and complex,
procedures are put in place to prevent such gaming. For example, a
partial gate that allowed small redemptions could result in investors
redeeming small amounts over a number of days, essentially achieving
large redemptions through multiple smaller redemption
transactions.\2048\ Funds could prevent this sort of gaming by limiting
each shareholder's redemptions to a certain amount, but this type of
restriction would only serve to increase the costs and complexity of
such a gate. Third, a partial gate based on the size of redemptions
could effectively exempt certain types of funds and their shareholders
(e.g., retail funds and their shareholders) from a gating requirement.
---------------------------------------------------------------------------
\2048\ See supra section III.A.1.c herein discussing gaming of
redemption restrictions.
---------------------------------------------------------------------------
Fourth, we also believe partial gates would complicate the fees and
gates requirements as an operational matter. If partial gates were
assessed on a redemption-by-redemption basis (e.g., the size of a
shareholder's redemption), we believe, as one commenter stated, ``[t]he
systems enhancements necessary to track holdings for purposes of
determining each shareholder's redemption limit would be more
complicated, cumbersome, and costly than the changes required to
implement the full gate.'' \2049\ Similarly, complexity would be
compounded by the existence of omnibus accounts, as funds would need to
track all redemptions made by a single investor through multiple
accounts over the course of a day to prevent investors from making
redemptions in excess of the limit imposed by a partial gate in a
single day by spreading them over multiple omnibus accounts.
---------------------------------------------------------------------------
\2049\ See Fidelity Comment Letter.
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f. In-Kind Redemptions
As discussed in the Proposing Release, we requested comment in 2009
[[Page 47919]]
on a potential amendment that would require funds to satisfy redemption
requests in excess of a certain size through in-kind redemptions.\2050\
We also requested comment on this type of redemption restriction when
we requested comment on the PWG Report.\2051\ Almost all commenters on
the PWG alternative opposed it.\2052\ 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.\2053\
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 under stress with
similar adverse consequences for the funds and the short-term financing
markets.\2054\
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\2050\ See 2009 Proposing Release, supra note 66, at section
III.B; PWG Report, supra note 506, at section 3.c. 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. 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 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. See 2009 Proposing Release, supra note 66,
at n.30.
\2051\ See PWG Report, supra note 506, at section 3.c
(discussing requiring that money market funds satisfy certain
redemptions in-kind).
\2052\ But see Proposing Release, supra note 25 at n.472.
\2053\ See Proposing Release, supra note 25 at 233-34 n.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. See Proposing Release, supra note 25, at n.474.
\2054\ See Proposing Release, supra note 25 at n.475.
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In connection with the current reforms, we again asked for comment
regarding possible in-kind redemption restrictions. Two commenters
noted the complexity of implementing this mechanism.\2055\ One of these
commenters suggested that the Commission permit, but not require, money
market funds to meet redemptions by returning a pro rata share of the
fund's assets rather than cash to investors.\2056\ In light of these
comments and comments we previously received, we continue to believe
requiring in-kind redemptions could create operational difficulties
that might prevent funds from treating investors fairly in practice. In
contrast, we anticipate reforms such as liquidity fees and gates would
fulfill many of our policy goals in a manner that is operationally
simpler and potentially fairer to investors than in-kind redemptions.
---------------------------------------------------------------------------
\2055\ See State Street Comment Letter (``State Street agrees
with commenters that requiring in[hyphen]kind redemptions would be
unworkable due to the complex valuation and operational issues that
would be imposed on both the fund and on investors receiving
portfolio securities.''); HSBC Comment Letter.
\2056\ See HSBC Comment Letter.
---------------------------------------------------------------------------
We also note requiring in-kind redemptions would not necessarily
stop runs and the related adverse effects on the short-term financing
markets and capital formation. Rather, we believe the liquidity fees
and gates approach described in section III.A would better achieve our
policy goals, including improving money market funds' ability to manage
and mitigate potential contagion from high levels of redemptions and
helping to preserve the benefits of money market funds for investors
and the short-term financing markets for issuers. We note that money
market funds are already permitted to satisfy redemptions in kind if
they disclose such a possibility in the fund's prospectus.\2057\
---------------------------------------------------------------------------
\2057\ See section 2(a)(32) (defining a redeemable security as a
security where the holder is entitled . . . to receive approximately
his proportionate share of the issuer's current net assets, or the
cash equivalent thereof (italics added)). See also rule 18f-1, which
provides an exemption from certain prohibitions of section 18(f)(1)
of the Act with regard to redemptions in kind and in cash.
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g. Standalone Floating NAV Combined With Only Liquidity Fees or
Redemption Gates
The Commission also considered combining a floating NAV with either
a liquidity fee or a redemption gate; that is, we considered an
alternative where money market funds would be required to maintain a
floating NAV combined with a liquidity fee but not a redemption gate
and an alternative where money market funds would be required to
maintain a floating NAV combined with a redemption gate but not a
liquidity fee. Combining a floating NAV with just a liquidity fee or
just a redemption gate would simplify the operational implementation of
the rule and perhaps make money market funds more attractive to
investors.
These more limited combinations, however, would likely fail to
achieve the policy goals of the money market fund reform to the same
extent as the full set of reforms that we are adopting today. Without
liquidity fees, there would be heightened incentives for shareholders
to redeem in times of market stress before fund managers deplete their
funds' liquidity to meet redemptions. The costs of providing liquidity
to redeeming shareholders would fall on non-redeeming shareholders,
creating a financial inequity between shareholder types.
Similarly, without the possibility of imposing gates, funds would
lose an important tool to manage redemptions during periods of stress.
They would not be able to fully halt redemptions, which could affect
funds' ability to generate internal liquidity as assets mature, perhaps
undermining capital formation. Losing the time necessary to generate
internal liquidity would increase the likelihood funds would have to
sell desirable assets, perhaps at ``fire sale'' prices. Funds would not
have as much time to identify solutions and communicate with investors
as they would with gates. They would also lose the ability to create a
``cooling off'' period, which might temper the effects of short-term
investor panic, possibly reducing investors' incentives to redeem
shares.
Precommiting to either a combination of a floating NAV and fees or
a combination of a floating NAV and gates would reduce funds' ability
to manage heavy redemptions relative to having a floating NAV and both
fees and gates. In addition, it would limit boards' ongoing discretion
to address potential problems. A fund's optimal response to managing
heavy redemptions would likely depend on its particular circumstance,
market conditions, and the appropriateness of imposing a fee or gate.
As discussed in section III.A above, we believe funds are likely to
first impose fees in times of market stress and then to impose gates,
but only if fees fail to control redemptions. That said, the managers
of a fund that experiences a credit event in an otherwise healthy
economy might instead choose to gate their fund to staunch redemptions,
forgoing a liquidity fee because liquidity costs are low. By forcing
funds to precommit to fees or gates (along with a floating NAV), this
alternative limits funds' ability to manage and mitigate potential
contagion from such redemptions.
2. Alternatives in the FSOC Proposed Recommendations
As discussed in the Proposing Release, we considered a number of
alternatives for regulatory reform, including the reforms proposed by
FSOC. We received comment on several of these alternatives. After
considering the comments that FSOC received on their proposed reforms
(the ``FSOC Proposed Recommendations''), as well as the comments we
received on the
[[Page 47920]]
Proposing Release and the economic analysis set forth in this Release,
we have concluded that these alternatives generally would not achieve
our regulatory goals as well as the reforms we are adopting today. We
are, however, today adopting a floating NAV for institutional funds,
which was one proposed reform included in the FSOC Proposed
Recommendations. We discuss below these options, and our principal
reasons for not adopting them (other than the floating NAV for
institutional prime money market funds).
In November 2012, the 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 \2058\--requiring that
money market funds use a floating NAV--is one of the reforms we are
adopting today for institutional prime money market funds. We discuss
this option in section III.B below. The other two options in the FSOC
Proposed Recommendations each would require that money market funds
maintain a NAV buffer, or a specified amount of additional assets
available to absorb daily fluctuations in the value of the fund's
portfolio securities. 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.'' \2059\ The required minimum size of
a fund's NAV buffer would be determined based on the composition of the
money market fund's portfolio according to the following formula:
---------------------------------------------------------------------------
\2058\ See FSOC Proposed Recommendations, supra note 1562, at
section V.A.
\2059\ 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 1562,
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.
---------------------------------------------------------------------------
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, non-redeemable 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).\2060\ 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.\2061\ We note, however, that we
believe this funding method is the most expensive of the three because
of the opportunity costs the fund's sponsor would bear to the extent
that the firms redirect this funding from other essential activities,
as further discussed below.\2062\
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\2060\ See FSOC Proposed Recommendations, supra note 1562, at
section V.B.
\2061\ 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 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 506, 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.
\2062\ 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., Comment Letter of The Systemic Risk Council (Jan. 18,
2013) (available in File No. FSOC 2012-0003) (``Systemic Risk
Council FSOC Comment Letter'') (``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.'')).
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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.\2063\ 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.''
---------------------------------------------------------------------------
\2063\ See FSOC Proposed Recommendations, supra note 1562, at
section V.C.
---------------------------------------------------------------------------
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.\2064\ The
other measures discussed in the FSOC Proposed Recommendations include
more stringent investment diversification requirements (which we are
generally adopting, as discussed in section III.I above), increased
minimum liquidity levels (which we are not adopting), and more robust
disclosure requirements (which we are generally adopting, as discussed
in sections III.E and III.F above).\2065\
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\2064\ See id, at section V.C.
\2065\ 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 are not adopting this alternative.
There is no evidence that current liquidity requirements are
inadequate, and several commenters agreed. See, e.g., ICI Comment
Letter, U.S. Bancorp Comment Letter, Federated Comment Letter. For
example, the DERA 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 DERA Study, supra
note 24. We have therefore determined not to address additional
minimum liquidity requirements at this time.
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[[Page 47921]]
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, and that
we received on the Proposing Release. As we discuss in more detail
below, the Commission is not pursuing these alternatives because we
continue to believe that the imposition of either a NAV buffer combined
with a minimum balance at risk or a stand-alone 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 reforms we are adopting today.
a. NAV Buffer
Several commenters expressed support for a NAV buffer (which we did
not propose), although no commenters explicitly discussed an opposition
to such a buffer as part of their comments on this proposal.\2066\ In
particular, two commenters argued that a capital buffer would reduce
the incentives for a fund to take excessive risk and for investors to
run.\2067\ As discussed in the Proposing Release, 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.\2068\
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\2066\ See, e.g., Americans for Fin. Reform Comment Letter;
Comment Letter of Dorothy B. Sherry (Sept. 21, 2013) (``Sherry
Comment Letter''); Occupy the SEC Comment Letter. However, many
commenters opposed a NAV buffer when included as an alternative in
the FSOC recommendation. See, e.g. Comment Letter of Invesco Ltd.
(Feb. 15, 2013) (available in File No. FSOC-2012-0003) (``Invesco
FSOC Comment Letter''); Blackrock FSOC Comment Letter; Comment
Letter of Independent Directors Council (Jan. 23, 2013) (available
in File No. FSOC-2012-0003) (``IDC FSOC Comment Letter'').
\2067\ See, e.g., Hanson et al. Comment Letter; Squam Lake
Comment Letter.
\2068\ 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 47 (``For a poorly diversified fund with 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 47 (``For a well-diversified 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 59 (``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.''); Comment Letter of
Occupy the SEC (Feb. 15, 2013) (available in File No. FSOC-2012-
0003) (``Occupy the SEC FSOC Comment Letter''), supra note 52
(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).
---------------------------------------------------------------------------
Alternatively, if a buffer were not intended for complete loss
absorption, but rather designed primarily to absorb day-to-day
variations in the market-based 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 \2069\ must
have been designed to absorb daily price fluctuations as well as
relatively large security defaults.\2070\ In fact, a 3% buffer would
accommodate all but extremely large losses, such as those experienced
during the crisis. However, a buffer that 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. Two commenters
disagreed, noting that a capital buffer in the range of three to four
percent would reduce yields for ordinary investors by about five basis
points.\2071\ However, another commenter asserted that a capital buffer
would have a much more dramatic effect on yields by effectively turning
prime money market funds into synthetic Treasury funds.\2072\
Accordingly, as we discuss below, a buffer of the size contemplated by
either alternative in the FSOC Proposed Recommendations appears to be
too costly to be practicable.\2073\
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\2069\ 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.
\2070\ 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.
\2071\ See Americans for Fin. Reform Comment Letter; Squam Lake
Comment Letter.
\2072\ See Craig M. Lewis, The Economic Implications of Money
Market Fund Capital Buffers (Nov. 2013), available at http://www.sec.gov/divisions/riskfin/workingpapers/rsfi-wp2014-01.pdf
(``Lewis'').
\2073\ 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.
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i. Benefits of a NAV Buffer
As discussed in the Proposing Release, 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.\2074\ As noted by commenters, it would preserve
money market funds' stable share price and
[[Page 47922]]
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.\2075\ Like the reforms we are adopting today, the NAV buffer
presents trade-offs between stability, yield, and liquidity.
---------------------------------------------------------------------------
\2074\ See FSOC Proposed Recommendations, supra 1562, at section
V.B.
\2075\ See Americans for Fin. Reform Comment Letter; Squam Lake
Comment Letter.
---------------------------------------------------------------------------
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).\2076\ 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 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.
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\2076\ See, e.g., Occupy the SEC FSOC Comment Letter, supra note
52.
---------------------------------------------------------------------------
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, as noted by commenters, 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.\2077\
---------------------------------------------------------------------------
\2077\ See, e.g., Harvard Business School FSOC Comment Letter,
supra note 47 (``Capital buffers also mean that there is an investor
class that explicitly bears losses and has incentives to curb ex
ante risk taking.''); Americans for Fin. Reform Comment Letter;
Hanson et al. Comment Letter; and Squam Lake Comment Letter.
---------------------------------------------------------------------------
Another potential benefit is that a NAV buffer might provide
counter-cyclical 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.\2078\ 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 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 that is 24% greater than the loss
precipitating the redemptions.
---------------------------------------------------------------------------
\2078\ See, e.g., Comment Letter of J.P. Morgan Asset Management
(Jan. 14, 2013) (available in File No. FSOC-2012-0003) (``J.P.
Morgan FSOC Comment Letter'') (``[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.'').
---------------------------------------------------------------------------
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 short-term financing markets, which
would provide more reliability as to the demand for short-term credit
to the economy.
ii. Costs of a NAV Buffer
The Proposing Release also recognized that there are significant
ongoing costs associated with a NAV buffer. Some commenters agreed that
a capital buffer would impose a cost on funds and their investors, but
these commenters claimed that the magnitude of the costs would be
relatively modest.\2079\ For the reasons discussed below, we disagree
with these commenters that the costs would be relatively modest. Costs
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 experience sudden
losses.\2080\ Such rapid severe redemptions could impair the fund's
business model and viability.
---------------------------------------------------------------------------
\2079\ See Americans for Fin. Reform Comment Letter; Hanson et
al. Comment Letter; Squam Lake Comment Letter.
\2080\ See, e.g., Systemic Risk Council FSOC Comment Letter
(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 a false sense of security in a crisis''). See
also infra note 2091 and accompanying discussion.
---------------------------------------------------------------------------
Another possible implication 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.\2081\
---------------------------------------------------------------------------
\2081\ But see, e.g., U.S. Chamber FSOC Comment Letter (arguing
that ``a NAV buffer is likely to incentivize sponsors to reach for
yield.''); Vanguard FSOC Comment Letter (``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.''); Federated V Comment
Letter (``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.'').
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[[Page 47923]]
The most significant indirect cost of a NAV buffer is the
opportunity cost associated with maintaining a NAV buffer.\2082\ 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.\2083\
---------------------------------------------------------------------------
\2082\ See Lewis, supra note 2072.
\2083\ 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 (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
(``[A]ny capital over 0.75% will make the MMF product uneconomical
for sponsors to offer.''); Comment Letter of Federated Investors,
Inc. (Feb. 15. 2013) (available in File No. FSOC-2012-0003)
(``Federated Investors Feb. 15 FSOC Comment Letter'') (calculating
that ``prime MMFs would no longer be economically viable products''
based on cost estimates provided by the ICI.).
---------------------------------------------------------------------------
The second indirect cost of a NAV buffer is the equilibrium rate of
return that a provider of funding for a NAV buffer would demand.\2084\
An entity that 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, as
noted by at least one commenter, the promised yield, or cost of the
buffer, increases with the relative amount of risk it is expected to
absorb.\2085\ This is a well-known leverage effect.\2086\
---------------------------------------------------------------------------
\2084\ See Lewis, supra note 2072.
\2085\ See Squam Lake Comment Letter.
\2086\ 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.
---------------------------------------------------------------------------
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.\2087\ 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.\2088\ 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.\2089\ Capital is one part of a 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.\2090\
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.
---------------------------------------------------------------------------
\2087\ See the Federal Reserve Board's Web site on Capital
Guidelines and Adequacy, available at http://www.federalreserve.gov/bankinforeg/topics/capital.htm, for an overview of minimum capital
requirements.
\2088\ 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.'').
\2089\ 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).
\2090\ 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.
---------------------------------------------------------------------------
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.\2091\ 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 that value principal
stability and liquidity may no longer view money market funds as viable
investments.
---------------------------------------------------------------------------
\2091\ See, e.g., Federal Reserve Bank Presidents FSOC Comment
Letter (``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.'').
---------------------------------------------------------------------------
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
[[Page 47924]]
fund shareholders. If fund managers are unable to pass through the
yield associated with holding relatively riskier securities (compared
to government securities), like commercial paper or short-term
municipal securities, to money market fund shareholders, it is likely
that they will reduce their investment in these securities.\2092\ 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 that invests in these relatively riskier securities
(e.g., a fund with a WAM of 90 days rather than one with a WAM of 60
days) \2093\ and fund managers cannot pass through the higher
associated yields, it is likely that managers will reduce investments
in these securities because they cannot differentiate their funds on
the basis of yield.
---------------------------------------------------------------------------
\2092\ But see supra note 2081.
\2093\ See DERA Study, supra note 24, at 28-31.
---------------------------------------------------------------------------
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.\2094\
---------------------------------------------------------------------------
\2094\ See, e.g., Invesco FSOC Comment Letter (``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.'').
---------------------------------------------------------------------------
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.
We have carefully considered the comments received on both the PWG
report and our Proposing Release regarding the NAV buffer alternative
and we continue to believe that our original analysis of the costs and
benefits remains appropriate. Specifically, we continue to believe that
a NAV buffer should not be adopted because we feel that a NAV buffer
would reduce yields on money market funds and would therefore render
such funds to be unattractive to many investors to a greater extent
than the reforms we are adopting.
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.\2095\ 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 non-
subordinated 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. The Commission did not
receive any comments on this alternative, and, as discussed below, we
continue to believe that a minimum balance at risk is not the most
appropriate alternative to meet the policy goals of our reforms.
---------------------------------------------------------------------------
\2095\ See FSOC Proposed Recommendations, supra note 1562, at
section V.B.
---------------------------------------------------------------------------
i. Benefits of a Minimum Balance at Risk
As discussed in the Proposing Release, an MBR requirement could
provide some benefits to money market funds. First, it would force
redeeming shareholders to pay for the cost of 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.\2096\ It thus 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.
---------------------------------------------------------------------------
\2096\ See, e.g., Comment Letter of Jeffrey Gordon (Feb. 28,
2013) (available in File No. FSOC-2012-0003) (``Gordon FSOC Comment
Letter'') (``[T]he Minimum Balance at Risk feature is a novel way to
reduce MMF run risk by imposing some of the run costs on the users
of MMFs.'').
---------------------------------------------------------------------------
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,
2014, 43% of prime money market fund assets had a maturity of 30 days
or less.\2097\ 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.
---------------------------------------------------------------------------
\2097\ 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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[[Page 47925]]
ii. Costs of a Minimum Balance at Risk
However, we also recognized that 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 early redeeming investors to bear the losses they
are trying to avoid.
As discussed in section III.A.1 above, there may be 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 may be
sold first because managers can trade at close to their non-distressed
valuations because they do not typically experience 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.\2098\
---------------------------------------------------------------------------
\2098\ 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.''); Comment Letter of
Charles Schwab (Jan. 17, 2013) (available in File No. FSOC-2012-
0003) (``[I]t is not clear to us that holding back a certain
percentage of a client's funds would reduce run risk.'')
---------------------------------------------------------------------------
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). Given that money market funds' largest
commercial paper exposure is to issuances by financial
institutions,\2099\ a reduction in the demand of money market
instruments may have an impact on the ability of financial institutions
to issue commercial paper.\2100\
---------------------------------------------------------------------------
\2099\ See supra section III.K.3.
\2100\ See, e.g., Wells Fargo FSOC Comment Letter (``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.'').
---------------------------------------------------------------------------
The MBR would 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 unsophisticated investors to
understand fully.\2101\
---------------------------------------------------------------------------
\2101\ Several commenters have noted that the MBR would be
confusing to retail investors. See, e.g., Comment Letter of Fidelity
Investments (Feb. 14, 2013) (available in File No. FSOC-2012-0003);
Comment Letter of T. Rowe Price (Jan. 30, 2013) (available in File
No. FSOC-2012-0003).
---------------------------------------------------------------------------
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 record-keepers 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 different
rights: unrestricted shares, holdback shares, and subordinated holdback
shares.\2102\ 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, including
whether board or shareholder approval is necessary.\2103\ 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.\2104\
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\2102\ 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). 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.
\2103\ See Comment Letter of Federated Investors, Inc. (Re:
Alternative 2) (Jan. 25. 2013) (available in File No. FSOC-2012-
0003); March 2012 PWG Comment Letter.
\2104\ Other factors may include the concentration of fund
shares among certain shareholders, the number of objecting
beneficial owners and non-objecting 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.
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As noted above, we did not receive any comments on the MBR
alternative based on our discussion of it in the Proposing Release and
we continue to believe that 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.
3. Alternatives in the PWG Report
As discussed in the Proposing Release, we considered each option
discussed in the President's Working Group on Financial Markets, which
published a report on money market fund reform options in 2010 (the
``PWG
[[Page 47926]]
Report'').\2105\ We discussed these alternatives in the Proposing
Release, and the comments that we had received on several of these
alternatives, as discussed below. We have decided not to pursue these
options because we believe, after considering the comments we received
on the PWG Report, as well as the comments we received on the Proposing
Release and the economic analysis set forth in this Release, that they
would not achieve our regulatory goals as well as the package of
reforms that we are adopting today. We discuss below these options, and
our principal reasons for not adopting them.\2106\
---------------------------------------------------------------------------
\2105\ Report of the President's Working Group on Financial
Markets, Money Market Fund Reform Options (Oct. 2010) (``PWG
Report'') available at http://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.
\2106\ We note we may not have the legal authority to implement
some of the alternatives discussed below, even were we to find that
they might help achieve our regulatory goals.
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a. Private Emergency Liquidity Facility
As discussed in the Proposing Release, one option outlined by the
PWG Report, is a private emergency liquidity facility (``LF'') for
money market funds.\2107\ One comment letter on the PWG Report proposed
a structure for such a facility in some detail.\2108\ 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 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.
---------------------------------------------------------------------------
\2107\ See PWG Report, supra note 506, at 23-25.
\2108\ See ICI Jan 2011 PWG Comment Letter.
---------------------------------------------------------------------------
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 liquidity
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.\2109\ 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.\2110\
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\2109\ 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 2089.
\2110\ See, e.g., ICI Jan 2011 PWG Comment Letter; Letter of the
Dreyfus Corporation (Jan. 10, 2011) (available in File No. 4-619)
(``Dreyfus PWG Comment Letter''); Comment Letter of Federated
Investors, Inc. (Jan. 7, 2011) (available in File No. 4-619).
---------------------------------------------------------------------------
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.'' \2111\ 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.'' \2112\ Another
commenter, although ``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.\2113\ 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.'' \2114\ 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.'' \2115\ Finally, another commenter echoed this concern,
stating:
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\2111\ Comment Letter of BlackRock Inc. (Jan. 10, 2011)
(available in File No. 4-619) (``BlackRock PWG Comment Letter'').
\2112\ 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 2088; Michael C. Keeley & Frederick T.
Furlong, A Reexamination of Mean-Variance Analysis of Bank Capital
Regulation, 14 J. of Banking and Fin. 69 (1990).
\2113\ Comment Letter of Wells Fargo Funds Management, LLC (Jan.
10, 2011) (available in File No. 4-619) (``Wells Fargo PWG Comment
Letter'').
\2114\ Id.
\2115\ Comment Letter of Fidelity Investments (Jan. 10, 2011)
(available in File No. 4-619) (``Fidelity Jan 2011 PWG Comment
Letter'').
[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 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.\2116\
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\2116\ Comment Letter of Federal Reserve Bank of Richmond (Jan.
10, 2011) (available in File No. 4-619) (``Richmond Fed PWG Comment
Letter'').
A private liquidity facility was also discussed at the 2011
Roundtable, where many participants made points
[[Page 47927]]
and expressed concerns similar to those discussed above.\2117\
---------------------------------------------------------------------------
\2117\ See, e.g., Roundtable Transcript, supra note 63. (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).
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The Commission did not receive any comments regarding this
alternative after we proposed our reforms. However, as noted in the
Proposing Release, we have considered comments on the PWG Report, and
our staff has spent considerable time evaluating whether an LF would
successfully mitigate the risk of liquidity runs in money market funds
and change the economic incentives of market participants. We continue
to believe that this alternative should not be adopted for the reasons
discussed in the Proposing Release, including, 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.\2118\ 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
without additional loss protection would not sufficiently prevent
widespread liquidity-induced runs on money market funds.
---------------------------------------------------------------------------
\2118\ 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.'')
---------------------------------------------------------------------------
We also continue to be 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 liquidity 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
As discussed in the Proposing Release, 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.\2119\ 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 liquidity runs in money market funds and their detrimental impacts
on investors and capital formation.\2120\ Insurance might replace 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
liquidity runs.
---------------------------------------------------------------------------
\2119\ 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 2089.
\2120\ Authority for a guarantee program like the Temporary
Guarantee Program for Money Market Funds has since been removed. See
Emergency Economic Stabilization Act of 2008 Sec. 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).
---------------------------------------------------------------------------
As noted in the Proposing Release, although a few commenters on the
PWG Report expressed some support for a system of insurance for money
market funds,\2121\ most opposed this potential reform option.\2122\
Those commenters expressed concern that government insurance would
create moral hazard and encourage excessive risk taking by funds.\2123\
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.\2124\ For example, one commenter stated that:
---------------------------------------------------------------------------
\2121\ See, e.g., Richmond Fed PWG Comment Letter (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'').
\2122\ 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; Dreyfus PWG Comment Letter; Fidelity Jan 2011 PWG Comment
Letter; Wells Fargo PWG Comment Letter; Comment Letter of John M.
Winters (Jan. 5, 2011) (available in File No. 4-619) (``Winters PWG
Comment Letter'').
\2123\ See, e.g., American Bankers PWG Comment Letter; BlackRock
PWG Comment Letter; ICI Jan 2011 PWG Comment Letter; Wells Fargo PWG
Comment Letter.
\2124\ See, e.g., ICI Jan 2011 PWG Comment Letter; Wells Fargo
PWG Comment Letter.
``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 assets from
these funds during periods of severe market stress.'' \2125\
---------------------------------------------------------------------------
\2125\ See ICI Jan 2011 PWG Comment Letter.
[[Page 47928]]
---------------------------------------------------------------------------
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.\2126\ They also
stated that they did not believe any private insurance coverage would
have sufficient capacity.\2127\ However, some commenters on our
Proposing Release supported a system of insurance for money market
funds, noting that historically insurance has provided stability during
times of stress.\2128\
---------------------------------------------------------------------------
\2126\ See, e.g., BlackRock PWG Comment Letter; Fidelity Jan
2011 PWG Comment Letter; Dreyfus PWG Comment Letter; Wells Fargo PWG
Comment Letter; Winters PWG Comment Letter.
\2127\ See, e.g., BlackRock PWG Comment Letter; Fidelity Jan
2011 PWG Comment Letter; Wells Fargo PWG Comment Letter; Winters PWG
Comment Letter.
\2128\ See Comment Letter of John Chang (June 27, 2013) (``Chang
Comment Letter''); Comm. on Cap. Mkt. Reg. Comment Letter.
---------------------------------------------------------------------------
We have carefully considered the comments on the PWG Report and our
Proposing Release. However, considering foremost that we do not have
regulatory authority to create a public insurance scheme for money
market funds, we are not pursuing this option. Separately, we continue
to believe that it would not 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 risk-taking 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.\2129\ If insurance actually increases moral
hazard and decreases corresponding market discipline, it may in fact
increase rather than decrease money market funds' susceptibility to
liquidity runs. If the only way to counter these incentives was by
imposing a very costly regulatory structure and risk-based pricing
system our reforms 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.
---------------------------------------------------------------------------
\2129\ See, e.g., Yuk-Shee Chan et al., Is Fairly Priced Deposit
Insurance Possible?, 47 J. Fin. 227 (1992).
---------------------------------------------------------------------------
c. Special Purpose Bank
In the Proposing Release, we also evaluated whether money market
funds should be regulated as special purpose banks. Stable net asset
value money market fund shares can bear some similarity to bank
deposits.\2130\ Some aspects of bank regulation could be used to
mitigate some of the risks described in section II above.\2131\ 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. We did not receive any comments on this
alternative.
---------------------------------------------------------------------------
\2130\ See supra note 2090 and accompanying text.
\2131\ Id.
---------------------------------------------------------------------------
As the PWG Report noted, and as commenters reinforced, there are a
number of drawbacks to regulating money market funds as special purpose
banks. Although a few commenters expressed some support for this
option,\2132\ almost all commenters on the PWG Report addressing this
possible reform option opposed it.\2133\ 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.\2134\ 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.\2135\ For example, one of these
commenters 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.''
\2136\ 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.\2137\
---------------------------------------------------------------------------
\2132\ See Volcker PWG Comment Letter (``MMMFs that desire to
offer their clients bank-like 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 (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.'').
\2133\ See, e.g., BlackRock PWG Comment Letter; Fidelity Jan
2011 PWG Comment Letter; ICI Jan 2011 PWG Comment Letter; Comment
Letter of the Institutional Money Market Funds Association (Jan. 10,
2011) (available in File No. 4-619) (``IMMF Comment Letter'').
\2134\ See, e.g., Richmond Fed PWG Comment Letter; ICI Jan 2011
PWG Comment Letter.
\2135\ See, e.g., Comment Letter of the Mutual Fund Directors
Forum (Jan. 10, 2011) (available in File No. 4-619) (``MFDF PWG
Comment Letter''); Fidelity Jan 2011 PWG Comment Letter; ICI Jan
2011 PWG Comment Letter.
\2136\ See Fidelity Jan 2011 PWG Comment Letter.
\2137\ See, e.g., Fidelity Jan 2011 PWG Comment Letter; ICI Jan
2011 PWG Comment Letter.
---------------------------------------------------------------------------
Foremost, we are not pursuing this option because we lack
regulatory authority to transform money market funds into special
purpose banks. Separately, however, we continue to believe that the
potential costs involved in creating a new special purpose bank
regulatory framework to govern money market funds are not 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
would not be well tailored to the structure of and risks involved in
money market funds compared to the reforms we are adopting in this
Release. As noted above, we received no comments on this alternative
after the Proposing Release was issued. After considering our lack of
regulatory authority to transform money market funds into special
purpose banks as well as the views expressed in the PWG comment letters
and for the reasons set forth above, we continue to believe that
transforming money market funds into special purpose banks is not the
most appropriate reform.
d. Dual Systems of Money Market Funds
In the Proposing Release, we evaluated options that would institute
a dual system of money market funds, where either institutional money
market
[[Page 47929]]
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,\2138\ 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 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).
---------------------------------------------------------------------------
\2138\ See PWG Report, supra note 506, at 29-32.
---------------------------------------------------------------------------
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 decision to not subject retail and government money
market funds to a floating NAV requirement and to not subject
government money market funds to a fees and gates requirement in effect
creates a dual system, which we discuss in greater detail in section
III.C.1.
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 liquidity 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 being adopted today.
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 both
types of money market funds even if only one type experiences
difficulty.\2139\
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\2139\ 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 http://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.'').
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However, 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 continue to
believe that a dual system of money market fund regulation involving
these enhanced regulatory constraints should not be adopted. We did not
receive any comments on these types of dual systems. However, as noted
above, our current reforms would to some extent create a dual system of
money market funds, and we discuss in greater detail our rationale for
that approach, together with an analysis of commenter's views and the
economic effects of that approach, in section III.C.1.
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
changes. As stated in the Proposing Release, we are taking this
opportunity to amend rule 2a-7 to clarify the operation of these
provisions. In addition, we are also amending rule 2a-7 to state more
clearly a limit we imposed on money market funds' investments in second
tier securities in 2010.\2140\ Two commenters stated that they
supported our clarifying amendments but did not comment on any specific
provisions of the amendments.\2141\ One of these commenters generally
supported our amendments but did not address or discuss any costs or
benefits.\2142\ The second commenter stated that it believed the
clarifying amendments conform with current fund practices, that there
would be no costs to funds that may not currently conform to these
amendments, and that there would be little to no effect on market
efficiency, competition or capital formation.\2143\ A third commenter
stated that most, if not all, money market funds currently conform to
the proposed clarifying amendments, and stated that it does not
anticipate a significant cost burden to the industry in conforming with
any of the proposed amendments.\2144\ This commenter specifically
supported certain of the amendments and provided comment on certain
specific provisions of the amendments.\2145\ We discuss these comments
below. No commenters objected to the proposed clarifying amendments.
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\2140\ In addition, we are adopting as proposed, 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 is changing under our
amendments. Specifically, we are replacing references to
``paragraphs (c)(2), (c)(3), and (c)(4)'' with ``paragraph (d)''.
\2141\ See U.S. Bancorp Comment Letter; Fidelity Comment Letter.
\2142\ See Fidelity Comment Letter.
\2143\ See U.S. Bancorp Comment Letter.
\2144\ See State Street Comment Letter.
\2145\ Id.
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As stated in the Proposing Release, we believe that for funds that
are already acting consistently with our amendments, there will be no
associated costs. We requested comment as to whether there would be any
costs to funds that may not currently conform to the clarifying
amendments. As noted above, no commenter provided any quantification of
potential costs or benefits but one commenter suggested that there
would be no costs to funds that may not currently conform to the
clarifying amendments \2146\ and one commenter stated that it does not
anticipate a significant cost burden to the industry in conforming with
the proposed amendments.\2147\ As stated in the Proposing Release, we
understand that most funds currently comply with our clarifying
amendments and did not receive comments stating otherwise, except that
one commenter noted that funds do not always include open sales
receivables as liquid assets, and do not necessarily determine maturity
for short-term floating rate securities in the
[[Page 47930]]
manner proposed by the amendment.\2148\ This commenter did note
however, that it agreed that most, if not all money market funds
currently conform to the proposed clarifying amendments.\2149\ We
therefore expect that the clarifying amendments will likely not result
in any significant economic effects or quantifiable costs or benefits.
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\2146\ See U.S. Bancorp Comment Letter.
\2147\ See State Street Comment Letter.
\2148\ Id.
\2149\ Id.
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1. Definitions of Daily Liquid Assets and Weekly Liquid Assets
We are adopting, as proposed, amendments to clarify certain
characteristics of instruments that qualify as a ``daily liquid asset''
or ``weekly liquid asset'' for purposes of the rule. First, we are
making clear that money market funds cannot use the maturity-shortening
provisions in current paragraph (d) of rule 2a-7 regarding interest
rate readjustments \2150\ when determining whether a security satisfies
the maturity requirements of a daily liquid asset or weekly liquid
asset,\2151\ which include securities that will mature within one or
five business days, respectively.\2152\ Using an interest rate
readjustment to determine maturity as permitted under current paragraph
(d) for these purposes allows funds to include as daily or weekly
liquid assets securities that the fund would not have a legal right to
convert to cash in one or five business days. This is not 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.\2153\
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\2150\ See current 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).
\2151\ See rule 2a-7(a)(8); rule 2a-7(a)(34). The amended
definitions require funds to determine a security's maturity in the
same way they must calculate for purposes of determining WAL under
amended rule 2a-7(d)(1)(iii).
\2152\ Current 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.
Current 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.
\2153\ See 2010 Adopting Release, supra note 17, at text
following n.213.
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Second, we are adopting as proposed, amendments 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.\2154\ Our amendment clarifies that interest-bearing agency
notes that are issued at a discount do not qualify.\2155\ We understand
that these interest-bearing agency notes issued at a discount are
extremely rare and 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.\2156\
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\2154\ See rule 2a-7(a)(34)(iii).
\2155\ 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.
\2156\ See 2010 Adopting Release, supra note 17, 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 in 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.
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Finally, we are amending as proposed, rule 2a-7 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.\2157\ 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. A fund (or its adviser)
could include these receivables in daily and weekly liquid assets if
the fund (or its adviser) has no reason to believe that the buyer might
not perform.
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\2157\ See rule 2a-7(a)(8)(iv); rule 2a-7(a)(34)(v).
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We continue to understand that the instruments that most money
market funds currently hold as daily and weekly liquid assets currently
conform to the amendments and that these practices are consistent with
positions our staff has taken in informal guidance to money market
funds.\2158\ Although one commenter noted that it is not always typical
for money market funds to include open sales receivables as liquid
assets, this commenter also stated that most, if not all, money market
funds currently conform to the proposed amendments.\2159\ The first two
clarifying amendments discussed above are designed to make clear 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.\2160\ 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. We continue to believe that by including certain
receivables as daily and weekly assets, funds will benefit because the
types of assets that can satisfy those liquidity requirements will be
increased.
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\2158\ See Staff Responses to Questions about Money Market Fund
Reform, (revised Nov. 24, 2010) (http://www.sec.gov/divisions/investment/guidance/mmfreform-imqa.htm) (``Staff Responses to MMF
Questions''), Questions II.1, II.2, II.4.
\2159\ See State Street Comment Letter.
\2160\ See rule 2a-7(a)(8)(iii) (definition of daily liquid
assets); rule 2a-7(a)(34)(iii) and (iv) (definition of weekly liquid
assets).
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We also continue to believe that there would not be any significant
costs associated with our amendments to the definitions of daily and
weekly liquid assets. We do not anticipate that there will be
operational costs for any funds that currently hold securities that
will no longer qualify as daily or weekly assets because those
securities likely would mature before the compliance date for our
amendments.\2161\ Because we continue to believe that most money market
funds are currently acting consistently with the amendments that
clarify assets that qualify as daily and weekly assets, we do not
anticipate that the amendments will have any effect on efficiency or
capital formation. To the extent that some funds' practices do not
already conform, however, the clarifications may eliminate any
competitive advantages that may have resulted from those practices,
although we expect that any such advantages would have been small
because the amendments make minor clarifying changes to the assets that
qualify as daily and weekly liquid assets but do not otherwise remove a
significant portion of assets that would otherwise
[[Page 47931]]
qualify as daily or weekly liquid assets. We did not receive comments
suggesting otherwise.
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\2161\ See current rule 2a-7(a)(12)(i) (An eligible security
must have a remaining maturity of no more than 397 days); see infra
section III.N.4 (discussing the compliance date for the clarifying
amendments).
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2. Definition of Demand Feature
We are amending the definition of demand feature in rule 2a-7 as
proposed 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.\2162\ Our
amendment eliminates the requirement that a demand feature be
exercisable at any time on no more than 30 calendar days' notice.\2163\
---------------------------------------------------------------------------
\2162\ See rule 2a-7(a)(9).
\2163\ 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 ABS
unconditionally to receive principal and interest within 397
calendar days of making demand. See current rule 2a-7(a)(9).
---------------------------------------------------------------------------
One commenter addressed this proposed clarifying amendment, stating
that it agreed that 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.\2164\ Eliminating the requirement
that a demand feature be exercisable at any time on no more than 30
days' notice removes from rule 2a-7 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.\2165\ Because, as
discussed in section II.E.1 above, the 2010 amendments added
significant new provisions to enhance the liquidity of money market
funds, we continue to believe it is unnecessary to continue to require
that demand features be exercised at any time on no more than 30 days'
notice.\2166\ Therefore, the demand feature definition will focus on
funds' ability to receive payment within 397 calendar days of exercise
of the demand feature.
---------------------------------------------------------------------------
\2164\ See State Street Comment Letter.
\2165\ 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 1735, at
accompanying nn.151-152.
\2166\ Our amendments are also 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 http://www.sec.gov/divisions/investment/noaction/2009/citigroupglobal052809-2a7.htm.
---------------------------------------------------------------------------
As stated in the Proposing Release, we believe that 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. One commenter agreed that limiting the 30-day
notice requirement may improve efficiency by simplifying the operation
of rule 2a-7.\2167\ As noted in the Proposing Release, our amendment
will permit funds to purchase securities with demand features from a
larger pool of issuers. We continue to believe that permitting funds to
purchase securities with demand features from a larger pool of issuers
may promote competition among issuers and facilitate capital formation
because issuers will have a higher number of other issuers to compete
against in selling securities to funds, which in turn may incentivize
issuers to develop new or additional securities with demand features.
We also continue to believe that our amendment will not impose costs on
funds, and did not receive comment indicating otherwise.\2168\ One
commenter agreed that it did not anticipate any additional cost to the
industry in connection with this amendment.\2169\
---------------------------------------------------------------------------
\2167\ See State Street Comment Letter.
\2168\ 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 amendment will provide any benefits or
impose any costs with respect to these rules, other than those
described above. We also are updating 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 ``Sec. 270.2a-7(a)(9)'' and ``Sec. 270.2a-
7(a)(18)'') and rule 31a-1(b)(1) (replacing the references to ``rule
2a-7(a)(8)'' and ``rule 2a-7(a)(15)'' with ``Sec. 270.2a-7(a)(9)''
and ``Sec. 270.2a-7(a)(18)'').
\2169\ See State Street Comment Letter.
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3. Short-Term Floating Rate Securities
We are also amending rule 2a-7 as proposed to clarify the method
for determining WAL for short-term floating rate securities.\2170\ WAL
is similar to a fund's WAM, except that WAL is determined without
reference to interest rate readjustments.\2171\ Under current rule 2a-
7, a short-term variable rate security, the principal of which 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.'' \2172\ 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.\2173\
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\2170\ See rule 2a-7(i)(4).
\2171\ See current rule 2a-7(c)(2)(iii).
\2172\ See current rule 2a-7(d)(2).
\2173\ See current 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); current rule 2a-7(a)(15) (defining
``floating rate security''); current rule 2a-7(a)(31) (defining
``variable rate security'').
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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.\2174\ The omission of an explicit
reference to demand features in the maturity-shortening 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.\2175\
Therefore, we are amending 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.\2176\
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\2174\ See 1996 Adopting Release, supra note 1735, 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).
\2175\ 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. See current rule 2a-7(d)(5).
\2176\ See rule 2a-7(i)(4).
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As stated in the Proposing Release, we understand that most money
market funds currently determine maturity for
[[Page 47932]]
short-term floating rate securities consistent with our
amendment.\2177\ Although one commenter noted that it does not
determine maturity for short-term floating rate securities in the
manner consistent with the proposed amendment and instead uses the rate
reset date regardless of the type of security, this commenter did state
that most, if not all, money market funds currently conform to the
proposed clarifying amendments.\2178\ This commenter also noted that it
agreed that there would be minimal cost related to the proposed
amendment.\2179\ Accordingly, we continue to believe that the amendment
will likely not result in costs to most funds and that to the extent a
fund may not already act consistently with our amendment, the amendment
will likely not result in significant costs to such a fund. Any funds
that currently limit or avoid 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 amendments should address those effects. Because
we continue to believe that most funds currently interpret the maturity
requirements as we provide in our amendments, we believe that although
our changes may produce benefits, these benefits are not quantifiable
because we cannot predict the extent to which, absent our amendments,
funds may have decided to interpret the maturity requirements
differently in the future. For those funds that do not currently
interpret the maturity requirements as we provide in our amendments, we
are unable to estimate any quantifiable benefits because we are unable
to predict the extent to which a fund may increase investments in
short-term floating rate securities that are higher yielding than
alternative investments in the fund's portfolio, and did not receive
any comments on such issue. We also believe that our amendments will
not result in a significant, if any, impact on efficiency or capital
formation. We did not receive any comments suggesting otherwise.
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\2177\ 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 http://www.sec.gov/divisions/investment/noaction/2010/ici081010.htm.
\2178\ See State Street Comment Letter.
\2179\ Id.
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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.\2180\ As discussed in the Proposing Release, 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 are amending rule
2a-7 as proposed 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.\2181\
---------------------------------------------------------------------------
\2180\ See 2010 Adopting Release, supra note 17, at nn.65-69 and
accompanying text.
\2181\ See rule 2a-7(d)(2)(ii).
---------------------------------------------------------------------------
We continue to believe that most money market funds currently
determine the remaining maturity for second tier securities consistent
with this amendment. Accordingly, we continue to believe that our
amendment will likely not result in costs to funds or impact
competition, efficiency, or capital formation. In cases where the 45-
day limit applicable to second tier securities is determined with
reference to the maturity-shortening provisions for interest rate
adjustments for certain funds, such funds that alter their future
portfolio investments to conform to this amendment may benefit from
increased liquidity. In addition, as we noted in the Proposing Release,
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 compliance date for our
amendments.\2182\ We did not receive any comments suggesting otherwise.
---------------------------------------------------------------------------
\2182\ See infra section III.N.4 (discussing the compliance date
for the clarifying amendments).
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N. Compliance Dates
The compliance dates for our amendments are set forth below. The
compliance date for our floating NAV and liquidity fees and gates
amendments is October 14, 2016. The compliance date for new Form N-CR
is July 14, 2015 and the compliance date for our diversification,
stress testing, disclosure, Form PF, Form N-MFP, and clarifying
amendments is April 14, 2016. If any provision of these rules, or the
application thereof to any person or circumstance, is held to be
invalid, such invalidity shall not affect other provisions or
application of such provisions to other persons or circumstances that
can be given effect without the invalid provision or application.
1. Compliance Date for Amendments Related to Liquidity Fees and Gates
The compliance date for our amendments related to liquidity fees
and gates, including any related amendments to disclosure, is October
14, 2016.\2183\ We are adopting a compliance period of 2 years for
money market funds to implement the fees and gates amendments instead
of the proposed one-year compliance period. One commenter argued that
the compliance period for our fees and gates amendments should be
reduced.\2184\ Several commenters, however, argued that our fees and
gates amendments require at least 2 years to implement.\2185\ For
example, one commenter stated that the multiple programming
requirements and costs involved suggest that 2 years is a reasonable
amount of time to require implementation of fees and gates.\2186\ In
addition, a few commenters recommended extending the compliance period
for fees and gates to 3 years.\2187\ After further consideration, we
have decided to extend the compliance period to 2 years.
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\2183\ We expect a fund to make any related changes to
disclosure at the time the fund implements the amendments related to
fees and gates.
\2184\ See Santoro Comment Letter.
\2185\ See, e.g., Dreyfus Comment Letter; UBS Comment Letter.
\2186\ See Dreyfus Comment Letter.
\2187\ See Fidelity Comment Letter.
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We expect that providing a longer compliance period will allow
additional time for money market funds and their sponsors and service
providers to conduct the requisite operational changes to their systems
to implement these provisions, and for fund sponsors to restructure or
establish new money market funds if they choose to rely on an available
exemption.\2188\ It also will provide a substantial amount of time for
money market fund shareholders to consider the reforms and make any
[[Page 47933]]
corresponding changes to their investments. In addition, we have
decided to adopt a two-year compliance period in order to provide a
uniform compliance date for the floating NAV and fees and gates
amendments, which we believe will provide money market funds with a
smoother transition and prevent funds from having to make various
operational and compliance changes multiple times. Accordingly, the
compliance date is 2 years after the effective date of the adoption of
the amendments to rule 2a-7(c)(2) and other related provisions of rule
2a-7 that apply to the liquidity fees and gates amendments, rule 22e-
3(a)(1) and (d), rule 30b1-7, rule 30b1-8, rule 482(b)(3)(i) and
(b)(4), Parts E-G of Form N-CR, Form N-MFP and Items 3, 4(b)(1), and
16(g)(1) of Form N-1A.
---------------------------------------------------------------------------
\2188\ See, e.g., Fidelity Comment Letter (stating that, as the
SEC acknowledges, in addition to the requisite systems modifications
that fund sponsors and service providers must implement, many fund
sponsors may need to restructure or establish new money market funds
if they chose to rely on any exemptions available).
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2. Compliance Date for Amendments Related to Floating NAV
The compliance date for our amendments related to floating NAV,
including any related amendments to disclosure, is October 14,
2016.\2189\ We are adopting, as proposed, a compliance period of 2
years for money market funds to implement the floating NAV amendments.
A few commenters stated that they agreed that the transition period for
the floating NAV amendments should be at least 2 years.\2190\ Most
commenters, however, argued for a compliance period longer than the
proposed two-year period,\2191\ with some commenters specifically
arguing that the floating NAV amendments require at least 3 years to
implement.\2192\ Several commenters suggesting a longer compliance
period argued that adopting a floating NAV would require significant
operational modifications.\2193\ In addition, many of the commenters
recommending a longer compliance period argued that the relevant tax
and accounting issues should be resolved by the appropriate regulator
well before the compliance date of any final money market fund
reform.\2194\ As we discuss above in section III.B.6, we have been
informed that, the Treasury Department and the IRS today will propose
new regulations and issue a revenue procedure (with an effective date
of 60 days after publication of today's reforms in the Federal
Register) that address relevant tax and accounting issues associated
with our amendments.\2195\ A two-year compliance period also will allow
time for the Commission to consider finalizing rules removing NRSRO
ratings from rule 2a-7, so that funds could make many of the
compliance-related changes at one time.
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\2189\ We expect a fund to make any related changes to
disclosure at the time the fund implements the amendments related to
floating NAV.
\2190\ See, e.g., T. Rowe Price Comment Letter; HSBC Comment
Letter; Northern Trust Comment Letter.
\2191\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter; Fidelity Comment Letter.
\2192\ See, e.g., ICI Comment Letter; Goldman Sachs Comment
Letter; Legg Mason Comment Letter.
\2193\ See, e.g., ICI Comment Letter; Legg Mason & Western Asset
Comment Letter.
\2194\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter; J.P. Morgan Comment Letter; ABA Business Law Section Comment
Letter.
\2195\ See supra section III.B.6.
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After further consideration, we believe it is appropriate to adopt
a compliance period of 2 years. We expect that a two-year compliance
period will provide time for funds and their shareholders to make any
operational modifications necessary to transition to a floating NAV. In
addition, we expect that a two-year compliance period will allow time
for funds to implement any needed changes to their investment policies
and train staff, and also provide time for investors to analyze and
consider how they might wish to adjust their cash management
strategies. A two-year compliance period also will allow funds to
reorganize their operations and establish new funds to meet the
definition of a retail money market fund, to the extent necessary.
Accordingly, the compliance date is 2 years after the effective date of
the adoption of the amendments to rule 2a-7(c) and other related
provisions of rule 2a-7 that apply to the floating NAV amendments, rule
22e-3(a)(1) and (d), rule 30b1-7, rule 482(b)(3)(i) and (b)(4), Form N-
MFP and Item 4(b)(1) of Form N-1A.
3. Compliance Date for Rule 30b1-8 and Form N-CR
The compliance date for rule 30b1-8, Form N-CR, and the related Web
site disclosure \2196\ is July 14, 2015. We received no comments
specifically addressing the compliance date for rule 30b1-8, Form N-CR
or the related Web site disclosure. After reviewing the operational
considerations as well as the significant interest of investors and the
Commission in receiving this information, we are adopting, as proposed,
a compliance period of 9 months.
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\2196\ See rule 2a-7(h)(10)(v) (Web site disclosure of certain
information required to be reported in Form N-CR).
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We are eliminating, as proposed, the provision in current rule 2a-7
that requires money market funds to report defaults or events of
insolvency to the Commission by email, because it would duplicate Part
B (default or event of insolvency of portfolio security issuer) of Form
N-CR.\2197\ We are also eliminating, as proposed, the provision in
current rule 2a-7 that requires money market funds to disclose to the
Commission by email instances when a sponsor supports a fund by
purchasing a security pursuant to rule 17a-9, because it would
duplicate Part C (provision of financial support to fund) of Form N-
CR.\2198\ Money market funds will continue to be required to comply
with these email notification requirements in rule 2a-7 until the date
in which money market funds are required to comply with Part B and Part
C of Form N-CR. Accordingly, the effective date of removal of the email
notification requirements in rule 2a-7 is 9 months after the effective
date of the adoption of Part B and Part C of Form N-CR.\2199\
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\2197\ See current rule 2a-7(7)(iii)(A).
\2198\ See current rule 2a-7(7)(iii)(B).
\2199\ We note that a money market fund need not comply with the
email notification requirements prior to the effective date of
removal if the money market fund instead elects to comply with the
requirements of Part B and Part C of Form N-CR, as applicable.
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We note that 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 are disclosure
items specifically related to our liquidity fees and gates amendments
and therefore would also have a conforming compliance period of 2
years. Accordingly, the compliance date for Parts E-G of Form N-CR and
the related Web site disclosure requirements pursuant to rule 2a-
7(h)(10)(v) is 2 years after the effective date of the adoption of Part
E-G of Form N-CR and rule 2a-7(h)(10)(v). The compliance date for all
other Parts of Form N-CR is 9 months. Accordingly, the compliance date
for rule 30b1-8, Parts A-D and Part H of Form N-CR, and the related Web
site disclosure requirements pursuant to rule 2a-7(h)(10)(v) is 9
months after the effective date of the adoption of rule 30b1-8, Parts
A-D and Part H of Form N-CR and rule 2a-7(h)(10)(v).
4. Compliance Date for Diversification, Stress Testing, Disclosure,
Form PF, Form N-MFP, and Clarifying Amendments
The compliance date for amendments that are not specifically
related to either floating NAV or liquidity fees and gates, including
amendments to diversification, stress testing, disclosure that are not
specifically related to either floating NAV or liquidity fees and
gates,
[[Page 47934]]
Form PF, Form N-MFP, and clarifying amendments is April 14, 2016. We
are adopting an 18 month compliance period for money market funds to
implement these amendments instead of the proposed 9 month compliance
period. As discussed above, disclosure amendments that relate to the
floating NAV or liquidity fees and gates amendments will have a two-
year compliance period. For disclosure amendments that are not
specifically related to the floating NAV or liquidity fees and gates
amendments, we are adopting an 18 month compliance period. These
disclosure amendments include amendments to Form N-1A requiring
historical disclosure of affiliate financial support,\2200\ and
amendments to rule 2a-7 requiring certain Web site disclosure of
portfolio holdings and other fund information.\2201\ Several commenters
argued that the compliance period for amendments not relating to
floating NAV or liquidity fees and gates should be extended in order
for funds to implement the amendments and make any necessary
operational changes.\2202\ After further consideration, we expect that
18 months will allow additional time for money market funds and their
sponsors and service providers to implement any applicable requirements
and conduct any requisite operational changes to their systems to
implement these provisions.
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\2200\ See Item 16(g)(2) of Form N-1A (historical disclosure of
affiliate financial support). For purposes of the required
historical disclosure of affiliate financial support, funds will be
required only to disclose events that occur on or after the
compliance date. See supra section III.E.5.
\2201\ See rules 2a-7(h)(10)(i)-(iv). For purposes of the
required Web site disclosure of portfolio holdings and other fund
information, funds will be required to disclose such information for
the prior six months, even if such information is from prior to the
compliance date. See supra section III.E.9.
\2202\ See, e.g., ICI Comment Letter (recommending a minimum of
18 months for funds to comply with the disclosure amendments); UBS
Comment Letter (recommending a 12 to 18 month compliance period for
all proposed regulatory changes that are not specifically related to
either floating NAV or liquidity fees and gates); Dreyfus Comment
Letter (recommending a two-year compliance period for amendments
that are not specifically related to either floating NAV or
liquidity fees and gates).
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Accordingly, the compliance date for amendments relating to
diversification is 18 months after the effective date of the amendments
to rule 2a-7(a)(18) and (d)(3) and other related provisions of rule 2a-
7 that apply to the diversification amendments. The compliance date for
amendments related to stress testing is 18 months after the effective
date of the amendments to rule 2a-7(g)(8) and other related provisions
of rule 2a-7 that apply to the stress testing amendments. The
compliance date for disclosure amendments not specifically related to
either floating NAV or liquidity fees and gates is 18 months after the
effective date of the amendments to Item 16(g)(2) of Form N-1A and rule
2a-7(h)(10). The compliance date for amendments to rule 204(b)-1 under
the Advisers Act and Form PF is 18 months after the effective date of
the amendments to rule 204(b)-1 under the Advisers Act and Form PF. The
compliance date for amendments to rule 30b1-7 and Form N-MFP is 18
months after the effective date of the amendments to rule 30b1-7 and
Form N-MFP. The compliance date for the clarifying amendments is 18
months after the effective date of the amendments to rule 2a-7
pertaining to the clarifying amendments.
IV. Paperwork Reduction Act
Certain provisions of the proposed amendments contain ``collections
of information'' within the meaning of the Paperwork Reduction Act of
1995 (``PRA'').\2203\ 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 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 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
open-end 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.\2204\ The Commission submitted 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.
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\2203\ 44 U.S.C. 3501 through 3521.
\2204\ 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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Today the Commission is adopting amendments intended 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. Our
amendments will (i) permit all money market funds to impose a liquidity
fee and/or ``gate'' the fund if a fund's weekly liquidity level falls
below the required regulatory amount; (ii) require all non-government
money market funds to impose a liquidity fee if the fund's weekly
liquidity level falls below a designated regulatory threshold, unless
the fund's board determines that imposing such a fee is not in the best
interests of the fund; (iii) require, as a targeted reform, that
institutional non-government money market funds sell and redeem shares
based on the current market-based value of the securities in their
underlying portfolios, rounded to four decimal places (e.g., $1.0000),
i.e., transact at a floating NAV; and (iv) require that money market
funds adopt other amendments designed to make money market funds more
resilient, including increasing diversification of their portfolios,
enhancing their stress testing, and improving transparency through
enhanced disclosure. The amendments further require investment advisers
to certain unregistered liquidity funds, which can resemble money
market funds, to provide additional information about those funds to
the SEC. We discuss below the collection of information burdens
associated with these amendments.
A. Rule 2a-7
A number of the amendments we are adopting today, including our
liquidity fees and gates reform, as well as our floating NAV reform,
affect rule 2a-7. These amendments to rule 2a-7 also amend or establish
new collection of information burdens by: (a) Requiring money market
funds to be diversified with respect to the sponsors of asset-backed
securities by deeming the
[[Page 47935]]
sponsor to guarantee the asset-backed security unless the fund's board
of directors makes a finding otherwise; (b) requiring that ``retail
money market funds'' adopt and implement policies and procedures
reasonably designed to limit beneficial ownership of the fund to
natural persons; (c) requiring that ``government money market funds''
amend policies and procedures to reflect the 0.5% de minimis non-
conforming basket; (d) requiring money market funds' boards to make and
document a number of determinations regarding the imposition of fees
and gates when weekly liquid assets fall below a certain threshold; (e)
replacing the requirement that funds promptly notify the Commission via
electronic mail of defaults and other events with disclosure on new
Form N-CR; (f) amending the stress testing requirements; and (g)
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 amendments create new
collection of information requirements. The respondents to these
collections of information are 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.
1. Asset-Backed Securities
Under the amendments we are adopting today, we are requiring that a
money market fund treat the sponsors of ABS as guarantors subject to
rule 2a-7's 10% diversification limit applicable to guarantee and
demand features, 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, credit or
other support to determine the ABS's quality or liquidity.\2205\ The
board of directors must adopt written procedures requiring periodic
evaluation of this determination.\2206\ 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.\2207\ These
requirements are collections of information under the PRA, and are
designed to help ensure that the objectives of the diversification
limitations are achieved. The new collection of information is
mandatory for money market funds that rely on rule 2a-7, and to the
extent that the Commission receives confidential information pursuant
to the collection of information, such information will be kept
confidential, subject to the provisions of applicable law.\2208\
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\2205\ See rule 2a-7(a)(18)(ii).
\2206\ See rule 2a-7(g)(7).
\2207\ See rule 2a-7(h)(6).
\2208\ 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)).
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In the Proposing Release, the Commission estimated that
approximately 183 money market funds held asset-backed securities and
would have been required to adopt written procedures regarding the
periodic evaluation of determinations made by the fund as to ABS not
subject to guarantees. The Commission estimated the one-time burden to
prepare and adopt these procedures would have been 1,647 hours \2209\
at approximately $1.2 million in total time costs for all money market
funds.\2210\ Amortized over a three-year period, this would have
resulted in an average annual burden of 549 hours and time costs of
approximately $400,000 for all money market funds.\2211\ The Commission
estimated that the average annual burden to prepare materials and
written records for the boards' required review of new and existing
determinations would have been 732 burden hours \2212\ and
approximately $940,071 in total time costs for all money market
funds.\2213\ Averaging the initial burden plus the average annual
burdens over three years would have resulted in an average annual
burden of 1,281 hours and time costs of approximately $1.3 million for
all money market funds. The Commission estimated in the Proposing
Release that there would have been no external costs associated with
this collection of information.
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\2209\ This estimate was 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 x 183 funds
expected to adopt procedures = 1,647 total burden hours.
\2210\ This estimate was based on the following calculation: 183
Money market funds x $7,032 in total costs per fund = $1.2 million.
\2211\ This estimate was 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.
\2212\ This estimate was based on the following calculation: 4
Burden hours per money market fund x 183 funds = 732 total burden
hours.-
\2213\ This estimate was based on the following calculation: 183
Money market funds x $5,137 in total costs per fund = $940,071.
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The Commission did not receive any comments on the estimated hour
and cost burdens. The Commission has modified the estimated increase in
annual burden hours and total time costs that will result from the
amendment based on updated industry data. The Commission believes that
the written procedures will be developed for all the money market funds
in a fund complex by the fund adviser, and that a fund complex will
have economies of scale to the extent that there may be more than one
money market fund in a complex. Based on its review of reports on Form
N-MFP as of February 28, 2014, the Commission estimates that
approximately 152 money market funds hold asset-backed securities and
will be required to adopt written procedures regarding the periodic
evaluation of determinations made by the fund as to ABS not subject to
guarantees. The Commission continues to estimate that it will 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,
the Commission estimates the one-time burden to prepare and adopt these
procedures will be approximately nine hours per money market fund, at a
time cost of $7,440 per fund.\2214\ The Commission further estimates
the one-time burden to prepare and adopt these procedures will be 1,368
hours \2215\ at $1,130,880 in total time costs for all money market
funds.\2216\ Amortized over a three-year period, this will result
[[Page 47936]]
in an average annual burden of 456 hours and time costs of $376,960 for
all funds.\2217\ The Commission continues to estimate that a money
market fund that will be required to adopt such written procedures will
spend, on an 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.\2218\ Therefore, the Commission estimates that the
average annual burden to prepare materials and written records for a
board's required review of new and existing determinations will be
approximately four hours per fund\2219\ at a time cost of approximately
$5,540 per fund.\2220\ The Commission therefore estimates the annual
burden will be 608 burden hours\2221\ and $842,080 in total time costs
for all money market funds.\2222\ Adding the one-time burden, amortized
over three years, to prepare and adopt procedures with the annual
burden to prepare materials for determinations will result in a total
amortized annual burden of 1,064 hours and time costs of $1,219,040 for
all funds.\2223\ We estimate that there are no external costs
associated with this collection of information.
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\2214\ This estimate is based on the following calculation: (8
Hours x $380 per hour for an attorney = $3,040) + (1 hour x $4,400
per hour for a board of 8 directors = $4,400) = $7,440. The staff
previously estimated in 2009 that the average cost of board of
director time was $4,000 per hour for the board as a whole, based on
information received from funds and their counsel. Adjusting for
inflation, the staff estimates that the current average cost of
board of director time is approximately $4,400. All other 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 2013,
available at http://www.sifma.org/research/item.aspx?id=8589940603,
modified by Commission staff to account for an 1,800-hour work-year
and multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
\2215\ 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 x 152 funds
expected to adopt procedures = 1,368 total burden hours.
\2216\ This estimate is based on the following calculation: 152
Money market funds x $7,440 in total costs per fund complex =
$1,130,880.
\2217\ This estimate is based on the following calculations:
1,368 Burden hours / 3 = 456 average annual burden hours; $1,130,880
burden costs / 3 = $376,960 average annual burden cost.
\2218\ 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 rule 2a-7(a)(18)(ii) and rule 2a-7(h)(6).
\2219\ 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.
\2220\ This estimate is based on the following calculations: (3
Hours x $380 per hour for an attorney = $1,140) + (1 hour x $4,400
per hour for a board of 8 directors = $4,400) = $5,540.
\2221\ This estimate is based on the following calculation: 4
Burden hours per money market fund x 152 funds = 608 total burden
hours.
\2222\ This estimate is based on the following calculation: 152
Money market funds x $5,540 in total costs per fund = $842,080.
\2223\ This estimate is based on the following calculation:
(1,368 Burden hours / 3 = 456 average annual burden hours) + 608
annual burden hours = 1,064 hours; ($1,130,880 burden costs / 3 =
$376,960 average annual burden cost) + $842,080 annual time costs =
$1,219,040.
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2. Retail and Government Funds
i. Retail Funds
Under our floating NAV reform, a retail money market fund--which
means a money market fund that adopts and implements policies and
procedures reasonably designed to limit beneficial owners to natural
persons--will be allowed to continue to maintain a stable NAV through
the use of amortized cost valuation and/or penny-rounding pricing. The
requirement that retail money market funds adopt policies and
procedures is a collection of information under the PRA. The new
collections of information are mandatory for money market funds that
seek to qualify as ``retail money market funds'' under rule 2a-7 as
amended,\2224\ and to the extent that the Commission receives
confidential information pursuant to this collection of information,
such information will be kept confidential, subject to the provisions
of applicable law.\2225\
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\2224\ See rule 2a-7(a)(25); 2a-7(c)(1)(i).
\2225\ See supra note 2208.
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For purposes of the PRA, the Commission estimates that
approximately 55 money market fund complexes will seek to qualify as
retail money market funds under rule 2a-7 and therefore be required to
adopt written policies and procedures reasonably designed to limit
beneficial owners to natural persons.\2226\ We continue to estimate, as
we did in the Proposing Release, that it will take approximately 12
hours of a fund attorney's time to prepare the procedures and one hour
for a board to adopt the procedures.\2227\ The Commission did not
receive any comments on the estimated hour and cost burdens.
Accordingly, we have modified our estimate of the total time cost that
will result from the amendments based on updated industry data and
estimate an initial time cost of approximately $8,960 per fund
complex.\2228\ Therefore, we estimate the one-time burden to prepare
and adopt these procedures will be approximately 715 hours \2229\ at
$492,800 in total time costs for all fund complexes.\2230\ Amortized
over a three year period, this will result in an average annual burden
of 238 hours and time costs of $164,267 for all funds.\2231\ We
estimate that there are no external costs associated with this
collection of information.
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\2226\ For purposes of the PRA, staff estimates that those money
market funds that self-reported as ``retail'' funds as of February
28, 2014 (based on iMoneyNet data) will likely seek to qualify as
retail money market funds under amended rule 2a-7. Based on
iMoneyNet data, these 55 fund complexes managed 195 self-reported
``retail'' money market funds.
\2227\ Staff believes that the burden associated with drafting
and adopting policies and procedures reasonably designed to limit
beneficial ownership to natural persons will be approximately the
same as the burden that would have been required under our proposal
(requiring that funds adopt and implement procedures reasonably
designed to allow the conclusion that the omnibus account holder
does not permit any beneficial owner, directly or indirectly, to
redeem more than the daily permitted amount).
\2228\ This estimate is based on the following calculation: ([12
Hours x $380 per hour for an attorney = $4,560] + [1 hour x $4,400
per hour for a board of 8 directors = $4,400] = $8,960).
\2229\ 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 x 55 fund complexes = 715 total burden
hours for all fund complexes.
\2230\ This estimate is based on the following calculation: 55
Fund complexes x $8,960 in total costs per fund complex = $492,800.
\2231\ This estimate is based on the following calculation: 715
Burden hours / 3 = 238 average annual burden hours; $492,800 burden
costs / 3 = $164,267 average annual burden cost.
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ii. Government Funds
Under today's amendments, government money market funds will not be
required to implement a floating NAV or fees and gates. We define a
government money market fund to mean a fund that invests at least 99.5%
of its total assets in cash, government securities, and/or repurchase
agreements collateralized by cash or government securities. Currently,
a government money market fund is permitted to invest up to 20% of its
total assets in non-government assets.\2232\ Under our amendments, a
government money market fund will no longer be permitted to invest up
to 20% of its total assets in non-government assets; rather, these
funds will be permitted a 0.5% de minimis non-conforming basket in
which the fund may invest in non-government assets. Accordingly, we
anticipate that government money market funds will need to amend their
existing policies and procedures to reflect the new 0.5% de minimis
basket.
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\2232\ See supra note 628 (defining ``non-government assets'');
see also supra note 629 (noting that the ``names rule'' effectively
limits government funds from investing more than 20% of total assets
in non-government assets).
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For purposes of the PRA, the Commission estimates that
approximately 60 money market fund complexes will seek to qualify as
government money market funds under rule 2a-7 and therefore be required
to amend their written policies and procedures to reflect the 0.5% de
minimis basket.\2233\ We estimate that it will take approximately one
hour of a fund attorney's time to amend the procedures and 0.5 hours
for a board to adopt the amended procedures. Accordingly, we estimate
the total initial time cost that will result from the
[[Page 47937]]
amendments will be approximately $2,580 per fund complex.\2234\
Therefore, we estimate the one-time burden to amend these procedures
will be approximately 90 hours \2235\ at $154,800 in total time costs
for all fund complexes.\2236\ Amortized over a three-year period, this
will result in an average annual burden of approximately 30 hours and
time costs of $51,600 for all funds.\2237\ We estimate that there are
no external costs associated with this collection of information.
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\2233\ This estimate is based on Form N-MFP data as of February
28, 2014.
\2234\ This estimate is based on the following calculation: ([1
Hours x $380 per hour for an attorney = $380] + [0.5 hours x $4,400
per hour for a board of 8 directors = $2,200] = $2,580).
\2235\ This estimate is based on the following calculation: 1
Burden hours to amend written procedures + 0.5 burden hours to adopt
procedures = 1.5 burden hours per money market fund complex; 1.5
burden hours per fund complex x 60 fund complexes = 90 total burden
hours for all fund complexes.
\2236\ This estimate is based on the following calculation: 60
Fund complexes x $2,580 in total costs per fund complex = $154,800.
\2237\ This estimate is based on the following calculation: 90
Burden hours / 3 = 30 average annual burden hours; $154,800 burden
costs / 3 = $51,600 average annual burden cost.
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3. Board Determinations--Fees and Gates
Under the fees and gates amendments, if a money market fund's
weekly liquid assets fall below 30% or 10%, respectively, of its total
assets, the fund's board may be required to make and document a number
of determinations regarding the imposition of fees and gates,\2238\
including (i) whether to impose a 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 to lift a
redemption gate put in place (subject to other rule
requirements).\2239\ This requirement is a collection of information
under the PRA, and is designed to ensure that a fund that imposes a fee
or gate does so when it is in its best interests (as determined by its
board). This new collection of information is 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 will be kept confidential,
subject to the provisions of applicable law.\2240\
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\2238\ As discussed in section III.A above, after a fund's
weekly liquid assets have dropped below 30%, a fund's board may
determine that it is in the best interests of the fund to impose a
liquidity fee or redemption gate. After a fund's weekly liquid
assets have dropped below 10%, a fund must impose a 1% a liquidity
fee on all redemptions, unless its board determines it is not in the
best interests of the fund to do so. See rule 2a-7(c)(2)(i) and
(ii).
\2239\ See id.
\2240\ See supra note 2208.
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As proposed, the fees and gates amendments would have required the
same collection of information if a money market fund's weekly liquid
assets fell below 15% of its total assets. As discussed in the
Proposing Release, Commission staff analysis of Form N-MFP data showed
that, between March 2011 and October 2012, five prime money market
funds had weekly liquid assets below 15% of total assets.\2241\ As set
forth in the Proposing Release, the same Commission staff analysis of
Form N-MFP data shows that 138 prime money market funds had weekly
liquid assets below 30% of total assets during this same period.\2242\
In the proposal, the Commission estimated approximately 28 annual
burden hours,\2243\ and a total time cost of $39,580 for all money
market funds.\2244\ We did not receive any comments on the estimated
hour and cost burdens related to board determinations under the fees
and gates amendments.
---------------------------------------------------------------------------
\2241\ See Proposing Release, supra note 25, at 548-49 (showing
that, during the period, four funds dropped below 15% weekly liquid
assets and one fund dropped below 10% weekly liquid assets).
\2242\ See Proposing Release, supra note 25, at 177. This same
analysis shows that one prime money market fund had weekly liquid
assets below 10% between March 2011 and October 2012. Because 30% is
the higher threshold, the fund that dropped below 10% weekly liquid
assets during the period would also be included within the 138 funds
that crossed below 30% weekly liquid assets during the period.
\2243\ This estimate was based on the following calculation: 7
Burden hours per money market fund x 4 funds = 28 total burden
hours.
\2244\ This estimate was based on the following calculation: 4
Money market funds x $9,895 in total costs per fund complex =
$39,580.
---------------------------------------------------------------------------
The Commission continues to estimate that the affected money market
funds that will satisfy the triggering event will 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.\2245\ Therefore, the Commission
estimates that the average annual burden to prepare materials and
written records for a board's required determinations will be
approximately seven hours per fund,\2246\ the same as proposed, at a
time cost of approximately $10,700 per fund.\2247\ The estimated time
cost has increased from the proposal, which estimated $9,895 per fund,
as a result of updated industry data.\2248\ Based on a total of 83
funds per year that will have weekly liquid assets below 30% of total
assets,\2249\ the Commission estimates the annual burden will be
approximately 581 burden hours,\2250\ and $888,100 in total time costs
for all money market funds.\2251\
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\2245\ 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
2239.
\2246\ This estimate is based on the following calculation: 4
Hours to prepare materials + 2 hours for board review + 1 hour for
record preparation = 7 hours per year.
\2247\ This estimate is based on the following calculation: [5
Hours x $380 per hour for an attorney = $1900] + [2 hours x $4,400
per hour for a board of 8 directors = $8,800] = $10,700.
\2248\ The proposal estimated $379 per hour for an attorney
based on published rates that had been taken from SIFMA's Management
and Professional Earnings in the Securities Industry 2012, available
at http://www.sifma.org/research/item.aspx?id=8589940603, modified
by Commission staff to account for an 1,800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. The proposal also estimated that the average
cost of board of director time was $4,000 per hour for the board as
a whole based on information received from funds and their counsel.
Adjusting for inflation, the staff estimates that the current
average cost of board of director time is approximately $4,400.
\2249\ This estimate is based on the following calculation: (138
Funds / 20 months) x 12 months = 83 funds per year.
\2250\ This estimate is based on the following calculation: 7
Burden hours per fund x 83 funds = 581 burden hours.
\2251\ This estimate is based on the following calculation:
$10,700 In total costs per fund x 83 money market funds = $888,100.
---------------------------------------------------------------------------
The increases in annual burden hours and total time costs from the
proposal are largely due to the increase in the estimated number of
funds that will be subject to collection of information (from four to
83) as a result of the higher weekly liquid assets threshold for
imposition of fees and gates. We estimate that there are no external
costs associated with this collection of information.
4. Notice to the Commission
Our amendments also eliminate, as proposed, the requirements under
rule 2a-7 relating to notifications money market funds must make to the
Commission upon the occurrence of certain events. Specifically, the
amendments eliminate the requirements for money market funds to
promptly notify the Director of Investment Management or its designee
by electronic mail (i) 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
[[Page 47938]]
half of one percent or more of the fund's total assets; \2252\ and (ii)
of any purchase of a security from the fund by an affiliated person in
reliance on rule 17a-9 under the Investment Company Act.\2253\ The
Proposing Release also estimated that approximately 20 money market
funds per year previously would have been required to provide the
notification of an event of default or insolvency, and that each such
notification would entail 0.5 burden hours. The Commission also
estimated that approximately 25 money market fund complexes per year
previously would have been required to provide notification of a
purchase of a portfolio security in reliance on rule 17a-9, and each
such notification would entail one burden hour. Based on these
estimates, we calculated that the elimination of these requirements
would reduce the current annual burden by approximately 10 hours for
notices of default or insolvency, at a total time cost savings of
$3,790,\2254\ and by approximately 25 hours for notices of purchases in
reliance on rule 17a-9, at a total time cost savings of $9,475.\2255\
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\2252\ See current 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).
\2253\ See current 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).
\2254\ This estimate was based on the following calculations: 20
Funds x 0.5 hour reduction in hours per fund = reduction of 10
hours; 10 burden hours x $379 per hour for an attorney = $3,790.
\2255\ This estimate was based on the following calculations: 25
Fund complexes x 1 hour reduction in hours per fund = reduction of
25 hours; 25 burden hours x $379 per hour for an attorney = $9,475.
---------------------------------------------------------------------------
No commenters addressed the number of money market funds that would
be affected by the proposal or the estimated reduction in annual burden
hours or total time cost savings that would result from the proposed
amendments. Accordingly, the Commission has not modified the estimated
reduction in annual burden hours associated with the amendments,
although it has modified its estimate of the total hour burden
reduction that will result from the amendments based on updated
industry data. Given these estimates, the amendments will reduce the
current annual burden by approximately 10 hours for notices of default
or insolvency, at a total time cost reduction of $3,800,\2256\ and by
approximately 25 hours for notices of purchases in reliance on rule
17a-9, at a total time cost reduction of $9,500.\2257\ Therefore, the
total reduction in burden is 35 hours at a total time cost of
$13,300.\2258\ We estimate that there are no external costs associated
with this collection of information.
---------------------------------------------------------------------------
\2256\ This estimate is based on the following calculations: 20
Funds x 0.5 hour reduction in hours per fund = reduction of 10
hours; 10 burden hours x $380 per hour for an attorney = $3,800.
\2257\ This estimate is based on the following calculations: 25
Fund complexes x 1 hour reduction in hours per fund = reduction of
25 hours; 25 burden hours x $380 per hour for an attorney = $9,500.
\2258\ This estimate is based on the following calculation: 10
Hours (reduction for notices of default or insolvency) + 25 hours
(reduction for notices of purchases in reliance on rule 17a-9) = 35
hours total reduction; $3,800 (reduction for notices of default or
insolvency) + $9,500 (reduction for notices of purchases in reliance
on rule 17a-9) = $13,300 total reduction.
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5. Stress Testing
We are adopting amendments to the stress testing requirements under
rule 2a-7. Specifically, we are adopting reforms to the current stress
testing provisions that will require funds to test their ability to
maintain weekly liquid assets of at least 10% and to minimize principal
volatility in response to specified hypothetical events that include
(i) increases in the level of short-term interest rates, (ii) a
downgrade or default of particular portfolio security positions, each
representing various portions of the fund's portfolio, and (iii) the
widening of spreads in various sectors to which the fund's portfolio is
exposed, each in combination with various increases in shareholder
redemptions. 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.\2259\ In
addition, the written procedures must provide for a report of the
stress testing results to be presented to the board of directors at its
next regularly scheduled meeting (or sooner, if appropriate in light of
the results).\2260\ These requirements are collections of information
under the PRA, and are designed, in part, to address disparities in the
quality and comprehensiveness of stress tests. The collection of
information is 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 will be
kept confidential, subject to the provisions of applicable law.\2261\
---------------------------------------------------------------------------
\2259\ See rule 2a-7(h)(8).
\2260\ See rule 2a-7(g)(8)(ii).
\2261\ See supra note 2208.
---------------------------------------------------------------------------
In the Proposing Release, we noted that we were proposing to amend
the stress testing provisions 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.\2262\ Under our
proposed amendments, floating NAV money market funds would have been
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.
---------------------------------------------------------------------------
\2262\ See proposed (FNAV) rule 2a-7(g)(7).
---------------------------------------------------------------------------
Based on the proposed amendments to stress testing, the Commission
estimated in the Proposing Release that each fund that would have been
required to implement the proposed stress testing changes would have to
incur an average one-time burden of 92 hours at a time cost of
$42,688.\2263\ Based on an estimate of 92 funds that would incur this
one-time burden,\2264\ the Commission estimated that the aggregate one-
time burden for all money market funds to implement the proposed
amendments to stress testing would have been 8,464 hours at a total
time cost of $3.9 million.\2265\ Amortized over a three year period,
this would have resulted in an average annual burden of 2,821 burden
hours and $1.3
[[Page 47939]]
million total time cost for all funds.\2266\ The Commission estimated
in the Proposing Release that there would have been no external costs
associated with this collection of information. The Commission did not
receive any comments on the estimated hour and cost burdens.
---------------------------------------------------------------------------
\2263\ Staff estimated that these systems modifications would
include the following costs: (i) Project planning and systems design
(24 hours x $291 (hourly rate for a senior systems analyst) =
$6,984); (ii) systems modification integration, testing,
installation, and deployment (32 hours x $282 (hourly rate for a
senior programmer) = $9,024); (iii) drafting, integrating,
implementing procedures and controls (24 hours x $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 x $354 (hourly rate for an assistant compliance director) =
$2,832) + (4 hours (4 hour training session for board of directors)
x $4,000 (hourly rate for board of 8 directors) = $16,000) =
$18,832). Therefore, staff estimated 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).
\2264\ This estimate was based on staff experience and
discussions with industry.
\2265\ This estimate was based on the following calculations: 92
Funds x 92 hours per fund = 8,464 hours; 92 funds x $42,688 = $3.9
million.
\2266\ 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.
---------------------------------------------------------------------------
Although we are adopting amendments to the stress testing
requirements with modifications from the proposal, the Commission does
not believe that the changes from the proposed amendments will directly
affect the burden hours or total time costs associated with the
requirement that money market funds maintain a written copy of their
stress testing procedures, and any modifications thereto, and preserve
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. However, the Commission has modified the estimated
increase in annual burden hours and total time costs that will result
from the amendment based on updated industry data.
We understand that most money market funds, in their normal course
of risk management, include many of the elements we are adopting in
their stress testing. Nevertheless, we expect that funds may incur a
one-time internal burden to reprogram an existing system to provide the
required reports of stress testing results based on our amendments. We
believe that the stress testing procedures will be modified for all the
money market funds in a fund complex by the fund adviser, and that a
fund complex will have economies of scale to the extent that there may
be more than one money market fund in a complex. The Commission
estimates that each fund that will have to implement the stress testing
changes will incur an average one-time burden of 92 hours at a time
cost of $43,872.\2267\ Based on an estimate of 559 money market funds
that will incur this one-time burden,\2268\ the Commission estimates
that the aggregate one-time burden for all money market funds to
implement the amendments to stress testing will be 51,428 hours at a
total time cost of $24,524,448.\2269\ Amortized over a three year
period, this will result in an average annual burden of approximately
17,143 burden hours and $8,174,816 total time cost for all funds.\2270\
We estimate that there are no external costs associated with this
collection of information.
---------------------------------------------------------------------------
\2267\ The Commission estimates that these systems modifications
will include the following costs: (i) Project planning and systems
design (24 hours x $260 (hourly rate for a senior systems analyst) =
$6,240); (ii) systems modification integration, testing,
installation, and deployment (32 hours x $303 (hourly rate for a
senior programmer) = $9,696); (iii) drafting, integrating,
implementing procedures and controls (24 hours x $319 (blended
hourly rate for assistant general counsel ($426), chief compliance
officer ($485), senior EDP auditor ($241) and operations specialist
($125)) = $7,656); and (iv) preparation of training materials (8
hours x $335 (hourly rate for an assistant compliance director) =
$2,680) + (4 hours (4 hour training session for board of directors)
x $4,400 (hourly rate for board of 8 directors) = $17,600) =
$20,280). Therefore, the Commission estimates an average one-time
burden of 92 hours (24+32+24+8+4), at a total cost per fund of
$43,872 ($6,240+$9,696+$7,656+$20,280).
\2268\ We increased the estimated number of funds from the
Proposing Release based on staff experience and discussions with
industry.
\2269\ This estimate is based on the following calculations: 559
Funds x 92 hours per fund = 51,428 hours; 559 funds x $43,872 =
$24,524,448
\2270\ This estimate is based on the following calculations:
51,428 Hours / 3 = approximately 17,143 burden hours; $24,524,448 /
3 = $8,174,816.
---------------------------------------------------------------------------
Each report to the board of directors will include an assessment of
the money market fund's ability to have invested at least 10% of its
total assets in weekly liquid assets and to minimize principal
volatility, and an assessment by the fund's adviser of the fund's
ability to withstand the events that are reasonably likely to occur
within the following year. Under current rule 2a-7, money market funds
are required to have written procedures that provide for a report of
the stress testing results to be presented to the board of directors at
its next regularly scheduled meeting (or sooner, if appropriate in
light of the results). However, because we are amending the type of
information that must be included in the report to the board, we have
estimated the collection of information burden hours increase and the
total time cost increase.
The Commission estimates that it will take on average an
additional: (i) Two hours of portfolio management time, (ii) one hour
of compliance time, (iii) one hour of professional legal time and (iv)
0.5 hours of support staff time, requiring an additional 4.5 burden
hours at a time cost of approximately $1,302 per fund.\2271\ Under
normal circumstances, the report must be provided at the next scheduled
board meeting, and the Commission estimates that the report and the
adviser's assessment will cover all money market funds in a complex.
For purposes of these calculations, the Commission assumes that funds
will conduct stress tests no less than monthly. With an average of six
board meetings each year, the Commission estimates that the annual
burden for regularly scheduled reports will be 27 hours per money
market fund.\2272\ Under the rule, a report must be provided earlier if
appropriate in light of the results of the test. The Commission
estimates that as a result of unanticipated changes in market
conditions or other events, stress testing results are likely to prompt
additional reports on average four times each year.\2273\ Thus, the
Commission estimates reports will result in an additional 18 hours for
an individual fund each year.\2274\ The Commission estimates the total
annual burden for all money market funds will be an additional 25,155
hours at a total time cost of $7,278,180.\2275\
---------------------------------------------------------------------------
\2271\ This estimate is based on the following calculation: (2
Hours x $301 per hour for a portfolio manager = $602) + (1 hour x
$283 for a compliance manager = $283) + (1 hour x $380 for an
attorney = $380) + (0.5 hours x $74 per hour for an administrative
assistant = $37) = $1,302.
\2272\ This estimate is based on the following calculation: (2
Hours (portfolio management) + 1 hour (compliance) + 1 hour (legal)
+ 0.5 hours (support staff)) = 4.5 hours x 6 meetings = 27 hours.
\2273\ The Commission anticipates that in many years there will
be no need for special reports, but that in a year in which there is
severe market stress, a fund may report to the board weekly for a
period of 3 to 6 months. Such reporting will generate 9 to 18
reports in addition to the regular monthly reports. Assuming that
this type of event may occur once every five years, and additional
reports will be generated for 6 months, a fund will produce an
average of four additional reports per year (18 additional reports /
5 = 3.6 reports).
\2274\ This estimate is based on the following calculation: 4.5
Hours x 4 = 18 hours.
\2275\ This estimate is based on the following calculation: (27
Hours + 18 hours = 45 hours) x 559 money market funds = 25,155 hours
and ($1,302 x (6 regularly scheduled reports + 4 additional reports
= 10 reports per year) = $13,020 per fund) x 559 funds = $7,278,180.
---------------------------------------------------------------------------
Adding the one-time burden, amortized over three years, to
implement the stress testing amendments with the annual burden to
report the results of the stress tests to the board of will result in a
total amortized annual burden of 42,298 hours and time costs of
$15,452,996 for all funds.\2276\ We estimate that there are no external
costs associated with this collection of information.
---------------------------------------------------------------------------
\2276\ This estimate is based on the following calculation:
(51,428 Burden hours / 3 = 17,143 average annual burden hours) +
25,155 annual burden hours = 42,298 hours; ($24,524,448 burden costs
/ 3 = $8,174,816 average annual burden cost) + $7,278,180 annual
time costs = $15,452,996.
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6. Web Site Disclosure
The amendments we are adopting today require money market funds to
disclose certain additional information on their Web sites. These
amendments promote transparency to investors of money market funds'
risks and risk management by:
Harmonizing the specific portfolio holdings information
that rule 2a-7 requires a fund to disclose on the fund's
[[Page 47940]]
Web site with the corresponding portfolio holdings information required
to be reported on Form N-MFP; \2277\
---------------------------------------------------------------------------
\2277\ See rule 2a-7(h)(10)(i).
---------------------------------------------------------------------------
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 daily 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);
\2278\
---------------------------------------------------------------------------
\2278\ See rule 2a-7(h)(10)(ii).
---------------------------------------------------------------------------
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); \2279\ and
---------------------------------------------------------------------------
\2279\ See rule 2a-7(h)(10)(iii).
---------------------------------------------------------------------------
Requiring a fund to disclose on its Web site certain
information that the fund is required to report to the Commission on
Form N-CR regarding the imposition and removal of liquidity fees, the
suspension and resumption of fund redemptions, and the provision of
financial support to the fund.\2280\
---------------------------------------------------------------------------
\2280\ See rule 2a-7(h)(10)(v).
---------------------------------------------------------------------------
These new collections of information are mandatory for money market
funds that rely on rule 2a-7 and are not kept confidential.
a. Disclosure of Portfolio Holdings Information
We are adopting, largely as proposed, the requirement for a money
market fund to disclose on its Web site certain portfolio holdings
information that the fund also will be required to disclose on Form N-
MFP. This requirement will harmonize the holdings information that a
fund is required to disclose on its Web site with the corresponding
portfolio holdings information required to be reported on Form N-MFP.
We anticipate that the burden for each fund to draft and finalize the
disclosure that appears on its Web site will largely be incurred when
the fund files Form N-MFP.\2281\ In the Proposing Release, the
Commission estimated that a fund would incur an additional burden of
one 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, we estimated that each fund would incur 12
additional hours of internal staff time per year (one hour per monthly
filing), at a time cost of $2,484, to update the Web site to include
the new disclosure, for a total of 7,032 aggregate hours per year, at a
total aggregate time cost of $1,455,624.
---------------------------------------------------------------------------
\2281\ See infra section IV.C.
---------------------------------------------------------------------------
Certain commenters generally noted that complying with the new Web
site disclosure requirements would add costs for funds, including costs
to upgrade internal systems and software relevant to the Web site
disclosure requirements (which possibly could include costs to engage
third-party service providers for those money market fund managers that
do not have existing relevant systems).\2282\ One commenter, however,
noted that the portfolio holdings disclosure requirements should not
cause a significant cost increase as long as the information is made
available from relevant accounting systems,\2283\ and another commenter
stated that the proposed disclosure requirements generally should not
produce any meaningful costs.\2284\ Another commenter urged the
Commission to harmonize new disclosure requirements so that funds would
face lower administrative burdens, and investors would bear
correspondingly fewer costs.\2285\ As described above, the portfolio
holdings disclosure requirements we are adopting have changed slightly
from those that we proposed, in order to conform to modifications we
are making to the proposed Form N-MFP disclosure requirements.\2286\
The Commission estimates that the number of money market funds is
currently 559 and that the hour burden per fund remains the same as
previously estimated.\2287\ Because the 2010 money market fund reforms
already require money market funds to post monthly portfolio
information on their Web sites,\2288\ funds should not need to upgrade
their systems and software, or develop relevant systems (either in-
house or with the assistance of a third-party service provider) to
comply with the new portfolio holdings information disclosure
requirements. The Commission therefore does not believe that comments
about the costs required to upgrade relevant systems and software
should affect its estimates of the burdens and costs associated with
the portfolio holdings disclosure requirements. Taking this into
consideration, the Commission has not modified its previous hour burden
estimates. Although we have slightly revised the portfolio holdings
disclosure requirements since proposing the requirements, we believe
that these revisions do not produce additional burdens for funds and
thus does not affect previous hour burden estimates.
---------------------------------------------------------------------------
\2282\ See, e.g., UBS Comment Letter (``The SEC also proposed
additional information regarding the posting of: (i) The categories
of a money fund's portfolio securities; (ii) maturity date
information for each of the fund's portfolio securities; and (iii)
market-based values of the fund's portfolio securities at the same
time as this information becomes publicly available on Form N-MFP.
We believe this information is too detailed to be useful to most
investors and would be cost prohibitive to provide. Complying with
these new Web site disclosure requirements would add notable costs
for each money fund that UBS Global AM advises.''); Chamber II
Comment Letter (``With respect to the Web site disclosure
requirements, internal systems and software would need to be
upgraded or, for those MMF managers that do not have existing
systems, third-party service providers would need to be engaged. The
costs (which ultimately would be borne by investors through higher
fees or lower yields) could potentially be significant to an MMF and
higher than those estimated in the Proposal.''); Dreyfus Comment
Letter (noting that ``several of the new Form reporting and Web site
and registration statement disclosure requirements . . . come with .
. . material cost to funds and their sponsors''); see also Fin.
Svcs. Roundtable Comment Letter (noting that the disclosure
requirements would produce ``significant cost to the fund and
ultimately to the fund's investors''); SSGA Comment Letter (urging
the Commission to consider the ``substantial administrative,
operational, and expense burdens'' of the proposed disclosure-
related amendments); Chapin Davis Comment Letter (noting that the
disclosure- and reporting-related amendments will result in
increased costs in the form of fund staff salaries, or consultant,
accountant, and lawyer hourly rates, that will ultimately be borne
in large part by investors and portfolio issuers).
\2283\ See State Street Comment Letter.
\2284\ See HSBC Comment Letter.
\2285\ See Fin. Svcs. Roundtable Comment Letter.
\2286\ See supra section III.E.9.h (Costs of harmonization of
rule 2a-7 and Form N-MFP portfolio holdings disclosure
requirements).
\2287\ The estimate regarding the number of money market funds
is based on a review of reports on Form N-MFP filed with the
Commission for the month ended on February 28, 2014.
\2288\ See 2010 Adopting Release, supra note 17, at section
II.E.1.
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Based on an estimate of 559 money market funds posting their
portfolio holdings on their Web pages, we estimate that, in the
aggregate, the amendment will result in a total of 6,708 burden hours
per year,\2289\ at a total aggregate time cost of $1,522,716.\2290\ We
estimate that there are no external costs associated with this
collection of information.
---------------------------------------------------------------------------
\2289\ This estimate is based on the following calculation: 12
Hours per year x 559 money market funds = 6,708 hours.
\2290\ This estimate is based on the following calculation:
6,708 Hours x $227 per hour for a webmaster = $1,522,716.
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[[Page 47941]]
b. Disclosure of Daily Weekly Assets and Weekly Liquid Assets and Net
Shareholder Flow
We are adopting, as proposed, the requirement for a money market
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, as of the end of each business day during the
preceding six months. The burdens associated with this requirement
include one-time burdens as well as ongoing burdens. In the Proposing
Release, the Commission estimated that a money market fund would incur
a one-time burden of 70 hours, at a time cost of $20,150, 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, the
Commission estimated that money market funds would incur, in aggregate,
a total one-time burden of 41,020 hours, at a time cost of $11,807,900,
to comply with these Web site disclosure requirements. We estimated
that each fund would incur an ongoing annual burden of 32 hours, at a
time cost of $9,184, 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. We further estimated that, in the
aggregate, money market funds would incur an average ongoing annual
burden of 18,752 hours, at a time cost of $5,381,824, to comply with
this disclosure requirement.
As discussed above, certain commenters generally noted that
complying with the new Web site disclosure requirements would add costs
for funds, including costs to upgrade internal systems and software
relevant to the Web site disclosure requirements (which possibly could
include costs to engage third-party service providers for those money
market fund managers that do not have existing relevant systems).\2291\
One commenter noted that these costs could potentially be ``significant
to [a money market fund] and higher than those estimated in the
Proposing Release.'' \2292\ Another commenter suggested that obtaining
the daily and weekly liquid asset data for purposes of complying with
the disclosure requirements would result in additional costs that the
Commission did not include in its estimate in the Proposing Release,
namely, the costs associated with the enhanced controls required to
disseminate this information publicly each day.\2293\ However, one
commenter stated that the proposed disclosure requirements should not
produce any meaningful costs.\2294\
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\2291\ See UBS Comment Letter (``We do not support these
changes, because they would require a significant restructuring of
the money funds' Web sites, which would be expensive to complete and
maintain.''); see also supra note 2282.
\2292\ See Chamber II Comment Letter.
\2293\ See State Street Comment Letter at Appendix A (``Due to
the inherent risks associated with public disclosure, there will be
enhanced controls required with respect to the daily public
dissemination of daily and weekly liquid assets and the risks of
shareholders making redemption decisions in reliance on that
information . . . adds to staff to calculate and review the daily
and weekly liquid assets.'').
\2294\ See HSBC Comment Letter.
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The Commission estimates that the number of money market funds is
currently 559. We agree that the one-time costs for certain money
market funds to upgrade internal systems and software, and/or develop
such systems if a money market fund does not have existing relevant
systems, could be higher than those average one-time costs estimated in
the Proposing Release. However, because the estimated one-time costs
were based on the mid-point of a range of estimated costs, the higher
costs that may be incurred by certain industry participants have
already been factored into our estimates.\2295\ Our assumptions in
estimating one-time hour and cost burdens therefore have not changed
from those discussed in the Proposing Release. Based on an estimate of
559 money market funds posting information about their daily and weekly
liquid assets, as well as their net inflows or outflows, on their Web
pages, we estimate that, in the aggregate, the amendment will result in
a total one-time burden of 39,130 hours,\2296\ at a time cost of
$11,336,520,\2297\ to comply with these Web site disclosure
requirements. Amortized over a three-year period, this will result in
an average annual burden of approximately 13,043 hours and time costs
of approximately $3,778,840 for all money market funds.\2298\
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\2295\ See Proposing Release, supra note 25, at n.1044.
\2296\ This estimate is based on the following calculation: 70
Hours x 559 money market funds = 39,130 hours.
\2297\ This estimate is based on the following calculation:
$20,280 Per fund x 559 money market funds = $11,336,520. The $20,280
per fund figure is, in turn, based on the following calculations:
(20 Hours (mid-point of 16 hours and 24 hours for project
assessment) x $309 (blended hourly rate for a compliance manager
($283) and a compliance attorney ($334)) = $6,180) + (50 hours (mid-
point of 40 hours and 60 hours for project development,
implementation, and testing) x $282 (blended hourly rate for a
senior systems analyst ($260) and a senior programmer ($303)) =
$14,100) = $20,280 per fund. See Proposing Release, supra note 25,
at nn.1044 and 1045.
\2298\ This estimate was based on the following calculations:
39,130 Burden hours / 3 = 13,043 average annual burden hours;
$11,336,520 burden costs / 3 = $3,778,840 average annual burden
cost.
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The Commission agrees that money market funds may incur additional
costs associated with the enhanced controls required to publicly
disseminate daily and weekly liquid asset data, which costs were not
estimated in the Proposing Release. Incorporating these additional
costs into new estimates, we estimate that each fund will incur an
ongoing annual burden of 36 hours,\2299\ at a time cost of
$10,274,\2300\ 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. Based on an estimate of 559 money
market funds posting information about their daily and weekly liquid
assets (as well as their net inflows or outflows) on their Web pages,
we estimate that the amendment will result in an average aggregate
ongoing annual burden of
[[Page 47942]]
20,124 hours,\2301\ at a time cost of $5,743,166,\2302\ to comply with
this disclosure requirement.
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\2299\ The Commission estimates that the lower bound of the
range of the ongoing annual hour burden to update the required Web
site information will be 21 hours per year (5 minutes per day x 252
business days in a year = 1,260 minutes, or 21 hours). We estimate
that the upper bound of the range of the ongoing annual hour burden
to update the required Web site information will be 42 hours per
year (10 minutes per day x 252 business days in a year = 2,520
minutes, or 42 hours).
Additionally, we estimate that each fund will incur an
additional ongoing annual hour burden of between 3 hours and 6 hours
associated with implementing enhanced controls required to publicly
disseminate the data at issue. Specifically, depending on the
controls the fund already has in place, the Commission estimates
that it will take a compliance manager and an attorney between 3 and
6 hours to review and update (or if necessary, to develop and
implement) the controls associated with the public dissemination of
daily liquid asset and weekly liquid asset data each year.
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.E.9.h. Likewise, for purposes of our
estimates for the PRA analysis, we have taken the mid-point of the
range discussed above (mid-point of 24 hours (21 hours + 3 hours)
and 48 hours (42 hours + 6 hours) = 36 hours).
\2300\ This estimate is based on the following calculation:
(31.5 Hours (mid-point of 21 hours and 42 hours for updating the
required Web site information) x $282 (blended rate for a senior
systems analyst and senior programmer) = $8,883) + (4.5 hours (mid-
point of 3 hours and 6 hours for implementing enhanced controls
associated with public dissemination of data) x $309 (blended rate
for a compliance manager and a compliance attorney) = $1,391) =
$10,274 per fund.
\2301\ This estimate is based on the following calculation: 36
Hours x 559 money market funds = 20,124 hours.
\2302\ This estimate is based on the following calculation:
$10,274 Per fund x 559 money market funds = $5,743,166.
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Adding the one-time burden, amortized over three years, to prepare
and adopt procedures with the annual burden to prepare materials for
determinations will result in a total amortized annual burden of 33,167
hours and time costs of $9,522,006 for all funds.\2303\ We estimate
that there are no external costs associated with this collection of
information.\2304\
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\2303\ This estimate is based on the following calculation:
(39,130 Burden hours / 3 = 13,043 average annual burden hours) +
20,124 annual burden hours = 33,167 hours; ($11,336,520 burden costs
/ 3 = $3,778,840 average annual burden cost) + $5,743,166 annual
time costs = $9,522,006.
\2304\ While a money market fund could rely on third-party
service providers to assist in developing systems relevant to the
Web site disclosure requirements (see supra note 2282 and
accompanying text; infra note 2305 and accompanying text), a fund
also could rely on in-house capability to develop such systems. Our
cost estimates assume that funds will use in-house resources to
develop such systems except where it is more economical to use
third-party service providers.
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c. Disclosure of Daily Current NAV
We are adopting, as proposed, the requirement for a money market
fund to disclose on its Web site a schedule, chart, graph, or other
depiction showing the fund's current NAV per share as of the end of
each business day during the preceding six months. The burdens
associated with this requirement include one-time burdens as well as
ongoing burdens. In the Proposing Release, the Commission estimated
that a money market fund would incur a one-time burden of 70 hours, at
a time cost of $20,150, 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 current NAV per
share as of the end of each business day during the preceding six
months. Using an estimate of 586 money market funds, we estimated that
money market funds would incur, in aggregate, a total one-time burden
of 41,020 hours, at a time cost of $11,807,900, to comply with these
Web site disclosure requirements. We estimated that each fund would
incur an ongoing annual burden of 32 hours, at a time cost of $9,184,
to update the depiction of the fund's current NAV per share on the
fund's Web site each business day during that year. We further
estimated that, in the aggregate, money market funds would incur an
average ongoing annual burden of 18,752 hours, at a time cost of
$5,381,824, to comply with this disclosure requirement.
As discussed above, certain commenters generally noted that
complying with the new Web site disclosure requirements would add costs
for funds, including costs to upgrade internal systems and software
relevant to the Web site disclosure requirements (which possibly could
include costs to engage third-party service providers for those money
market fund managers that do not have existing relevant systems).\2305\
One commenter noted that these costs could potentially be ``significant
to [a money market fund] and higher than those estimated in the
Proposal.'' \2306\ However, another commenter stated that it agrees
that those money market funds that presently publicize their current
NAV per share daily on the fund's Web site will incur few additional
costs to comply with the proposed disclosure requirements, and also
that it agrees with the Commission's estimates for the ongoing costs of
providing a depiction of the fund's current NAV each business
day.\2307\
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\2305\ See supra note 2282.
\2306\ See Chamber II Comment Letter.
\2307\ See State Street Comment Letter at Appendix A; see also
HSBC Comment Letter (stating that the proposed disclosure
requirements should not produce any ``meaningful cost'').
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The Commission estimates that the number of money market funds is
currently 559. We agree that the one-time costs for certain money
market funds to upgrade internal systems and software, and/or develop
such systems if a money market fund does not have existing relevant
systems, could be higher than those average one-time costs estimated in
the Proposing Release. However, because the estimated one-time costs
were based on the mid-point of a range of estimated costs, the higher
costs that may be incurred by certain industry participants have
already been factored into our estimates.\2308\ Our assumptions in
estimating one-time hour and cost burdens therefore have not changed
from those discussed in the Proposing Release. Based on an estimate of
559 money market funds posting information about their current NAV per
share on their Web pages, we estimate that, in the aggregate, the
amendment will result in a total one-time burden of 39,130 hours,\2309\
at a time cost of $11,336,520,\2310\ to comply with these Web site
disclosure requirements. As discussed above, we received no comments
providing specific suggestions or critiques about our assumptions in
estimating ongoing hour and cost burdens associated with the disclosure
of a fund's current NAV per share, and therefore our methods of
estimating these burdens also have not changed from those discussed in
the Proposing Release. Based on an estimate of 559 money market funds
posting information about their daily current NAV per share on their
Web pages, we estimate that, in the aggregate, the amendment will
result in an average ongoing annual burden of 17,888 hours,\2311\ at a
time cost of $5,044,416,\2312\ to comply with this disclosure
requirement.
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\2308\ See Proposing Release, supra note 25 at n.1044.
\2309\ This estimate is based on the following calculation: 70
Hours x 559 money market funds = 39,130 hours.
\2310\ This estimate is based on the following calculation:
$20,280 Per fund x 559 money market funds = $11,336,520. The $20,280
per fund figure is, in turn, based on the following calculations:
(20 Hours (mid-point of 16 hours and 24 hours for project
assessment) x $309 (blended hourly rate for a compliance manager
($283) and a compliance attorney ($334)) = $6,180) + (50 hours (mid-
point of 40 hours and 60 hours for project development,
implementation, and testing) x $282 (blended hourly rate for a
senior systems analyst ($260) and senior programmer ($303)) =
$14,100) = $20,280 per fund. See Proposing Release, supra note 25,
at nn.1044 and 1045.
\2311\ This estimate is based on the following calculation: 32
Hours x 559 money market funds = 17,888 hours.
\2312\ This estimate is based on the following calculation: (32
Hours x $282 (blended hourly rate for a senior systems analyst
($260) and a senior programmer ($303)) = $9,024) x 559 money market
funds = $5,044,416.
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Amortizing these hourly and cost burdens over three years results
in an average annual increased burden of 30,931 burden hours \2313\ at
a time cost of $8,823,256.\2314\ We estimate that there are no external
costs associated with this collection of information.\2315\ Adding the
one-time burden, amortized over three years, to prepare and adopt
procedures with the annual burden to prepare materials for
determinations will result in a total amortized annual
[[Page 47943]]
burden of 30,931 hours and time costs of $8,823,256 for all
funds.\2316\
---------------------------------------------------------------------------
\2313\ This estimate is based on the following calculation:
[(39,130 Initial burden hours + 17,888 annual burden hours (year 1))
+ 17,888 burden hours (year 2) + 17,888 burden hours (year 3)] / 3 =
30,931 hours.
\2314\ This estimate is based on the following calculation:
[($11,336,520 Initial monetized burden + $5,044,416 monetized burden
(year 1)) + $5,044,416 monetized burden (year 2) + $5,044,416
monetized burden (year 3)] / 3 = $8,823,256.
\2315\ While a money market fund could rely on third-party
service providers to assist in developing systems relevant to the
Web site disclosure requirements (see supra notes 2282 and 2305 and
accompanying text), a fund also could rely on in-house capability to
develop such systems. Our cost estimates assume that funds will use
in-house resources to develop such systems except where it is more
economical to use third-party service providers.
\2316\ This estimate is based on the following calculation:
(39,130 Burden hours / 3 = 13,043 average annual burden hours) +
17,888 annual burden hours = 30,931 hours; ($11,336,520 burden costs
/ 3 = $3,778,840 average annual burden cost) + $5,044,416 annual
time costs = $8,823,256.
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d. Disclosure Regarding Financial Support Received by the Fund, the
Imposition and Removal of Liquidity Fees, and the Suspension and
Resumption of Fund Redemptions
We are adopting, substantially as proposed, the requirement for a
money market fund to disclose on its Web site certain information that
the fund is required to report on Form N-CR regarding the provision of
financial support to the fund, as well as the imposition and removal of
liquidity fees, and the suspension and resumption of fund
redemptions.\2317\ In the Proposing Release, the Commission estimated
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. We further estimated that the Commission would
receive 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 fee and/or
resumption of Fund redemptions''). Using these numbers, we estimated
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, at a total aggregate
time cost of $8,280. We further estimated that the requirement to
disclose information about the imposition and removal of liquidity
fees, and the suspension and resumption of fund redemptions, on the
fund's Web site would result in a total aggregate burden of eight hours
per year, at a total aggregate time cost of $1,656.
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\2317\ As discussed in section III.E.9, the final amendments
include certain changes to the Web site disclosure requirements from
the proposal, largely designed to track the information on the Web
site with the initial filings that will be provided on Form N-CR.
---------------------------------------------------------------------------
Although certain commenters generally noted, as discussed above,
that complying with the new Web site disclosure requirements would add
costs for funds,\2318\ one commenter stated that the costs of
disclosing liquidity fees and gates and instances of financial support
on the fund's Web site would be minimal when compared to other
costs,\2319\ and another commenter stated that the proposed disclosure
requirements should not produce any meaningful costs.\2320\ As
described above, we have modified the required time frame for
disclosing information about financial support received by a fund on
the fund's Web site, and have also modified the financial support
disclosure requirement to require a fund to post only a subset of the
information required to be filed in response to Part C of Form N-CR.
However, this modification does not produce additional burdens for
funds because it merely allows more time for the same disclosure and
thus does not affect previous hour burden estimates. The Commission
also has determined not to change the assumptions used in our estimates
in response to the comments we received, as the comments provided no
specific suggestions or critiques regarding our methods for estimating
the hour burdens and costs associated with the Form N-CR-linked Web
site disclosure requirements. We have, however, modified our estimates
of the number of reports that will be filed each year on Part C, Part
E, Part F, and Part G of Form N-CR, and these modified estimates have
affected our estimates of the burdens associated with the related Web
site disclosure requirements.\2321\ Given these estimates, the
requirement to disclose information about financial support received by
a money market fund on the fund's Web site will result in a total
aggregate burden of 30 hours per year, at a total aggregate time cost
of $6,810.\2322\ In addition, the requirement to disclose information
about the imposition and removal of liquidity fees, and the suspension
and resumption of fund redemptions, on the fund's Web site will result
in a total aggregate burden of 3.6 hours per year, at a total aggregate
time cost of $817.\2323\ We estimate that there are no external costs
associated with this collection of information.
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\2318\ See supra note 2282.
\2319\ See State Street Comment Letter.
\2320\ See HSBC Comment Letter.
\2321\ See infra section IV.D.2.
\2322\ This estimate is based on the following calculation: 30
Hours per year (1 hour per Web site update x 30 total Web site
updates per year) x $227 per hour for a webmaster = $6,810. Because
all money market funds are required to have a Web site (see rule 2a-
7(h)(10)), and because the disclosure at issue does not require any
particular formatting or computational capacity, we assume that
money market funds will not need to create a Web site or update
their current systems capability to disclose the relevant
information, and therefore we estimate that there are no one-time
costs associated with this disclosure requirement.
\2323\ This estimate is based on the following calculation: 3.6
Hours per year (1 hour per Web site update x 3.6 total Web site
updates per year) x $227 per hour for a webmaster = approximately
$817. We estimate that there are no one-time costs associated with
this disclosure requirement.
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e. Change in Burden
The aggregate additional annual burden associated with the Web site
disclosure amendments discussed above is 70,840 hours \2324\ at a time
cost of $19,875,605.\2325\ There is no change in the external cost
burden associated with this collection of information.
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\2324\ This estimate is based on the following calculation:
6,708 Hours (annual aggregate burden for the disclosure of portfolio
holdings information) + 33,167 (average annual aggregate burden for
the disclosure of daily liquid assets and weekly liquid assets and
net shareholder flow) + 30,931 (average annual aggregate burden for
the disclosure of daily current NAV) + 30 hours (annual aggregate
burden for the disclosure of financial support provided to money
market funds) + 3.6 hours (annual aggregate burden for the
imposition and removal of liquidity fees, and suspension and
resumption of fund redemptions) = 70,840 hours. This calculation
reflects hourly burdens that have been amortized over three years,
where appropriate.
\2325\ This estimate is based on the following calculation:
$1,522,716 (Annual aggregate costs associated with the disclosure of
portfolio holdings information) + $9,522,006 (average annual
aggregate costs associated with the disclosure of daily liquid
assets and weekly liquid assets and net shareholder flow) +
$8,823,256 (average annual aggregate costs associated with the
disclosure of daily current NAV) + $6,810 (annual aggregate costs
associated with the disclosure of financial support provided to
money market funds) + $817 (annual aggregate costs associated with
the imposition and removal of liquidity fees, and suspension and
resumption of fund redemptions) = $19,875,605. This calculation
reflects hourly burdens that have been amortized over three years,
where appropriate.
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7. 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 amendments to
rule 2a-7 increase the burden estimate to 632,244 hours annually for
all funds.\2326\
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\2326\ This estimate is based on the following calculation:
517,228 Hours (currently approved burden) + 1,064 hours (ABS
determination & recordkeeping) + 238 hours (retail funds) + 30 hours
(government funds) + 581 hours (board determinations)-35 hours
(notice to the Commission) + 42,298 hours (stress testing) + 70,840
(Web site disclosure) = 632,244 hours.
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B. 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. The rule requires a money market fund to
provide prior notification to the Commission of its decision to suspend
redemptions and liquidate.\2327\ This requirement is a collection of
information under the PRA, and is designed to assist Commission staff
in monitoring a
[[Page 47944]]
money market fund's suspension of redemptions. The collection of
information is 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,\2328\ and to the extent that the Commission receives
confidential information pursuant to this collection of information,
such information will be kept confidential, subject to the provisions
of applicable law.
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\2327\ See rule 22e-3(a)(3).
\2328\ The 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).
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To provide shareholders with protections comparable to those
currently provided by the rule while also updating the rule to make it
consistent with our amendments to rule 2a-7, we are amending rule 22e-3
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 10% of
its total assets in weekly liquid assets.\2329\ As under the current
rule, a money market fund that maintains a stable NAV will continue to
be able to invoke the exemption in rule 22e-3 if it has broken the buck
or is about to ``break the buck.'' \2330\
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\2329\ See rule 22e-3(a)(1).
\2330\ See id.; see also supra section III.A.4 (discussing
amended rule 22e-3).
---------------------------------------------------------------------------
The amendments to rule 22e-3 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-3. We do not expect that money
market funds will invoke the exemption provided by rule 22e-3 more
frequently under our amendments than they do today. Although the
amendments change the circumstances under which a money market fund may
invoke the exemption provided by rule 22e-3, the amended rule still
will permit a money market fund to invoke the exemption only when the
fund is under significant stress, and we estimate 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, as we indicated in the Proposing
Release, we are not revising rule 22e-3's current approved annual
aggregate collection of information.
The rule's current approved annual aggregate burden is
approximately 30 minutes and is based on estimates that: (1) On
average, one money market fund will break the buck and liquidate every
six years; \2331\ (2) there are an average of two conduit funds that
may be invested in a money market fund that breaks the buck; \2332\ and
(3) each money market fund and conduit fund will spend approximately
one hour of an in-house attorney's time to prepare and submit the
notice required by the rule.\2333\ As discussed in the Proposing
Release, there will be no change in the external cost burden associated
with this collection of information. We did not receive any comments on
the estimated hour and cost burdens related to amended rule 22e-3.
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\2331\ 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 the Commission conservatively
estimates that one or more sponsors may not provide support.
\2332\ 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.
\2333\ 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 x 3 (combined number of affected funds and conduit funds) = 30
minutes. The estimated cost associated with the estimated burden
hours ($189) is based on the following calculations: $378/Hour
(hourly rate for an in-house attorney based on the Securities
Industry and Financial Markets Association, Management &
Professional Earnings in the Securities Industry 2011, modified to
account for an 1,800-hour work year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.) x
30 minutes = $189.
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C. Rule 30b1-7 and Form N-MFP
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.\2334\ This
collection of information will be mandatory for money market funds that
rely on rule 2a-7 and the information will not be kept confidential.
---------------------------------------------------------------------------
\2334\ For purposes of the PRA analysis, the current burden
associated with the requirements of rule 30b1-7 is included in the
collection of information requirements of Form N-MFP.
---------------------------------------------------------------------------
1. Discussion of Final Amendments
We are adopting a number of amendments to Form N-MFP which will
include new and amended collections of information. As discussed in
more detail in section III.G. above, we have revised the final
amendments from our proposal in a number of ways in order to reduce
costs to the extent feasible and still achieve our goals of enhancing
and improving the monitoring of money market fund risks. While the
final form amendments differ in some respects from what we proposed, we
are adopting many of the other proposed amendments unchanged.\2335\
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\2335\ We provide a more detailed discussion of our final
amendments and commenters' comments in section III.G above.
---------------------------------------------------------------------------
These amendments include:
Amendments Related to Rule 2a-7 Reforms. As discussed in more
detail in section III.G. above, we proposed a number of changes to Form
N-MFP designed to conform it with the general reforms of rule 2a-7. We
are adopting them largely as proposed, with some revisions to reflect
the revised approach we are taking to the primary reforms.\2336\
---------------------------------------------------------------------------
\2336\ See supra section III.G.
---------------------------------------------------------------------------
New Reporting Requirements. We are also adopting several new items
to Form N-MFP that we believe will improve the Commission's (and
investors') ability to monitor money market funds. As discussed in more
detail in section III.G. above, these final amendments include some,
but not all, of the new reporting requirements that we had proposed.
For example, as proposed, the final amendments include additional
reporting on fair value categorization and LEI information (if
available).\2337\ We are also adopting, with some changes from the
proposal, revisions to several other items, including revised
investment categories for portfolio securities and repurchase agreement
collateral. However, we are not adopting the lot level portfolio
security disclosure, top 20 shareholder information, and security
identifier level reporting on repo collateral that we had proposed.
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\2337\ Id.
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Clarifying and Other Amendments. We are adopting, as proposed,
several amendments to clarify current instructions and items of Form N-
MFP.\2338\ We are also making certain other, non-substantive,
structural changes to Form N-MFP.\2339\
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\2338\ See supra section III.G for a more detailed discussion of
these clarifications.
\2339\ As proposed, the amendments will renumber the items of
Form N-MFP to separate the items into four separate sections to
allow the Commission to reference, add, or delete items in the
future without having to re-number all subsequent items in the form.
See supra section III.G for a more detailed discussion of this
restructuring.
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[[Page 47945]]
2. 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.
3. Change in Burden
The Commission estimates that 559 money market funds are required
to file reports on Form N-MFP on a monthly basis.\2340\ No commenters
provided specific data or estimates regarding the cost estimates we
provided in the Proposing Release for the amendments to Form N-MFP,
although some suggested that the costs of some aspects of our proposed
amendments to Form N-MFP could be significant.\2341\ For example, some
commenters expressed concern that the proposed lot level portfolio
security disclosure would significantly increase the costs and burdens
of preparing Form N-MFP.\2342\ After consideration of these comments,
we believe that our original cost estimates may have understated the
costs if we had implemented the amendments as proposed. As noted above,
we have revised the final amendments from our proposal in a number of
ways in order to reduce costs to the extent feasible and still achieve
our goals of enhancing and improving the monitoring of money market
fund risks. In light of these changes, and taking into account other
commenters' estimates,\2343\ we believe our original cost estimates
continue to be reasonable. Accordingly, the Commission has not modified
the estimated annual burden hours associated with the final amendments
from those we estimated at the proposal. However, the Commission has
modified its estimates based on updated industry data on time costs as
well as the updated total number of money market funds that will be
affected.\2344\
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\2340\ This estimate is based on a review of reports on Form N-
MFP filed with the Commission for the month ended February 28, 2014.
\2341\ See, e.g., Fidelity Comment Letter; State Street Comment
Letter.
\2342\ See supra note 1477 and accompanying text.
\2343\ See, e.g., State Street Comment Letter, (estimating that
``the additional disclosures that will be required will at a minimum
double the cost of preparing and filing the Form N-MFP. If purchases
and sales information is also required, it may increase even
more.''); Dreyfus Comment Letter (estimating that it ``incurred
several hundreds of thousands of dollars in technology-related costs
to build systems required to populate the Form N-MFP for (at the
time) 51 MMFs,'' and that the reprogramming for each round of
changes to Form N-MFP ``will require several months of time at tens
of thousands of dollars in cost for each.''). As discussed in more
detail below, given that we are not adopting certain costlier
disclosures such as lot level reporting, the Commission estimates
that the current approved collection of information for Form N-MFP
of 45,214 aggregate annual hours will almost double to 83,412
aggregate annual hours, while external costs will rise from
$4,424,480 to $4,780,736. See supra section IV.C.2 and infra note
2363 and accompanying discussion.
\2344\ The updated industry data on time costs reflects salary
information from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, supra note 2214.
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The Commission understands that approximately 35% of the 559 \2345\
(for a total of 196\2346\) 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.
The Commission also understands that approximately 65% of the 559
\2347\ (for a total of 363) 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. The Commission
estimates that, in the first year, each fund (regardless of whether the
fund licenses the software or uses a third-party service provider,
given our assumption that these two options are cost-competitive with
one another) will incur an additional average annual burden of 85
hours, at a time cost of $22,069 per fund,\2348\ to prepare and file
the report on Form N-MFP (as amended) and an average of approximately
60 additional burden hours (five hours per fund, per filing), at a time
cost of $15,569 per fund \2349\ each year thereafter.\2350\
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\2345\ We are estimating that 559 money market funds will be
affected by our final amendments to Form N-MFP. This estimate is
based on a review of reports on Form N-MFP filed with the Commission
for the month ended February 28, 2014. In the Proposing Release we
estimated 586 funds would be affected by our proposed amendments.
See Proposing Release supra note 25 at n.688.
\2346\ The Commission estimated this 35% in the current burden.
This estimate is based on the following calculation: 559 Funds x 35%
= 196 funds.
\2347\ The Commission estimated this 65% in the current burden.
This estimate is based on the following calculation: 559 Funds x 65%
= 363 funds.
\2348\ This estimate is based on the following calculations: [30
Hours for the initial monthly filing at a total cost of $7,824 per
fund (8 hours x $232 blended average hourly rate for a financial
reporting manager ($266 per hour) and fund senior accountant ($198
per hour) = $1,856 per fund) + (4 hours x $157 per hour for an
intermediate accountant = $628 per fund) + (6 hours x $312 per hour
for a senior database administrator = $1872 per fund) + (4 hours x
$301 for a senior portfolio manager = $1204 per fund) + (8 hours x
$283 per hour for a compliance manager = $2,264 per fund)] + [55
hours (5 hours per fund x 11 monthly filings) at a total cost of
$14,245 per fund ($259 average cost per fund per burden hour x 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 $22,069 ($7,824 (initial
monthly filing) + $14,245 (remaining 11 monthly filings = $22,069).
\2349\ This estimate is based on the following calculations: (16
Hours x $232 blended average hourly rate for a financial reporting
manager ($266 per hour) and fund senior accountant ($198 per hour) =
$3,712 per fund) + (9 hours x $157 per hour for an intermediate
accountant = $1,413 per fund) + (13 hours x $312 per hour for a
senior database administrator = $4,056 per fund) + (9 hours x $301
for a senior portfolio manager = $2,709 per fund) + (13 hours x $283
per hour for a compliance manager = $3,679 per fund) = 60 hours (16
+ 9 + 13 + 9 + 13) at a total cost of $15,569 per fund ($3,712 +
$1,413 + $4,056 + $2,709 + $3,679). Therefore, the additional
average cost per fund per burden hour is approximately $259 ($15,569
/ 60 burden hours).
\2350\ In the Proposing Release, we estimated each fund would
incur an additional average annual burden of 85 hours (30 hours for
the initial monthly filing and 55 hours for the remaining monthly
filings (5 hours per fund, per filing x 11 months)), at a time cost
of $22,045 per fund, 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 each year thereafter. See Proposing Release, supra note 25,
at nn.1092 and 1093 and accompanying text.
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In the Proposing Release, we also discussed that software service
providers (whether provided by a licensor or third-party service
provider) would be likely to incur additional external costs to modify
their software and might pass those costs down to money market funds in
the form of higher annual licensing fees.\2351\ In the Proposing
Release, although we did not have the information necessary to provide
a point estimate of the external costs or the extent to which the
software service providers would pass down any external costs to funds,
we were able to estimate a range of costs, from 5% to 10% of current
annual licensing fees.\2352\ We received no specific comments on this
estimate. While we are making certain changes to the final amendments
as described above that may reduce costs, we do not believe that these
changes would significantly alter our estimated range of additional
external licensing costs.\2353\ Accordingly, as proposed, the
Commission estimates that 35% of funds (196 funds) will pay $336 in
additional external licensing costs each year and 65% of funds (363
funds) will pay $800 in additional external licensing costs each year
because of our final amendments to Form N-MFP.\2354\
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\2351\ See Proposing Release, supra note 25, at n.1094 and
accompanying text.
\2352\ Id.
\2353\ Similar to our previous estimates of time costs, we
believe our original estimates of external costs continue to be
reasonable in light of certain changes in the final amendments and
consideration of commenters' comments. See supra note 2343 and
accompanying discussion.
\2354\ As proposed, the Commission 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; the Commission estimates
that the annual licensing fee for 65% of money market unds is
$8,000: A 5% to 10% increase = $400 - $800 in increased costs. See
also, Proposing Release, supra note 25, at n. 1094 and accompanying
text.
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[[Page 47946]]
The Commission therefore estimates that our final amendments to
Form N-MFP will result in a first-year aggregate additional 47,515
burden hours \2355\ at a total time cost of $12,336,571 \2356\ plus
$356,256 in total external costs \2357\ for all funds, and 33,540
burden hours \2358\ at a total time cost of $8,703,071\2359\ plus
$356,256 in total external costs \2360\ for all funds each year
hereafter. Amortizing these additional hourly burdens over three years
results in an average annual aggregate burden of approximately 38,198
hours at a total time cost of $9,914,238, and $356,256 in total
external costs for all funds.\2361\ Finally, the Commission estimates
that our final amendments to Form N-MFP will result in a total
aggregate annual collection of information burden of 83,412 hours
\2362\ and $4,780,736 in external costs.\2363\
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\2355\ This estimate is based on the following calculation: 559
Funds x 85 hours = 47,515 burden hours in year one.
\2356\ This estimate is based on the following calculation: 559
Funds x $22,069 annual cost per fund in the initial year =
$12,336,571.
\2357\ This estimate is based on the following calculation: (196
Funds x $336 additional external costs = $65,856) + (363 funds x
$800 additional external costs = $290,400) = $356,256.
\2358\ This estimate is based on the following calculation: 559
Funds x 60 hours per fund = 33,540 hours.
\2359\ This estimate is based on the following calculation: 559
Funds x $15,569 annual cost per fund in subsequent years =
$8,703,071.
\2360\ See supra note 2357.
\2361\ This estimate is based on the following calculation:
(47,515 Hours in year 1 + 33,540 hours in year 2 + 33,540 hours in
year 3) / 3 = 38,198 average annual burden hours; ($12,336,571 in
year 1 + $8,703,071 in year 2 + $8,703,071 in year 3) / 3 =
$9,914,238 average annual burden costs; ($356,256 in year 1 +
$356,256 in year 2 + $356,256 in year 3) / 3 = $356,256 average
external costs.
\2362\ This estimate is based on the following calculation:
Current approved burden of 45,214 hours + 38,198 in additional
burden hours as a result of our amendments = 83,412 hours.
\2363\ This estimate is based on the following calculation:
Current approved burden of $4,424,480 in external costs + $356,256
in additional external costs as a result of our amendments =
$4,780,736.
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D. Rule 30b1-8 and Form N-CR
1. Discussion of New Reporting Requirements
Today we are adopting a new requirement that money market funds
file a current report with us when certain significant events
occur.\2364\ Generally, a money market fund will be required to file
Form N-CR if a portfolio security defaults, an affiliate provides
financial support to the fund, the fund experiences a significant
decline in its shadow price, or when liquidity fees or redemption gates
are imposed and when they are lifted.\2365\ In most cases, a money
market fund will be required to submit a brief summary filing on Form
N-CR within one business day of the occurrence of the event, and a
follow up filing within four business days that includes a more
complete description and information.\2366\ This requirement is a
collection of information under the PRA. The information provided on
Form N-CR will enable the Commission to enhance its oversight of money
market funds and its ability to respond to market events. The
Commission will be able to use the information provided on Form N-CR in
its regulatory, disclosure review, inspection, and policymaking roles.
Requiring funds to report these events on Form N-CR will provide
important transparency to fund shareholders, and also will provide
information more uniformly and efficiently to the Commission. It will
also provide investors and other market observers with better and
timelier disclosure of potentially important events. This collection of
information will be mandatory for money market funds that rely on rule
2a-7 and the information will not be kept confidential.
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\2364\ As we proposed, this requirement will be implemented
through our adoption of new rule 30b1-8, which requires funds to
file a report on new Form N-CR in certain circumstances. See rule
30b1-8; Form N-CR. For purposes of the PRA analysis, therefore, the
burden associated with the requirements of rule 30b1-8 is included
in the collection of information requirements of Form N-CR.
\2365\ See Form N-CR Parts B-H. More specifically, these events
include instances of portfolio security default (Form N-CR Part B),
financial support (Form N-CR Part C), a decline in a stable NAV
fund's current NAV per share (Form N-CR Part D), a decline in weekly
liquid assets below 10% of total fund assets (Form N-CR Part E),
whether a fund has imposed or removed a liquidity fee or gate (Form
N-CR Parts E, F and G), or any such other event(s) a Fund, in its
discretion, may wish to disclose (Form N-CR Part H). In addition,
Form N-CR Part A will 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 Form N-CR Part A. While the Commission estimates the burden of
reporting the information in response to Part A to be minimal, they
were considered in the estimates of the burdens incurred generally
in connection with the preparation, formatting and filing of a
report under any of the other Parts of Form N-CR.
\2366\ A report on Form N-CR will be made public on EDGAR
immediately upon filing.
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2. Estimated Burden
a. Overview of Cost and Burden Changes
Our cost estimates below generally reflect the costs associated
with an actual filing of Form N-CR.\2367\ The Proposing Release
estimated that a fund would annually spend on average approximately
five burden hours and total time costs of $1,708 to prepare, review and
submit a report under any Part of Form N-CR.\2368\ In the aggregate,
the Proposing Release estimated 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.\2369\ The Proposing Release estimated 586 money market funds
would be required to comply with new rule 30b1-8 and Form N-CR, \2370\
which would have resulted in an average annual burden of approximately
0.58 burden hours and average annual time costs of approximately $199
on a per-fund basis. The Proposing Release further estimated that there
would be no external costs associated with this collection of
information.\2371\
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\2367\ We also recognize the possibility for some advance
industry discussions and preparation in connection with Form N-CR,
as discussed in more detail in the text following supra note 1363.
\2368\ See Proposing Release supra note 25 at n.1203 and
accompanying text.
\2369\ See Proposing Release supra note 25 at n.1205 and
accompanying text.
\2370\ See Proposing Release supra note 25 at n.1206 and
accompanying text.
\2371\ See Proposing Release supra note 25 at discussion
following n.1206.
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As discussed in section III.F above, we are making various changes
from the proposal to our final amendments, a number of which we expect
to impact the frequency of filings as well as the costs associated with
filing a report on Form N-CR.\2372\ For example, with respect to Parts
B, C and D, we are now permitting filers to split their response into
an initial and follow-up filing,\2373\ similar to what we proposed for
Parts E and F in the Proposing Release. We believe this change will
increase total filing costs by increasing the number of filings. In
addition, although only one commenter provided specific cost
estimates,\2374\ we also took into account
[[Page 47947]]
commenters' general concerns and suggestions about the timing and
burdens of Form N-CR.\2375\ For example, commenters cited the
particular burdens and the role of the board in drafting and reviewing
the board disclosures in Parts E and F.\2376\ In light of commenters'
input, we therefore revisited (and typically increased) our prior cost
estimates. Recognizing the substantive differences between each Part of
Form N-CR, we are also breaking out our cost estimates for each Part
individually, rather than providing just one estimate with respect to
any Part as in the proposal.\2377\ We further expect, in particular
with respect to the follow-up reports under Parts B through F as well
as any reports on Part H, that certain funds may engage legal counsel
to assist with the drafting and review of Form N-CR, thereby incurring
additional external costs.\2378\ Accordingly, we have added an estimate
for new Part H and, in the discussion below, we are also updating and
providing a more nuanced estimate of the costs associated with filing a
report with respect to each of Parts B though G of Form N-CR.
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\2372\ See supra sections III.F.2-5 for a more detailed
discussion of each of our final amendments.
\2373\ See supra section III.F.7 (Timing of Form N-CR).
\2374\ See supra note 1295 and accompanying text. As discussed
in that section, because today we are allowing funds to file a
response to the Items discussed by the commenter within four
business days instead of just one business day, we expect that the
costs of filing Form N-CR should be significantly reduced from this
commenter's estimates. Id.
\2375\ See, e.g., supra sections III.F.7 (Timing of Form N-CR)
and III.F.8 (Operational Costs: Overview).
\2376\ See, e.g., IDC Comment Letter (``Any public disclosure
about a board's decision-making process would require careful and
thoughtful drafting and multiple layers of review (by board counsel,
fund counsel, and the directors, among others).''); Stradley Ronon
Comment Letter; SIFMA Comment Letter.
\2377\ See supra note 2368 and accompanying text.
\2378\ See supra note 1347 and accompanying discussion.
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b. Part B: Default Events
As proposed,\2379\ we estimate that the Commission would receive,
in the aggregate, an average of 20 sets \2380\ of initial and follow-up
reports \2381\ per year in response to Part B. Taking into account a
blend of legal and financial in-house professionals,\2382\ we estimate
that a fund would on average spend a total of 13.5 burden hours \2383\
and time costs of $4,830 \2384\ for one set of initial and follow-up
reports in response to Part B. Because some funds may also engage
outside legal counsel,\2385\ we estimate funds will also incur on
average external costs of approximately $1,000 for one set of
reports.\2386\ The Commission therefore estimates that the total annual
burden for Part B reporting would be 270 burden hours, time costs of
$96,600, and external costs of $20,000.\2387\
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\2379\ See Proposing Release supra note 25 at n. 1107 and
accompanying text.
\2380\ This estimate is based on the Commission's current
estimate of an average of 20 notifications of an event of default or
insolvency sent via email to the Director of IM 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). We believe that
this estimate is likely to be high, in particular when markets are
not in crisis as they were during 2008 or 2011. However, we are
continuing to use this higher estimate to be conservative in our
analysis.
\2381\ A fund must file a report on Form N-CR responding to
Items B.1 through B.4 on the first business day after the initial
date on which a default or event of insolvency contemplated in Item
B occurs. A fund must amend its initial report on Form N-CR to
respond to Item B.5 by the fourth business day after the initial
date on which a default or event of insolvency contemplated in Item
B occurs. See Form N-CR Item B Instructions.
\2382\ Recognizing that, depending on the particular
circumstances, different members of a fund's financial team may
assist with the preparation of Form N-CR in varying degrees, we have
estimated the time costs for a financial professional to be $255 per
hour, which is the blended average hourly rate for a senior
portfolio manager ($301), financial reporting manager ($266), and
senior accountant ($198). For similar reasons, we have estimated the
time costs for a legal professional to be $440 per hour, which is
the blended average hourly rate for a deputy general counsel ($546)
and compliance attorney ($334). In the Proposing Release, we based
our estimate of time costs on an in-house attorney and in-house
accountant only. See Proposing Release supra note 25 at n.1111 and
accompanying text. As noted in this section, we are making these and
other changes to provide a more nuanced estimate of the costs
associated with filing a report on Part B of Form N-CR.
\2383\ When filing a report, the Commission estimates that a
fund would spend on average approximately 3 hours of legal
professional time and 3 hours of financial professional time to
prepare, review and submit an initial filing. In addition, the
Commission estimates that a fund would spend on average
approximately 4.5 hours of legal professional time and 3 hours of
financial professional time to prepare, review and submit a follow-
up amendment. The estimates of the average legal professional time
above have already been reduced by the corresponding average amount
of time that we estimate will be shifted in the aggregate from in-
house counsel to outside counsel. See infra note 2386.
\2384\ This estimate is based on the following calculations: (3
Hours for the initial filing + 4.5 hours for the follow-up filing) x
$440 per hour for a legal professional = $3,300) + ((3 hours for the
initial filing + 3 hours for the follow-up filing) x $255 per hour
for a financial professional = $1,530) = 13.5 burden hours and time
costs of $4,830.
\2385\ We estimate the cost for outside legal counsel to be $400
per hour. This is based on an estimated $400 per hour cost for
outside legal services, and is the same estimate used by the
Commission for these services in the ``Exemptions for Advisers to
Venture Capital Funds, Private Fund Advisers With Less Than $150
Million Under Management, and Foreign Private Advisers'' final rule:
SEC Release No. IA-3222 (June 22, 2011); [76 FR 39646 (July 6,
2011)].
\2386\ Commenters provided us with no specific comments that
would allow us to estimate with any precision to what extent funds
may engage legal counsel to assist in the preparation of Form N-CR.
However, for purposes of this PRA, we estimate that in approximately
half of all instances funds will engage legal counsel to assist in
the preparation of a set of initial and follow up filings responding
to Part B of Form N-CR. In such cases, we estimate that
approximately half of the total legal professional time that in-
house counsel would have otherwise spent on responding to Part B of
Form N-CR will be shifted to outside counsel. Accordingly, a quarter
of the total legal professional time that would otherwise have been
spent on responding to Part B of Form N-CR, or 2.5 hours, will be
shifted from in-house counsel to outside counsel (\1/2\ of all
instances x \1/2\ legal professional time = \1/4\ aggregate legal
professional time). Accordingly, we estimate that funds will incur
additional external legal costs of $1,000 (2.5 hours x $400 per hour
for outside counsel) per set of initial and follow-up reports in
response to Part B.
\2387\ This estimate is based on the following calculation: 20
Reports per year x 13.5 burden hours per report = 270 burden hours;
20 reports per year x $4,830 time cost per report = $96,600 in time
costs; 20 reports per year x $1,000 external cost per report =
$20,000 in external costs.
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c. Part C: Financial Support
In a change from the proposal, we have made modifications to the
definition of financial support in Part C of Form N-CR,\2388\ which we
estimate will impact the frequency of filings on Part C of Form N-CR.
Accordingly, updating our estimate from the proposal,\2389\ we estimate
that the Commission will receive, in the aggregate, an average of 30
sets \2390\ of initial and follow-up reports \2391\ per
[[Page 47948]]
year in response to Part C. Taking into account a blend of legal and
financial in-house professionals,\2392\ we estimate that a fund will on
average spend a total of 18.5 burden hours \2393\ and time costs of
approximately $6,660 \2394\ for one set of initial and follow-up
reports in response to Part C. We also estimate funds will also incur
on average external costs of approximately $1,400 for one set of
reports.\2395\ The Commission therefore estimates that the total annual
burden for Part C reporting will be 555 burden hours, time costs of
$199,800, and external costs of $42,000.\2396\
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\2388\ See supra section III.F.3 (Definition of Financial
Support).
\2389\ See Proposing Release supra note 25 at n.1108 and
accompanying text (estimating an average of 40 reports per year
filed in response to an event specified on Part C).
\2390\ This estimate is based on our current estimate of an
average of 25 notifications of certain rule 17a-9 security purchases
that money market funds currently send via email to the Director of
IM 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). Because money market funds will be required to file a report
in response to 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 Commission 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. In the Proposing Release, we originally
estimated 40 filings per year under Part C of Form N-CR. See
Proposing Release supra note 25 at n.735 and accompanying text. As
discussed in supra section III.F.3, today we are adopting certain
exclusions from the definition of financial support that will narrow
the definition to a certain degree. Correspondingly, in anticipation
of a moderate reduction in instances that meet the definition as
amended today, we predict an estimated 30 filings per year under
Part C of Form N-CR. We believe that this estimate is likely to be
high, in particular when markets are not in crisis as they were
during 2008 or 2011. However, we are using this higher estimate to
be conservative in our analysis.
\2391\ A fund must file a report on Form N-CR responding to
Items C.1 through C.7 on the first business day after the initial
date on which any financial support contemplated in Item C is
provided to the fund. A fund must amend its initial report on Form
N-CR to respond to Items C.8 through C.10 by the fourth business day
after the initial date on which any financial support contemplated
in Item C is provided to the fund. See Form N-CR Item C
Instructions.
\2392\ See supra note 2382.
\2393\ When filing a report, the Commission estimates that a
fund will spend on average approximately 4.5 hours of legal
professional time and 4 hours of financial professional time to
prepare, review and submit an initial filing. In addition, the
Commission estimates that a fund will spend on average approximately
6 hours of legal professional time and 4 hours of financial
professional time to prepare, review and submit a follow-up
amendment. The estimates of the average legal professional time
above have already been reduced by the corresponding average amount
of time that we estimate will be shifted in the aggregate from in-
house counsel to outside counsel. See infra note 2395.
\2394\ This estimate is based on the following calculations:
((4.5 Hours for the initial filing + 6 hours for the follow-up
filing) x $440 per hour for a legal professional = $4,620) + ((4
hours for the initial filing + 4 hours for the follow-up filing) x
$255 per hour for a financial professional = $2,040) = 18.5 burden
hours and time costs of $6,660.
\2395\ Using the same assumptions as with respect to Part B in
supra note 2386, we estimate that approximately a quarter of the
total legal professional time that would otherwise have been spent
on responding to Part C of Form N-CR, or 3.5 hours, will be shifted
from in-house counsel to outside counsel. Accordingly, we estimate
that funds will incur additional external legal costs of $1,400 (3.5
hours x $400 per hour for outside counsel) per set of initial and
follow-up reports in response to Part C.
\2396\ This estimate is based on the following calculation: 30
Reports per year x 18.5 burden hours per report = 555 burden hours;
30 reports per year x $6,660 time cost per report = $199,800 in time
costs; 30 reports per year x $1,400 external cost per report =
$42,000 in external costs.
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d. Part D: Shadow Price Declines
In a change from the proposal, we estimate that the Commission will
receive, in the aggregate, an average of 0.3 sets \2397\ of initial and
follow-up reports \2398\ per year in response to Part D. Taking into
account a blend of legal and financial in-house professionals,\2399\ we
estimate that a fund will on average spend a total of 13.5 burden hours
\2400\ and time costs of approximately $4,830 \2401\ for one set of
initial and follow-up reports in response to Part D. We also estimate
funds will also incur on average external costs of approximately $1,000
for one set of reports.\2402\ The Commission therefore estimates that
the total annual burden for Part D reporting will be four burden hours,
time costs of $1,449, and external costs of $300.\2403\
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\2397\ Commission staff analyzed form N-MFP data from November
2010 to February 2014 and found that only one non-institutional fund
had a \1/4\ of 1 percent deviation from the stable $1.00 per share
NAV. 1 fund in over 39 months is equivalent to less than 1 (1 x 12 /
39 = 0.31) funds per year. See also supra note 1394. In the
Proposing Release, we had estimated 0.167 reports filed per year in
respect of Part D. See Proposing Release, supra note 25, at n.1205.
We revised this estimate to reflect more accurate accounting and
updated data.
\2398\ A retail or government money market fund must file a
report on Form N-CR responding to Items D.1 and D.2 on the first
business day after the initial date on which the fund's current NAV
deviates downward from its intended stable price per share by more
than \1/4\ of 1 percent. A fund must amend its initial report on
Form N-CR to respond to Item D.3 by the fourth business day after
the initial date on which the fund's current NAV deviates downward
from its intended stable price per share by more than \1/4\ of 1
percent. See Form N-CR Item D Instructions.
\2399\ See supra note 2382.
\2400\ When filing a report, the Commission estimates that a
fund will spend on average approximately 3 hours of legal
professional time and 3 hours of financial professional time to
prepare, review and submit an initial filing. In addition, the
Commission estimates that a fund will spend on average approximately
4.5 hours of legal professional time and 3 hours of financial
professional time to prepare, review and submit a follow-up
amendment. The estimates of the average legal professional time
above have already been reduced by the corresponding average amount
of time that we estimate will be shifted in the aggregate from in-
house counsel to outside counsel. See infra note 2402.
\2401\ This estimate is based on the following calculations: ((3
Hours for the initial filing + 4.5 hours for the follow-up filing) x
$440 per hour for a legal professional = $3,300) + ((3 hours for the
initial filing + 3 hours for the follow-up filing) x $255 per hour
for a financial professional = $1,530) = 13.5 burden hours and time
costs of $4,830.
\2402\ Using the same assumptions as with respect to Part B in
supra note 2386, we estimate that approximately a quarter of the
total legal professional time that would otherwise have been spent
on responding to Part D of Form N-CR, or 2 hours, will be shifted
from in-house counsel to outside counsel. Accordingly, we estimate
that funds will incur additional external legal costs of $1,000 (2.5
hours x $400 per hour for outside counsel) per set of initial and
follow-up reports in response to Part D.
\2403\ This estimate is based on the following calculation: 0.3
Reports per year x 13.5 burden hours per report = 4 burden hours;
0.3 reports per year x $4,830 time cost per report = $1,449 in time
costs; 0.3 reports per year x $1,000 external cost per report = $300
in external costs.
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e. Part E: Imposition of Liquidity Fees
In addition to other changes from the proposal,\2404\ we have made
modifications to the weekly liquid asset thresholds permitting or
triggering board consideration of a liquidity fee in Part E of Form N-
CR.\2405\ We therefore have updated our estimates of the frequency of
filings under Part E.\2406\ Moreover, in particular with respect to the
board disclosures, we expect that most if not all funds may engage
outside legal counsel to assist with the drafting and review of Form N-
CR, thereby incurring additional external costs.\2407\ Accordingly, we
estimate that the Commission will receive, in the aggregate, an average
of 1.2 sets \2408\ of initial and follow-up reports \2409\ per year in
response to an event specified on Part E. Taking into account a blend
of legal and financial in-house professionals,\2410\ as well as time
spent by the board reviewing the
[[Page 47949]]
disclosure,\2411\ we estimate that a fund will on average spend a total
of 20 burden hours \2412\ and time costs of approximately $10,910
\2413\ for one set of initial and follow-up reports in response to Part
E. Because we expect that most, if not all, funds may also engage
outside legal counsel to assist with the drafting and review of Part
E,\2414\ we also estimate funds will also incur on average external
costs of approximately $3,600 per set of reports.\2415\ The Commission
therefore estimates that the total annual burden for Part E reporting
will be 24 burden hours, time costs of $13,092, and external costs of
$4,320.\2416\
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\2404\ See supra section III.F.5 for a discussion of all our
final amendments to Part E. For example, we have made modifications
to the board disclosure requirements. See supra section III.F.5
(Board Disclosures). In addition, as noted in supra note 2376,
commenters cited the particular burdens and the role of the board in
drafting and reviewing the board disclosures in Parts E and F.
Accordingly, taking into account these and our other changes to Part
E, we have increased our cost estimates for Part E.
\2405\ See supra section III.F.5 (Conforming Changes).
\2406\ See infra note 2408 and accompanying text.
\2407\ See supra note 1377 and accompanying discussion.
\2408\ For purposes of this estimate, the Commission estimates
that 0.6 funds per year will file a report triggered by the 10%
weekly liquid asset threshold. See supra section III.F.5
(Operational Costs of Part E, F, and G: Imposition and Lifting of
Fees and Gates). In the Proposing Release, we had previously
estimated a total of 4 reports in response to Parts E and F based on
the previously proposed higher 15% weekly liquid asset trigger. See
Proposing Release supra note 25 at n.1202. In addition, the DERA
Study analyzed the distribution of weekly liquid assets and found
that 83 prime funds per year had their weekly liquid asset
percentages fall below 30%. See supra section III.F.5 (Operational
Costs of Part E, F, and G: Imposition and Lifting of Fees and
Gates). We are unable to estimate with any specificity how many of
these 83 prime funds would have decided to impose a discretionary
liquidity fee upon breaching the 30% weekly liquid asset threshold.
However, we generally expect relatively few funds will impose a
discretionary liquidity fee given its voluntary nature and potential
costs on redeeming shareholders. For purposes of this PRA, we
estimate that funds will voluntarily impose a liquidity fee at most
as often as they will be required to consider a liquidity fee based
on the 10% weekly liquid asset trigger. Accordingly, the Commission
conservatively estimates that 0.6 additional funds per year will
file a report in response to Part E because it breached the 30%
weekly liquid asset threshold and their board determined to impose
such a discretionary liquidity fee. Together with the filings
triggered by the 10% weekly liquid asset threshold, this will result
in a total of 1.2 sets of filings in response to Part E per year.
Although we believe this estimate is likely to be high, we are using
this estimate to be conservative in our analysis. See supra section
III.F.5 (Operational Costs of Part E, F, and G: Imposition and
Lifting of Fees and Gates).
\2409\ A fund must file a report on Form N-CR responding to
Items E.1 through E.4 on the first business day after the initial
date on which the reporting requirement under Part E was triggered.
A fund must amend its initial report on Form N-CR to respond to
Items E.5 and E.6 by the fourth business day after the initial date
on which the reporting requirement under Part E was triggered. See
Form N-CR Item E Instructions.
\2410\ See supra note 2382.
\2411\ For purposes of this PRA, we estimate time costs of
$4,400 per hour for a board of 8 directors. See supra note 2214.
\2412\ When filing a report, the Commission estimates that a
fund would spend on average approximately 3 hours of legal
professional time and 4 hours of financial professional time to
prepare, review and submit an initial filing. In addition, the
Commission estimates that a fund would spend on average
approximately 6 hours of legal professional time and 6 hours of
financial professional time to prepare, review and submit a follow-
up amendment. The Commission also estimates that a fund would spend
1 hour for a board of directors to review the reports. The estimates
of the average legal professional time above have already been
reduced by the corresponding average amount of time that we estimate
will be shifted in the aggregate from in-house counsel to outside
counsel. See infra note 2415.
\2413\ This estimate is based on the following calculations: ((3
Hours for the initial filing + 6 hours for the follow-up filing) x
$440 per hour for a legal professional = $3,960) + ((4 hours for the
initial filing + 6 hours for the follow-up filing) x $255 per hour
for a financial professional = $2,550) + (1 hour x $4,400 per hour
for a board of 8 directors = $4,400) = 20 burden hours and time
costs of $10,910.
\2414\ Because, for the reason discussed in supra note 1301 and
accompanying text, the potential imposition of a liquidity fee is
one of the most significant events that can occur to money market
funds, to be conservative we estimate that all funds would seek
outside counsel for purposes of this estimate.
\2415\ On average, we estimate that approximately half of the
total legal professional time that in-house counsel would have
otherwise spent on reviewing and responding to Part E of Form N-CR
will be shifted to outside counsel. Accordingly, for purposes of
this PRA, we estimate that a total of 9 hours will be shifted from
in-house counsel to outside counsel. Accordingly, we estimate that
funds would incur external legal costs of $3,600 (9 hours x $400 per
hour for outside counsel) per set of initial and follow-up reports
in response to Part E.
\2416\ This estimate is based on the following calculation: 1.2
Reports per year x 20 burden hours per report = 24 burden hours; 1.2
reports per year x $10,910 time cost per report = $13,092 in time
costs; 1.2 reports per year x $3,600 external cost per report =
$4,320 in external costs.
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f. Part F: Suspension of Fund Redemptions
In addition to other changes from the proposal,\2417\ we have
increased the weekly liquid asset threshold permitting boards to impose
a discretionary gate.\2418\ We therefore have updated our estimates of
the frequency of filings under Part F.\2419\ In particular with respect
to the board disclosures, we expect that most if not all funds may
engage legal counsel to assist with the drafting and review of Form N-
CR, thereby incurring additional external costs.\2420\ Accordingly, we
estimate that the Commission will receive, in the aggregate, an average
of 0.6 sets \2421\ of initial and follow-up reports \2422\ per year in
response to an event specified on Part F. Taking into account a blend
of legal and financial in-house professionals,\2423\ as well as time
spent by the board reviewing the disclosure, we estimate that a fund
will on average spend a total of 20 burden hours \2424\ and time costs
of approximately $10,910 \2425\ for one set of initial and follow-up
reports in response to Part F. Because we expect most if not all funds
may also engage legal counsel to assist with the drafting and review of
Form N-CR,\2426\ we estimate funds also further incur on average
external costs of approximately $3,600 for each set of reports.\2427\
The Commission therefore estimates that the total annual burden for
Part F reporting will be 12 burden hours, time costs of $6,546, and
external costs of $2,160.\2428\
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\2417\ See supra section III.F.5 for a discussion of all our
final amendments to Part F. For example, we have made modifications
to the board disclosure requirements. See supra section III.F.5
(Board Disclosures). In addition, as noted in supra note 2376,
commenters cited the particular burdens and the role of the board in
drafting and reviewing the board disclosures in Parts E and F.
Accordingly, taking into account these and our other changes to Part
F, we have increased our cost estimates for Part F.
\2418\ See supra section III.F.5 (Conforming Changes).
\2419\ See infra note 2421 and accompanying text.
\2420\ See supra note 1376 and accompanying discussion.
\2421\ In the Proposing Release, we had previously estimated a
total of 4 reports in response to Parts E and F based on the
previously proposed 15% weekly liquid asset trigger. See Proposing
Release supra note 25 at n.1202. However, we are revising this
estimate in light of the amended higher 30% weekly liquid asset
threshold for discretionary gates. In particular, the DERA Study
found that 83 prime funds per year had their weekly liquid asset
percentages fall below 30%. See supra section III.F.8 (Operational
Costs of Part E, F, and G: Imposition and Lifting of Fees and
Gates). Similar to discretionary liquidity fees, we are unable to
estimate with any specificity how many of these 83 prime funds would
have decided to impose a discretionary gate upon breaching the 30%
weekly liquid asset threshold. Cf. supra note 2408. However, we
conservatively estimate the number of instances in which a fund
breached the 30% weekly liquid asset threshold and its board
determined to impose a voluntary gate to be equal to the number of
instances in which a fund breached the 30% weekly liquid asset
threshold and its board determined to impose a voluntary fee. This
results in an estimate of approximately 0.6 sets of initial and
follow-up reports filed per year in response to Part F. Although we
believe this estimate is likely to be high, we are using this
estimate to be conservative in our analysis. See supra section
III.F.8 (Operational Costs of Part E, F, and G: Imposition and
Lifting of Fees and Gates).
\2422\ 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 a 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 a fund suspends
redemptions. See Form N-CR Item F Instructions.
\2423\ See supra note 2382.
\2424\ When filing a report, the Commission estimates that a
fund would spend on average approximately 3 hours of legal
professional time and 4 hours of financial professional time to
prepare, review and submit an initial filing. In addition, the
Commission estimates that a fund would spend on average
approximately 6 hours of legal professional time and 6 hours of
financial professional time to prepare, review and submit a follow-
up amendment. The Commission also estimates that a fund would spend
1 hour for a board of directors to review the reports. The estimates
of the average legal professional time above have already been
reduced by the corresponding average amount of time that we estimate
will be shifted in the aggregate from in-house counsel to outside
counsel. See infra note 2427.
\2425\ This estimate is based on the following calculations: ((3
Hours for the initial filing + 6 hours for the follow-up filing) x
$440 per hour for a legal professional = $3,960) + ((4 hours for the
initial filing + 6 hours for the follow-up filing) x $255 per hour
for a financial professional = $2,550) + (1 hour x $4,400 per hour
for a board of 8 directors = $4,400) = 20 burden hours and time
costs of $10,910.
\2426\ Because, for the reason discussed in supra note 1301 and
accompanying text, the potential imposition of a gate is one of the
most significant events that can occur to money market funds, to be
conservative we estimate that all funds would seek outside counsel
for purposes of this estimate.
\2427\ On average, we estimate that approximately half of the
total legal professional time that in-house counsel would have
otherwise spent on reviewing and responding to Part F of Form N-CR
will be shifted to outside counsel. Accordingly, for purposes of
this PRA, we estimate that a total of 8 hours will be shifted from
in-house counsel to outside counsel. Accordingly, we estimate that
funds will incur external legal costs of $3,600 (9 hours x $400 per
hour for outside counsel) per set of initial and follow-up reports
in response to Part F.
\2428\ This estimate is based on the following calculation: 0.6
Reports per year x 20 burden hours per report = 12 burden hours; 0.6
reports per year x $10,910 time cost per report = $6,546 in time
costs; 0.6 reports per year x $3,600 external cost per report =
$2,160 in external costs.
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g. Part G: Removal of Liquidity Fees and/or Resumption of Fund
Redemptions
As discussed in the Proposing Release, we continue to believe the
frequency of filings under Part G on Form N-CR to be closely correlated
to the frequency of filings under Parts E and F.\2429\ Given our
revised estimates
[[Page 47950]]
of the number of filings under Parts E and F,\2430\ we are
correspondingly updating our estimate of the number of filings under
Part G. We are further updating our estimates for Part G, because the
Commission expects the cost per filing associated with responding to
Part G to be lower than for Parts E or F.\2431\ Unlike Parts B through
F and H, for which we have included estimated external costs to account
for the possibility that funds may engage legal counsel to assist in
the preparation and review of Form N-CR,\2432\ we have not done so here
because of the relative simplicity of Part G. Accordingly, we estimate
that the Commission will receive, in the aggregate, an average of 1.8
reports \2433\ per year in response to Part G. Taking into account a
blend of legal and financial in-house professionals,\2434\ we estimate
that a fund will on average spend a total of two burden hours \2435\
and time costs of approximately $695 \2436\ for a filing in response to
Part G. The Commission therefore estimates that the total annual burden
for Part G reporting will be 3.6 burden hours, and time costs of
$1,251.\2437\
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\2429\ See, e.g., Proposing Release supra note 25 at n.1202 and
accompanying discussion. We expect there to be a close correlation
because Part G requires disclosure of the lifting of any liquidity
fee or gate imposed in connection with Part E or F.
\2430\ See supra notes 2408 and 2421.
\2431\ The Proposing Release estimated that a fund would spend
on average approximately 5 burden hours and total time costs of
$1,708 to prepare, review, and submit a report under any Part of
Form N-CR. See Proposing Release supra note 25 at n.1203 and
accompanying text. However, we expect a response to Part G to be
shorter than under Parts E or F, given that Part G only requires
disclosure of the date on which a fund removed a liquidity fee and/
or resumed Fund redemptions. See Form N-CR Item G.1. In addition,
unlike Part E or F, Part G would not require any follow-up report.
\2432\ See supra IV.D.2.g for our discussion of the external
costs of Parts B through F; see also infra this section for our
discussion of the external costs of Part H.
\2433\ As discussed in section III.F, we expect the frequency of
Part G filings will be closely correlated to any filings under Part
E of F, given that Part G will disclose the lifting of any liquidity
fee or gate imposed in connection with Part E or F. See supra
section III.F.8 (Operational Costs of Part E, F, and G: Imposition
and Lifting of Fees and Gates). In particular, for purposes of this
estimate the Commission estimates that 1.8 funds per year will file
a report in response to Part G, based on the assumption that each
time a fund files a report under Parts E or F it will also
eventually file a report under Part G. We believe this to be a high
estimate given that, among other things, at least some funds that
impose a liquidity fee or gate will likely to go out of business
(and thus would never reopen), although we are unable to predict
with certainty how many would do so.
\2434\ See supra note 2382.
\2435\ When filing a report, the Commission estimates that a
fund will spend on average approximately 1 hour of legal
professional time and 1 hour of financial professional time to
prepare, review, and submit a filing in response to Part G.
\2436\ This estimate is based on the following calculations: (1
Hour x $440 per hour for a legal professional = $440) + (1 hour x
$255 per hour for a financial professional = $255) = 2 burden hours
and time costs of $695.
\2437\ This estimate is based on the following calculation: 1.8
Reports per year x 2 burden hours per report = 3.6 burden hours; 1.8
reports per year x $695 time cost per report = $1,251 in time costs.
---------------------------------------------------------------------------
h. Part H: Other Events
Given the broad scope and voluntary nature of the optional
disclosure under Part H of Form N-CR, which is new from the proposal,
we believe that, in an event of filing, a fund's particular
circumstances that led it to decide to make such a voluntary disclosure
will be the predominant factor in determining the time and costs
associated with filing a report on Part H. To be conservative, we also
expect that some funds may engage outside legal counsel to assist with
the drafting and review of Part H, thereby incurring additional
external costs.\2438\ We estimate that the Commission will receive, in
the aggregate, approximately 15 reports \2439\ per year in response to
Part H of Form N-CR. Taking into account a blend of legal and financial
in-house professionals,\2440\ we estimate that a fund will on average
spend a total of four burden hours \2441\ and time costs of
approximately $1,390 \2442\ for one set of initial and follow-up
reports in response to Part H. We also estimate funds will also incur
on average external legal costs of approximately $800 per report.\2443\
The Commission therefore estimates that the total annual burden for
Part H reporting will be 60 burden hours, time costs of $20,850, and
external costs of $12,000.\2444\
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\2438\ See supra note 2386 and accompanying discussion.
\2439\ For purposes of this estimate, the Commission
conservatively estimates that funds will include a disclosure under
Part H in about a quarter of the instances they submit a follow-up
filing under Parts B through F, as well as with respect to a quarter
of all filings under Part G. Because of the timing constraints, we
generally would not expect that funds will make a Part H disclosure
in an initial filing. However, given the possibility that funds
might make a Part H disclosure in the initial filing or on a stand-
alone basis, we conservatively estimate one additional Part H filing
per year under each scenario. We therefore estimate an annual total
of approximately 15 filings in response to Part H based on the
following calculation: (20 sets of Part B filings per year) + (30
sets of Part C filings per year) + (0.3 sets of Part D filings per
year) + (1.2 sets of Part E filings per year) + (0.6 sets of Part F
filings per year) + (1.8 Part G filings per year) = approximately 54
Parts B-G filings per year. (54 Parts B-G filings per year / 4) + (2
additional Part H filings per year in an initial filing or on a
stand-alone basis) = approximately 15 Part H filings per year.
\2440\ See supra note 2382.
\2441\ This estimate is derived in part from our current PRA
estimate for Form 8-K under the Exchange Act. See ``Form 8-K,
Current Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934'' (OMB Control No. 3235-0060), available at
http://www.reginfo.gov. In particular, we estimate that Form 8-K
takes approximately 5 hours per response if rounded up to the next
whole hour. As an initial step, we conservatively added an
additional hour, for a total of 6 hours. Of this total, we estimate
that an average of 2 hours will be shifted to outside legal counsel
(corresponding to the 2 hours of legal professional time discussed
immediately below). Accordingly, when filing a report, the
Commission estimates that a fund would spend on average
approximately 2 hours of legal professional time and 2 hours of
financial professional time to prepare, review and submit a response
to Part H.
\2442\ This estimate is based on the following calculations: (2
Hours x $440 per hour for a legal professional = $880) + (2 hours x
$255 per hour for a financial professional = $510) = 4 burden hours
and time costs of $1,390.
\2443\ In particular, we expect that funds are more likely to
file a report on Part H when there are more complex events that need
to be addressed, which correspondingly we believe will make it
significantly more likely that funds will engage legal counsel. To
be conservative, we estimate that funds would engage outside legal
counsel in all cases they file a response to Part H. Accordingly, we
estimate that funds would incur additional external legal costs of
$800 (2 hours x $400 per hour for outside counsel) per set of
initial and follow-up reports in response to Part H (with the
estimated 2 hours of outside counsel time corresponding to the 2
hours of legal professional time we estimate in supra note 2441).
\2444\ This estimate is based on the following calculation: 15
Reports per year x 4 burden hours per report = 60 burden hours; 15
reports per year x $1,390 time cost per report = $20,850 in time
costs; 15 reports per year x $800 external cost per report = $12,000
in external costs.
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i. Aggregate Burden of Form N-CR
In the aggregate, we estimate that compliance with Form N-CR will
result in a total annual burden of approximately 929 burden
hours,\2445\ total annual time costs of approximately $339,588,\2446\
and total external costs of $80,780.\2447\ Given an estimated 559 money
market funds that will be required to comply with Form N-CR,\2448\ this
will result in an average annual burden of approximately 1.7 burden
hours, average annual time costs of approximately $607 on a per-fund
basis, and average annual external costs of $145.\2449\
---------------------------------------------------------------------------
\2445\ This estimate is based on the following calculation: 270
Hours (Part B) + 555 hours (Part C) + 4 hours (Part D) + 24 hours
(Part E) + 12 hours (Part F) + 3.6 hours (Part G) + 60 hours (Part
H) = 929 aggregate burden hours.
\2446\ This estimate is based on the following calculation:
$96,600 (Part B) + $199,800 (Part C) + $1,449 (Part D) + $13,092
(Part E) + $6,546 (Part F) + $1,251 (Part G) + $20,850 (Part H) =
$339,588 aggregate time costs.
\2447\ This estimate is based on the following calculation:
$20,000 (Part B) + $42,000 (Part C) + $300 (Part D) + $4,320 (Part
E) + $2,160 (Part F) + $12,000 (Part H) = $80,780 total external
costs.
\2448\ See supra note 2340.
\2449\ This estimate is based on the following calculation: 929
Burden hours / 559 funds = 1.7 annual burden hours per fund;
$339,588 / 559 funds = $607 annual time costs per fund; $80,780 /
559 funds = $145 annual external costs per fund.
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E. Rule 34b-1(a)
Rule 34b-1 under the Investment Company Act is an antifraud
provision
[[Page 47951]]
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.F
below. In the Proposing Release, the Commission noted that the proposal
to amend the wording of the rule 482(b)(4) risk disclosures would
indirectly affect rule 34b-1(a), although the Commission proposed no
changes to rule 34b-1(a) itself. We also noted that our discussion of
the amendments to rule 482(b)(4) accounted for the burdens associated
with the wording changes to the risk disclosures in money market fund
advertising, and by complying with our amendments to rule 482(b)(4),
money market funds would also automatically remain in compliance with
rule 34b-1(a) as affected by these amendments. Therefore, any burdens
associated with rule 34b-1(a) as a result of our proposed amendments to
rule 482(b)(4) were already accounted for in the Proposing Release's
Paperwork Reduction Act analysis of rule 482. No commenters addressed
rule 34b-1, and we continue to believe that any burdens associated with
rule 34b-1(a) as a result of the amendments we are adopting to rule
482(b)(4) are accounted for in section IV.F below.
F. Rule 482
We are adopting amendments affecting current requirements under
rule 482 of the Securities Act relating to the information that is
required to be included in money market funds' advertisements or other
sales materials. Specifically, the amendments revise the particular
wording of the current rule 482(b)(4) risk disclosures required to
appear in advertisements for money market funds (including on the fund
Web site). The fees and gates amendments, as well as the floating NAV
amendments, will change the investment expectations and experience of
money market fund investors. Accordingly, the amended wording of the
rule 482(b)(4) risk disclosures reflects the particular risks
associated with the imposition of liquidity fees or gates and/or a
floating NAV. In the Proposing Release, using an estimate of 586 money
market funds, the Commission estimated that money market funds would
incur, in aggregate, a total one-time burden of 3,077 hours, at a time
cost of $857,904, to comply with the amended requirements of rule 482.
This collection of information will be mandatory for money market funds
that rely on rule 2a-7, and the information will not be kept
confidential.
Certain commenters generally noted that complying with all of the
new disclosure requirements, including the amended requirements of rule
482, would involve additional costs.\2450\ Several commenters provided
dollar estimates of the initial costs to implement a fees and gates or
floating NAV framework and noted that these estimates would include the
costs of related disclosure, but these commenters did not specifically
break out the disclosure-related costs in their estimates.\2451\ One
commenter stated that the costs to update Web site disclosures to
reflect the new floating NAV and fees and gates requirements would be
``minimal when compared to other costs,'' \2452\ and another commenter
stated that the proposed disclosure requirements should not produce any
meaningful costs.\2453\ As described above, we are adopting amendments
to rule 482 that have been modified from the proposed amendments to
respond to certain commenters' concerns and other suggestions. The rule
482 disclosure requirements that we are adopting therefore differ from
the proposed rule 482 disclosure requirements in content and
format.\2454\ We believe that these revisions to the proposed
requirements do not produce additional burdens for funds because the
revisions only involve changes in the wording and formatting of the
required disclosure statement and do not impact the measures funds must
take to effect the disclosure requirements. Taking this into
consideration, as well as the fact that we received no comments
providing specific suggestions or critiques about our methods for
estimating the burdens and costs associated with the rule 482
amendments, the Commission has not modified its previous hour burden
estimates.\2455\
---------------------------------------------------------------------------
\2450\ See, e.g., Fin. Svcs. Roundtable Comment Letter (noting
that the proposed disclosure requirements generally would produce
``significant cost to the fund and ultimately to the fund's
investors''); SSGA Comment Letter (urging the Commission to consider
the ``substantial administrative, operational, and expense burdens''
of the proposed disclosure-related amendments); Chapin Davis Comment
Letter (noting that the disclosure- and reporting-related amendments
will result in increased costs in the form of fund staff salaries,
or consultant, accountant, and lawyer hourly rates, that will
ultimately be borne in large part by investors and portfolio
issuers).
\2451\ See, e.g., Chamber I Comment Letter; Fidelity Comment
Letter.
\2452\ See State Street Comment Letter, at Appendix A.
\2453\ See HSBC Comment Letter.
\2454\ See supra section III.E.1.
\2455\ The compliance period for updating rule 482(b)(4) risk
disclosures to reflect the floating NAV or liquidity fees and gates
amendments is 2 years. We understand that money market funds
commonly update and issue new advertising materials on a periodic
and frequent basis. Accordingly, given the extended compliance
period proposed, we expect 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, we
believe that funds could update the corresponding disclosure
statement on their Web sites when performing other periodic Web site
maintenance. We therefore account only for the incremental change in
burden that amending the rule 482(b)(4) risk disclosures will cause
in the context of a larger update to a fund's advertising materials
or Web site.
---------------------------------------------------------------------------
Based on an estimate of 559 money market funds that will be
required to update the risk disclosure included in fund advertisements
pursuant to rule 482, as amended, we estimate that, in the aggregate,
the amendments will result in 2,935 total one-time burden hours,\2456\
at a total one-time time cost of $818,376.\2457\ Amortized over a
three-year period, this will result in an average additional annual
burden of approximately 978 burden hours \2458\ at a total annual time
cost of approximately $272,792 for all funds.\2459\ Given that the
amendments are one-time updates to the wording of the risk disclosures
already required under current rule 482(b)(4), we believe that, once
funds have made these one-time changes, the amendments to rule
482(b)(4) will only require money market funds to incur the same costs
and hour burdens on an ongoing basis as under current rule 482(b)(4).
---------------------------------------------------------------------------
\2456\ This estimate is based on the following calculation: 5.25
Hours per year (4 hours to update and review the wording of the rule
482(b)(4) risk disclosure for each fund's printed advertising and
sales material, plus 1.25 hours to post and review the wording of
the rule 482(b)(4) risk disclosures on a fund's Web site) x 559
money market funds = approximately 2,935 hours.
\2457\ This estimate is based on the following calculation:
$1,464 (Total one-time costs per fund) x 559 funds = $818,376. The
$1,464 per fund figure is, in turn, based on the following
calculations: (3 hours (spent by a marketing manager to update the
wording of the risk disclosures for each fund's marketing materials)
x $254/hour for a marketing manager = $762) + (1 hour (spent by a
webmaster to update a fund's Web site risk disclosures) x $227/hour
for a webmaster = $227) + (1.25 hours (spent by an attorney to
review the amended rule 482(b)(4) risk disclosures) x $380/hour for
an attorney = $475) = $1,464.
\2458\ This estimate is based on the following calculation:
2,935 Hours / 3 = approximately 978 hours. The current approved
collection of information for Rule 482 is 305,705 hours annually for
all investment companies. Adding 978 hours to this approved
collection of information will result in a burden of 306,683 hours
each year.
\2459\ This estimate is based on the following calculation:
$818,376 / 3 = $272,792.
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[[Page 47952]]
G. Form N-1A
We are adopting amendments to Form N-1A relating to money market
funds' disclosure of: (i) Certain of the risks associated with
liquidity fees and gates and/or a floating NAV; (ii) historical
occasions on which the fund has considered or imposed liquidity fees or
gates; and (iii) historical instances in which the fund has received
financial support from a sponsor or fund affiliate. Specifically, we
are adopting amendments to Form N-1A that will require funds to include
certain risk disclosure statements in their prospectuses. We are also
adopting amendments to Form N-1A that will require money market funds
(other than government money market funds that have not chosen to
retain the ability to impose liquidity fees and suspend redemptions) to
provide disclosure in their SAIs regarding any occasion during the last
10 years in which: (i) The fund's weekly liquid assets have fallen
below 10%, and with respect to each occasion, whether the fund's board
has determined to impose a liquidity fee and/or suspend redemptions;
and (ii) the fund's weekly liquid assets have fallen below 30%, and the
fund's board has determined to impose a liquidity fee and/or suspend
redemptions.\2460\ Finally, we are also adopting amendments to Form N-
1A that will require each money market fund to disclose in its SAI
historical instances in which the fund has received financial support
from a sponsor or fund affiliate.\2461\
---------------------------------------------------------------------------
\2460\ See supra section III.E.5.
\2461\ See supra section III.E.7.
---------------------------------------------------------------------------
In addition, the fee and gate requirements we are adopting will
entail certain additional prospectus and SAI disclosure requirements
that will not necessitate rule and form amendments. Specifically,
pursuant to current disclosure requirements, we will expect that money
market funds (besides government money market funds that have not
chosen to retain the ability to impose liquidity fees and suspend
redemptions) will 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.\2462\ We also expect that, promptly after a money market
fund imposes a redemption fee or gate, it will inform investors of any
fees or gates currently in place by means of a post-effective amendment
or prospectus supplement.\2463\
---------------------------------------------------------------------------
\2462\ See supra section III.E.4.
\2463\ See supra section III.E.9.f.
---------------------------------------------------------------------------
The floating NAV amendments we are adopting will also require
certain additional prospectus and SAI disclosures, which will not
necessitate rule and form amendments. Pursuant to current disclosure
requirements, we expect that floating NAV money market funds will
include disclosure in their prospectuses about the tax consequences to
shareholders of buying, holding, exchanging, and selling the shares of
the floating NAV fund.\2464\ In addition, we expect that a floating NAV
money market fund will 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.\2465\ We also expect that, at the time a stable NAV money
market fund transitions to a floating NAV, it will update its
registration statement to include relevant related disclosure by means
of a post-effective amendment or prospectus supplement.\2466\ This
collection of information will be mandatory for money market funds that
rely on rule 2a-7, and the information will not be kept confidential.
---------------------------------------------------------------------------
\2464\ See supra section III.E.2.
\2465\ See supra section III.E.3.
\2466\ See id.
---------------------------------------------------------------------------
In the Proposing Release, the Commission estimated that the
proposed amendments to Form N-1A relating to the fees and gates
proposal, the Form N-1A requirements relating to the fees and gates
proposal that would not necessitate form amendments, and the proposed
sponsor support disclosure requirements together would result in all
money market funds incurring an annual increased burden of 1,007 hours,
at a time cost of $298,072. We also estimated that, under the fees and
gates alternative, there would be one-time aggregate external costs (in
the form of printing costs) of $6,269,175 associated with the new Form
N-1A disclosure requirements. The Commission estimated that the
proposed amendments to Form N-1A relating to the floating NAV proposal,
the Form N-1A requirements relating to the floating NAV proposal that
would not necessitate form amendments, and the proposed sponsor support
disclosure requirements together would result in all money market funds
incurring an annual increased burden of 907 hours, at a time cost of
$268,472. Additionally, we estimated that, under the floating NAV
alternative, there would be one-time aggregate external costs (in the
form of printing costs) of $3,134,588 associated with the new Form N-1A
disclosure requirements.
Certain commenters generally noted that complying with all of the
new disclosure requirements, including the Form N-1A disclosure
requirements, would involve some additional costs.\2467\ Several
commenters provided dollar estimates of the initial costs to implement
a fees and gates or floating NAV regime and noted that these estimates
would include the costs of related disclosure, but these commenters did
not specifically break out the disclosure-related costs in their
estimates.\2468\ One commenter stated that the costs to update a fund's
registration statement to reflect the new fees and gates and floating
NAV requirements would be ``minimal when compared to other costs,''
\2469\ and another commenter stated that the proposed disclosure
requirements should not produce any meaningful costs.\2470\ As
described above, we are adopting amendments to the Form N-1A disclosure
requirements that have been modified from the proposed amendments to
respond to commenters concerns. The amendments we are adopting to the
Form N-1A risk disclosure requirements therefore differ from the
proposed requirements in content and format.\2471\ In addition, the
amendments we are adopting to require funds to provide disclosure in
their SAIs about historical occasions on which the fund has considered
or imposed liquidity fees or gates, as well as historical occasions on
which the fund has received financial support from a sponsor or fund
affiliate, have been modified in certain respects from the proposed
amendments. We believe that these revisions do not produce additional
burdens for funds \2472\ and
[[Page 47953]]
therefore do not affect the assumptions we used in estimating hour
burdens and related costs. The comments we received on the new
disclosure requirements also do not affect the assumptions we used in
our estimates, as these comments provided no specific suggestions or
critiques regarding our methods for estimating hour and cost burdens
associated with the Form N-1A requirements. As described below,
however, our current estimates reflect the fact that the amendments we
are adopting today combine the floating NAV and fees and gates proposal
alternatives into one unified approach.
---------------------------------------------------------------------------
\2467\ See supra note 2450.
\2468\ See, e.g., Chamber I Comment Letter; Fidelity Comment
Letter.
\2469\ See State Street Comment Letter, at Appendix A.
\2470\ See HSBC Comment Letter.
\2471\ See supra section III.E.1.
\2472\ The revisions to the proposed Form N-1A risk disclosure
requirements do not produce additional burdens for funds because the
revisions only involve changes in the wording and formatting of the
required disclosure statement and do not impact the measures funds
must take to effect the disclosure requirements. The revisions to
the proposed SAI historical disclosure requirements do not produce
additional burdens for funds because the adopted amendments to Form
N-1A require a fund to disclose less detailed information than that
which would have been required under the proposed amendments to Form
N-1A. See supra text following note 975 and text accompanying and
following note 1019. Furthermore, because the SAI historical
disclosure overlaps with the information that a fund must disclose
on Parts C, E, F, and G of Form N-CR (see supra section III.E.8), we
believe that the burden for a fund to draft and finalize this
historical disclosure will largely be incurred when the fund files
Form N-CR, and thus the differences in the Form N-1A historical
disclosure requirements that we are adopting, compared to those that
we proposed, should not substantially affect our previous hour
burden estimates.
---------------------------------------------------------------------------
The burdens associated with the proposed amendments to Form N-1A
include one-time burdens as well as ongoing burdens. The Commission
estimates that each money market fund (except government funds that
have not chosen to retain the ability to impose liquidity fees and
suspend redemptions, and floating NAV money market funds) will incur a
one-time burden of five hours,\2473\ at a time cost of $1,595,\2474\ to
draft and finalize the required disclosure and amend its registration
statement. In addition, we estimate that each government fund that has
not chosen to retain the ability to impose liquidity fees and suspend
redemptions will incur a one-time burden of two hours,\2475\ at a time
cost of $638,\2476\ to draft and finalize the required disclosure and
amend its registration statement. We also estimate that each floating
NAV money market fund will incur a one-time burden of eight
hours,\2477\ at a time cost of $2,552,\2478\ to draft and finalize the
required disclosure and amend its registration statement. In aggregate,
the Commission estimates that all money market funds will incur a one-
time burden of 2,933 hours,\2479\ at a time cost of $935,627,\2480\ to
comply with the Form N-1A disclosure requirements. Amortizing the one-
time burden over a three-year period results in an average annual
burden of 978 hours at a time cost of $311,876.\2481\
---------------------------------------------------------------------------
\2473\ This estimate is based on the following calculation: 1
Hour to update the registration statement to include the required
disclosure statement + 3 hours to update the registration statement
to include the disclosure about effects that fees/gates may have on
shareholder redemptions, and the disclosure about historical
occasions on which the fund has considered or imposed liquidity fees
or gates + 1 hour to update the registration statement to include
the disclosure about historical occasions of financial support
received by the fund = 5 hours.
\2474\ This estimate is based on the following calculation: (1
Hour (to update registration statement to include required
disclosure statement) x $319 (blended hourly rate for a compliance
attorney ($334) and a senior programmer ($303)) = $319) + (3 hours
(to update registration statement to include disclosure about
effects that fees/gates may have on shareholder redemptions, and
disclosure about historical occasions on which the fund has
considered or imposed liquidity fees or gates) x $319 (blended
hourly rate for a compliance attorney ($334) and a senior programmer
($303)) = $957) + (1 hour (to update registration statement to
include disclosure about historical occasions of financial support
received by the fund) x $319 (blended hourly rate for a compliance
attorney ($334) and a senior programmer ($303)) = $319) = $1,595.
\2475\ This estimate is based on the following calculation: 1
Hour to update registration statement to include required disclosure
statement + 1 hour to update registration statement to include
disclosure about financial support received by the fund = 2 hours.
\2476\ This estimate is based on the following calculation: (1
Hour (to update registration statement to include required
disclosure statement) x $319 (blended hourly rate for a compliance
attorney ($334) and a senior programmer ($303)) = $319) + (1 hour
(to update registration statement to include disclosure about
financial support received by the fund) x $319 (blended hourly rate
for a compliance attorney ($334) and a senior programmer ($303)) =
$319) = $638.
\2477\ This estimate is based on the following calculation: 1
Hour to update registration statement to include required 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 on which the
fund has considered or imposed liquidity fees or gates + 3 hours 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 = 8 hours.
\2478\ This estimate is based on the following calculation: (1
Hour (to update registration statement to include required
disclosure statement) x $319 (blended hourly rate for a compliance
attorney ($334) and a senior programmer ($303)) = $319) + (3 hours
(to update registration statement to include disclosure about
effects that fees/gates may have on shareholder redemptions, and
disclosure about historical occasions on which the fund has
considered or imposed liquidity fees or gates) x $319 (blended
hourly rate for a compliance attorney ($334) and a senior programmer
($303)) = $957) + (3 hours (to update registration statement to
include tax- and operations-related disclosure about floating NAV) x
$319 (blended hourly rate for a compliance attorney ($334) and a
senior programmer ($303)) = $957) + (1 hour (to update registration
statement to include disclosure about financial support received by
the fund) x $319 (blended hourly rate for a compliance attorney
($334) and a senior programmer ($303)) = $319) = $2,552.
\2479\ This estimate is based on the following calculations: (5
Hours x 195 funds (559 money market funds - 205 institutional prime
funds -159 funds that will rely on the government fund exemption) =
975 hours) + (2 hours x 159 funds that will rely on the government
fund exemption = 318 hours) + (8 hours x 205 institutional prime
funds = 1,640 hours) = 2,933 hours. For purposes of this PRA
analysis, our calculations of the number of institutional prime
funds and funds that will rely on the government fund exemption are
based on Form N-MFP data as of February 28, 2014.
\2480\ This estimate is based on the following calculation:
2,933 Hours x $319 (blended hourly rate for a compliance attorney
($334) and a senior programmer ($303)) = $935,627.
\2481\ This estimate is based on the following calculation:
2,933 Burden hours / 3 = 977 average annual burden hours; $935,627
burden costs / 3 = $311,876 average annual burden cost.
---------------------------------------------------------------------------
The Commission estimates that each money market fund (except
government funds that have not chosen to retain the ability to impose
liquidity fees and suspend redemptions) will incur an ongoing burden of
one hour, at a time cost of $319,\2482\ each year to: 1) review and
update the SAI disclosure regarding historical occasions on which the
fund has considered or imposed liquidity fees or gates; 2) review and
update the SAI disclosure regarding historical occasions in which the
fund has received financial support from a sponsor or fund affiliate;
and 3) inform investors of any fees or gates currently in place (as
appropriate), or the transition to a floating NAV (as appropriate), by
means of a prospectus supplement. The Commission also estimates that
each government money market fund that has not chosen to retain the
ability to impose liquidity fees and suspend redemptions will incur an
ongoing burden of 0.5 hours, at a time cost of $160,\2483\ 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, we estimate that all money market funds will
incur an annual burden of 480 hours,\2484\ at a time cost of
$153,120,\2485\ to comply with the Form N-1A disclosure requirements.
---------------------------------------------------------------------------
\2482\ This estimate is based on the following calculation: (0.5
Hours (to review and update the SAI disclosure regarding historical
occasions on which the fund has considered or imposed liquidity fees
or gates, and to inform investors of any fees or gates currently in
place (as appropriate), or the transition to a floating NAV (as
appropriate), by means of a prospectus supplement) x $319 (blended
hourly rate for a compliance attorney ($334) and a senior programmer
($303)) = $159.5) + (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) x $319
(blended hourly rate for a compliance attorney ($334) and a senior
programmer ($303)) = $159.5) = $319.
\2483\ This estimate is based on the following calculation: (0.5
Hours x $319 (blended hourly rate for a compliance attorney ($334)
and a senior programmer ($303)) = approximately $160.
\2484\ This estimate is based on the following calculations: (1
Hour x 400 funds (559 money market funds -159 funds that will rely
on the government fund exemption) = 400 hours) + (0.5 hours x 159
funds that will rely on the government fund exemption =
approximately 80 hours) = 480 hours.
\2485\ This estimate is based on the following calculation: 480
Hours x $319 (blended hourly rate for a compliance attorney ($334)
and a senior programmer ($303)) = $153,120.
---------------------------------------------------------------------------
Amortizing these one-time and ongoing hour and cost burdens over
three years results in an average annual increased burden of 2.3 hours
per fund (other than government funds that have not chosen to retain
the ability to impose liquidity fees and suspend
[[Page 47954]]
redemptions, and floating NAV money market funds),\2486\ at a time cost
of $744.\2487\ Government funds that have not chosen to retain the
ability to impose liquidity fees and suspend redemptions will incur an
average annual increased burden of 1 hour,\2488\ at a time cost of
$319,\2489\ to comply with the Form N-1A disclosure requirements.
Floating NAV money market funds will incur an average annual increased
burden of 3.3 hours,\2490\ at a time cost of $1,063,\2491\ to comply
with the Form N-1A disclosure requirements.
---------------------------------------------------------------------------
\2486\ This estimate is based on the following calculation: 5
Burden hours (year 1) + 1 burden hour (year 2) + 1 burden hour (year
3) / 3 = approximately 2.3 burden hours.
\2487\ This estimate is based on the following calculation:
$1,595 (Year 1 monetized burden hours) + $319 (year 2 monetized
burden hours) + $319 (year 3 monetized burden hours) / 3 =
approximately $744.
\2488\ 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 burden hour.
\2489\ This estimate is based on the following calculation: $638
(Year 1 monetized burden hours) + $160 (year 2 monetized burden
hours) + $160 (year 3 monetized burden hours) / 3 = approximately
$319.
\2490\ This estimate is based on the following calculation: 8
Burden hours (year 1) + 1 burden hour (year 2) + 1 burden hour (year
3) / 3 = approximately 3.3 burden hours.
\2491\ This estimate is based on the following calculation:
$2,552 (Year 1 monetized burden hours) + $319 (year 2 monetized
burden hours) + $319 (year 3 monetized burden hours) / 3 =
approximately $1,063.
---------------------------------------------------------------------------
In total, the Commission estimates that all money market funds will
incur an average annual increased burden of 1,285 hours,\2492\ at a
time cost of $413,716,\2493\ to comply with the Form N-1A disclosure
requirements. Additionally, we estimate that there will be annual
aggregate external costs (in the form of printing costs) of $6,269,175
associated with the Form N-1A disclosure requirements.\2494\
---------------------------------------------------------------------------
\2492\ This estimate is based on the following calculation: (2.3
Hours x 195 funds (559 money market funds - 205 institutional prime
funds - 159 funds that will rely on the government fund exemption) =
approximately 449 hours) + (1 hour x 159 funds that will rely on the
government fund exemption = 159 hours) + (3.3 hours x 205
institutional prime funds = approximately 677 hours) = 1,285 hours.
The current approved collection of information for Form N-1A is
1,578,689 hours annually for all investment companies. Adding 1,285
hours to this approved collection of information will result in a
burden of 1,579,974 hours each year.
\2493\ This estimate is based on the following calculation:
($744 x 195 Funds (559 money market funds - 205 institutional prime
funds - 159 funds that will rely on the government fund exemption) =
$145,080) + ($319 x 159 funds that will rely on the government fund
exemption = $50,721) + ($1,063 x 205 institutional prime funds =
$217,915) = $413,716.
\2494\ We expect that a fund that must include disclosure about
historical occasions on which the fund has considered or imposed
liquidity fees or gates, or historical instances in which the fund
has received financial support from a sponsor or fund affiliate,
will need to add 2-8 pages of new disclosure to its registration
statement. Adding this new disclosure will therefore increase the
number of pages in, and change the printing costs of, the fund's
registration statement. The Commission calculates the external costs
associated with the proposed Form N-1A disclosure requirements as
follows: 5 pages (mid-point of 2 pages and 8 pages) x $0.045 per
page x 27,863,000 money market fund registration statements printed
annually = $6,269,175 annual aggregate external costs. 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 Comment Letter of Lexecon Inc. (Feb. 13, 2006)
(``Lexecon Comment Letter''). 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 http://www.ici.org/pdf/2013_factbook.pdf.
---------------------------------------------------------------------------
H. 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 potential 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 affected by today's 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.\2495\ This new collection of information will be
mandatory for large liquidity fund advisers, and will be kept
confidential to the extent discussed above in section III.H. Based on
data filed on Form PF and Form ADV, the Commission estimates that, as
of April 30, 2014, there were 28 large liquidity fund advisers subject
to this quarterly filing requirement that collectively advised 56
liquidity funds.
---------------------------------------------------------------------------
\2495\ 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.
---------------------------------------------------------------------------
1. Discussion of Amendments
Under our final amendments, for each liquidity fund it manages, a
large liquidity fund adviser will be required to provide, quarterly and
with respect to each portfolio security, certain additional information
for each month of the reporting period.\2496\ We discuss the additional
information we are requiring large liquidity fund advisers to provide
in more detail in section III.H.1 above. Generally, however, this
additional information is largely the same as the reporting
requirements for registered money market funds under amended Form N-
MFP, with some modifications to better tailor the reporting to private
liquidity funds.\2497\ As proposed, the final amendments will also
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).\2498\ The amendments will also require, as
proposed, 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 about on Form PF.\2499\ In addition, the final
amendments have been reorganized to minimize system changes and costs
as much as possible.\2500\ Finally, our changes from the proposal to
the final amendments to Form PF generally reflect any changes from the
proposal to the final amendments to Form N-MFP, such as the elimination
of the proposed lot level reporting.\2501\
---------------------------------------------------------------------------
\2496\ See Question 63 of Form PF. Advisers will be required to
file this information with their quarterly liquidity fund filings
with data for the quarter broken down by month. Advisers will 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.
\2497\ See supra section IV.H.1 for a more detailed discussion
of these additional reporting requirements.
\2498\ See supra section IV.H.1.
\2499\ See Question 64 to Form PF. See also supra section
IV.H.1.
\2500\ By eliminating lot level sale data reporting (proposed
question 64 of Form PF) and accordingly renumbering proposed
question 65 (parallel funds) as question 64, we have restructured
the amendments to Form PF so that the amendments keep the same
numbering range as the current form. See question 64 of Form PF;
Axiom Comment Letter (suggesting to reorganize and consolidate the
questions in the proposed form amendments to minimize the system
changes necessary to file the form).
\2501\ See supra section IV.H.1. See also, e.g., supra section
IV.C.1 (New Reporting Requirements).
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[[Page 47955]]
2. 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, we 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.\2502\ We estimated that 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
are $150 per annual filing and $150 per quarterly filing, resulting in
annual filings costs for large liquidity fund advisers of
$48,000.\2503\
---------------------------------------------------------------------------
\2502\ See Form PF Adopting Release supra note 1536 (``290
burden hours on average per year x 80 large liquidity fund advisers
= 23,200 hours.'').
\2503\ This estimate is based on the following calculation:
($150 Quarterly filing fee x 4 quarters) x 80 large liquidity fund
advisers) = $48,000.
---------------------------------------------------------------------------
3. Change in Burden
The Commission continues to estimate that, as proposed, the
paperwork burdens associated with Form N-MFP (as adopted with our final
amendments) are representative of the burdens that large liquidity fund
advisers could incur as a result of our final amendments to Form PF
because advisers will be required to file on Form PF virtually the same
information money market funds will file on Form N-MFP as amended and
because, as discussed in section IV.H, virtually all of the 28 large
liquidity funds advisers affected already manage a money market fund or
have a related person that manages a money market fund. Therefore, we
continue to 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.
Commenters provided no concrete cost estimates with respect to our
amendments to Form PF. As noted in section IV.H above, although one
commenter asserted that the costs of compliance for Form PF would
outweigh the benefits,\2504\ most commenters who discussed the Form PF
amendments generally supported them.\2505\ For the reasons discussed in
section IV.C, we believe our original cost estimates continue for Form
N-MFP to be reasonable. Likewise, for the same reasons, the Commission
generally has not modified from our proposal the cost estimates
associated with the final amendments to Form PF.\2506\ However, as with
Form N-MFP, the Commission has modified its estimates for Form PF based
on updated industry data on time costs as well as the updated total
number of large liquidity funds that would be affected.
---------------------------------------------------------------------------
\2504\ See SSGA Comment Letter. See also, e.g., Wells Fargo
Comment Letter (noting that the ``[t]he burdens associated with
complying with the proposed amendments to Form PF are substantial''
as a reason for why the proposed amendments to Form PF should not
apply to unregistered liquidity vehicles owned exclusively by
registered funds and complying with rule 12d1-1 under the Investment
Company Act.).
\2505\ See, e.g., Goldman Sachs Comment Letter; ICI Comment
Letter; Oppenheimer Comment Letter.
\2506\ Similarly, we estimate that our various other final
changes to Form PF, such as those referenced in supra note 2497-2500
and the accompanying discussion, will not significantly alter the
estimated paperwork burdens.
---------------------------------------------------------------------------
Accordingly, the Commission estimates that our final amendments to
Form PF will result in paperwork burden hours and external costs as
follows. First, as discussed in the PRA analysis for our amendments to
Form N-MFP, the Commission estimates that the average annual amortized
burdens per money market fund imposed by Form N-MFP as amended are 149
hours \2507\ and $8,552 in external costs.\2508\ As discussed above,
the Commission estimates that large liquidity fund advisers generally
will incur similar burdens for each of their liquidity funds.
Accordingly, we estimate that large liquidity fund advisers will incur
a time cost of $38,740 associated with these 149 estimated burden hours
for each large liquidity fund.\2509\ The Commission therefore estimates
increased annual burdens per large liquidity fund adviser with two
large liquidity funds each of 298 burden hours, at a total time cost of
$79,566, and external costs of $17,104.\2510\ This will result in
increased aggregate burden hours across all large liquidity fund
advisers of 8,344 burden hours,\2511\ at a time cost of
$2,227,848,\2512\ and $478,912 in external costs.\2513\ Finally, the
aggregate annual, amortized paperwork burden for Form PF as amended
therefore will be 251,264
[[Page 47956]]
burden hours \2514\ and $23,531,712 in external costs.\2515\
---------------------------------------------------------------------------
\2507\ As discussed in the PRA analysis for Form N-MFP, the
Commission estimates that Form N-MFP, as amended, will result in an
aggregate annual, amortized collection of information burden of
83,412 hours. See supra note 2343 and accompanying text. Based on
the Commission's estimated 559 money market fund respondents, this
results in a per fund annual burden of approximately 149 hours.
\2508\ As discussed in the PRA analysis for Form N-MFP, the
Commission estimates that Form N-MFP, as amended, will result in an
aggregate external cost burden of $4,780,736. See supra note 2363
and accompanying text. Based on the Commission's estimated 559 money
market fund respondents, this results in a per fund annual external
cost burden of approximately $8,552.
\2509\ The Commission 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, the
Commission estimates that large liquidity fund advisers will use the
same professionals, and in comparable proportions (conservatively
based on the proportion of professionals used with respect to our
final amendments to Form N-MFP as amortized over the first three
years), for purposes of the Commission's estimate of time costs
associated with our amendments to Form PF. As discussed in supra
note 2362 and the accompanying text, amortizing these additional
hourly and cost burdens of our final amendments to Form N-MFP over
three years results in an average annual aggregate burden of
approximately 38,198 hours at a total time cost of $9,914,238, or
average time costs of approximately $260 per hour. This results in
the following estimated time cost for the Commission's estimated 149
hour burdens per liquidity fund: 149 burden hours (per liquidity
fund for Form PF) x $260 (average per hour time costs) = $38,740
additional time costs per fund.
\2510\ This estimate assumes for purposes of the PRA that each
large liquidity fund adviser advises two large liquidity funds (56
total liquidity funds / 28 large liquidity fund advisers). Each
large liquidity fund adviser therefore will incur the following
burdens: 149 Estimated burden hours per fund x 2 large liquidity
funds = 298 burden hours per large liquidity fund adviser; $38,740
estimated time cost per fund x 2 large liquidity funds = $77,480
time cost per large liquidity fund adviser; and $8,552 estimated
external costs per fund (based on $4,780,736 in total external costs
for 559 funds with respect to Form N-MFP) x 2 large liquidity funds
= $17,104 external costs per large liquidity fund adviser.
\2511\ This estimate is based on the following calculation: 298
Estimated additional burden hours per large liquidity fund adviser x
28 large liquidity fund advisers = 8,344.
\2512\ This estimate is based on the following calculation:
$77,480 Estimated time cost per large liquidity fund adviser x 28
large liquidity fund advisers = $2,169,440.
\2513\ This estimate is based on the following calculation:
$17,104 Estimated external costs per large liquidity fund adviser x
28 large liquidity fund advisers = $478,912.
\2514\ 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. As calculated
below, because we are reducing our estimate of the number of large
liquidity funds from 80 to 28, our estimates of costs will actually
decrease on an aggregate basis. However, on a per fund basis, our
amendments to Form PF will increase the burden hours per large
liquidity fund adviser by 298 hours, as discussed above, resulting
in a total of 588 burden hours per large liquidity fund adviser.
Multiplying 588 by the current estimated number of 28 large
liquidity fund advisers results in 16,464 burden hours attributable
to large liquidity fund advisers, a 6,736 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 - 6,736 reduction =
251,264).
\2515\ 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. As calculated
below, because we are reducing our estimate of the number of large
liquidity funds from 80 to 28, our estimates of external costs will
actually decrease on an aggregate basis. However, we estimate
external costs to increase on a per fund basis. Reducing these
estimates to reflect the Commission's current estimate of 28 large
liquidity fund adviser respondents results in costs of $1,400,000
(28 large liquidity fund advisers x $50,000 per adviser) and $16,800
(28 large liquidity fund advisers x $600), respectively, for an
aggregate cost of $1,416,800. These costs, plus the additional
external costs associated with our amendments to Form PF ($478,912
as estimated above), result in total external costs attributable to
large liquidity fund advisers of $1,895,712, a reduction of
$2,152,288 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 $23,531,712 (current approved
external cost burden of $25,684,000 - $2,152,288 reduction =
$23,531,712).
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V. Regulatory Flexibility Act Certification
Section 3(a) of the Regulatory Flexibility Act of 1980 \2516\
(``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.\2517\ As stated in the Proposing Release,
based on information in filings submitted to the Commission, we believe
that there are no money market funds that are small entities.\2518\
Accordingly, the Commission certified, pursuant to section 605(b) of
the RFA, that new rule 30b1-8 and Form N-CR under the 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, if
adopted would not have a significant economic impact on a substantial
number of small entities.\2519\ We included this certification in
section VI of the Proposing Release.\2520\
---------------------------------------------------------------------------
\2516\ 5 U.S.C. 603(a).
\2517\ 5 U.S.C. 605(b).
\2518\ See Proposing Release, supra note 25, at n.1249 and
accompanying text.
\2519\ 5 U.S.C. 605(b).
\2520\ See Proposing Release supra note 25, section VI.
---------------------------------------------------------------------------
We encouraged written comments regarding this certification.\2521\
One commenter responded.\2522\ Among other things, this commenter
argued that, while our certification evaluated the impact of our
amendments on money market funds to which the amendments directly
apply, we did not account for the ``impact on numerous smaller entities
that are investors in money market funds or that do business with money
market funds. . . .'' \2523\ This RFA certification is properly based
on the economic impact of the amended rule on the entities that are
subject to the requirements of the amended rule.\2524\ The numerous
other entities suggested by the commenter are not subject to the
requirements of the amended rule and also are not included in the
definition of ``small business'' or ``small organization'' for purposes
of the RFA under the Investment Company Act,\2525\ Investment Advisers
Act \2526\ or Securities Act.\2527\ We recognize, however, that
entities other than those subject to the requirements of the amended
rule may be affected by the amendments we adopt today. As such, we have
discussed in the appropriate sections of this Release the effects of
today's amendments on entities other than those subject to the
requirements of the amended rule.\2528\
---------------------------------------------------------------------------
\2521\ See Id.
\2522\ See Federated X Comment Letter.
\2523\ Id.
\2524\ In advancing the argument, the commenter relies on
Aeronautical Repair Station Association v. Federal Aviation
Administration, 494 F.3d 161 (D.C. Cir. 2007). This case is
inapposite, however, because there the agency's own rulemaking
release expressly stated that the rule imposed responsibilities
directly on certain small business contractors. The court reaffirmed
its prior holdings that the RFA limits its application to small
entities ``which will be subject to the proposed regulation--that
is, those small entities to which the proposed rule will apply.''
Id. at 176 (emphasis and internal quotations omitted). See also
Cement Kiln Recycling Coal v. EPA, 255F. 3d 855, 869 (D.C. Cir.
2001).
\2525\ See rule 0-10 of the Investment Company Act, which
defines the term ``small business'' or ``small organization'' for
purposes of rules under the Act to mean an investment company that,
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.
\2526\ See rule 0-07 of the Investment Advisers Act, which
defines the term ``small business'' or ``small organization'' for
purposes of rules under the Act to mean an investment adviser that,
among other things, has assets under management of less than $25
million. Our changes to rule 204(b)-1 and Form PF would only apply
to certain large liquidity fund advisers with at least $1 billion in
combined liquidity fund and money market fund assets, well above the
$25 million threshold in rule 0-7 under the Investment Advisers Act.
\2527\ See rule 157 of the Securities Act, which, with respect
to investment companies, adopts the definition of rule 0-10 of the
Investment Company Act. We also note that our changes to rule 482
under the Securities Act will only apply to advertisements by money
market funds and not by any other issuers, whereas we are making
only technical, conforming amendments to rule 419 under the
Securities Act.
\2528\ See, e.g., supra sections III.A.5, III.B.8, III.C and
III.K.
---------------------------------------------------------------------------
The commenter also noted that our RFA analysis fails to consider
money market funds that have yet to enter the industry and may need to
begin their operations as ``small entities.'' \2529\ We believe that
the commenter misconstrues the RFA, which contemplates that an agency
shall calculate the number of small businesses that currently would be
affected by its proposed regulation.\2530\
---------------------------------------------------------------------------
\2529\ See Federated X Comment Letter.
\2530\ For example, the Office of Advocacy for the United States
Small Business Administration (``SBA'') publishes a guide for
government agencies regarding how to comply with the RFA, which
contains an example of an appropriate RFA certification. This
example has an agency calculate the number of small businesses that
currently would be affected by a proposed regulation. See ``A Guide
for Government Agencies: How to Comply with the Regulatory
Flexibility Act,'' available at http://www.sba.gov/sites/default/files/rfaguide_0512_0.pdf.
---------------------------------------------------------------------------
For the reasons described above, the Commission again certifies
that the amendments to new rule 30b1-8 and Form N-CR under the
Investment Company Act of 1940 and the 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.
VI. Update To Codification of Financial Reporting Policies
The Commission amends the ``Codification of Financial Reporting
Policies'' announced in Financial Reporting Release No. 1 (April 15,
1982) [47 FR 21028] as follows:
1. By adding new Section 220 ``Cash Equivalents'' and including the
text of the second and third paragraphs of
[[Page 47957]]
Section III.A.7 and the third paragraph of Section III.B.6.b of this
Release.
2. By adding a new Section 404.05.c ``Guidance on the Amortized
Cost Method of Valuation and Other Valuation Concerns'' and including
the first two introductory paragraphs before Section III.D.1., except
for the phrase ``After further consideration, and as suggested by a
number of commenters,'' and except for footnote 870.
a. By adding the subject heading ``1. Use of Amortized Cost
Valuation'', and including the first, third and fourth paragraphs,
except for footnote 874, of Section III.D.1.
b. By adding the subject heading ``2. Other Valuation Matters'' and
including the first sentence of the first paragraph of Section III.D.2.
c. By adding the subject heading ``Fair Value for Thinly Traded
Securities'' and including below the subject heading, the fourth and
fifth paragraphs of Section III.D.2.
d. By adding the subject heading ``Use of Pricing Services'' and
including below the subject heading, the first sentence of the sixth
paragraph except for the phrase ``As noted above,'' and the seventh,
eighth and ninth paragraphs of Section III.D.2.
The Codification is a separate publication of the Commission. It
will not be published in the Federal Register or Code of Federal
Regulations. For more information on the Codification of Financial
Reporting Policies, contact the Commission's Public Reference Room at
202-551-5850.
VII. Statutory Authority
The Commission is adopting 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 adopting 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 adopting 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-34(d), and 80a-37(a)]. The Commission is
adopting 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 adopting 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 adopting 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 adopting 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 adopting 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 adopting
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 adopting 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
adopting amendments to Form PF pursuant to authority set forth in
Sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4(b) and
80b-11(e)].
List of Subjects in 17 CFR Parts 230, 239, 270, 274, and 279
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Rules and Forms
For reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The authority citation for part 230 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 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, and Pub. L. 112-106, sec. 201(a), 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
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)''.
0
3. Section 230.482 is amended:
0
a. In paragraph (b)(3)(i) by adding after ``An advertisement for a
money market fund'' the phrase ``that is a government money market
fund, as defined in Sec. 270.2a-7(a)(16) of this chapter, or a retail
money market fund, as defined in Sec. 270.2a-7(a)(25) of this
chapter''.
0
b. By revising paragraph (b)(4) to read as follows:
Sec. 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, that is not a
government money market fund, as defined in Sec. 270.2a-7(a)(16) of
this chapter, or a retail money market fund, as defined in Sec.
270.2a-7(a)(25) of this chapter, must include the following statement:
You could lose money by investing in the Fund. Because the share
price of the Fund will fluctuate, when you sell your shares they may
be worth more or less than what you originally paid for them. The
Fund may impose a fee upon sale of your shares or may temporarily
suspend your ability to sell shares if the Fund's liquidity falls
below required minimums because of market conditions or other
factors. 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, that is a government money market fund,
as defined in Sec. 270.2a-7(a)(16) of this chapter or a retail money
market fund, as defined in Sec. 270.2a-7(a)(25) of this chapter, and
that is subject to the requirements of Sec. 270.2a-7(c)(2)(i) and/or
(ii) of this chapter (or is not subject to the requirements of Sec.
270.2a-7(c)(2)(i) and/or (ii) of this chapter pursuant to Sec. 270.2a-
7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to
impose liquidity fees and suspend redemptions consistent with the
requirements of Sec. 270.2a-7(c)(2)(i) and/or (ii)), must include the
following statement:
You could lose money by investing in the Fund. Although the Fund
seeks to preserve the value of your investment at $1.00 per share,
it cannot guarantee it will do so. The Fund may impose a fee upon
sale of your
[[Page 47958]]
shares or may temporarily suspend your ability to sell shares if the
Fund's liquidity falls below required minimums because of market
conditions or other factors. 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.
(iii) An advertisement for an investment company that holds itself
out to be a money market fund, that is a government money market fund,
as defined in Sec. 270.2a-7(a)(16) of this chapter, that is not
subject to the requirements of Sec. 270.2a-7(c)(2)(i) and/or (ii) of
this chapter pursuant to Sec. 270.2a-7(c)(2)(iii) of this chapter, and
that has not chosen to rely on the ability to impose liquidity fees and
suspend redemptions consistent with the requirements of Sec. 270.2a-
7(c)(2)(i) and/or (ii)), must include the following statement:
You could lose money by investing in the Fund. Although the Fund
seeks to preserve the value of your investment at $1.00 per share,
it cannot guarantee it will do so. 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 contractually committed 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 any capital contribution, purchase of a security from the
Fund in reliance on Sec. 270.17a-9 of this chapter, purchase of any
defaulted or devalued security at par, execution of letter of credit
or letter of indemnity, capital support agreement (whether or not
the Fund ultimately received support), performance guarantee, or any
other similar action reasonably intended to increase or stabilize
the value or liquidity of the fund's portfolio; however, the term
``financial support'' excludes any routine waiver of fees or
reimbursement of fund expenses, routine inter-fund lending, routine
inter-fund purchases of fund shares, or any action that would
qualify as financial support as defined above, that the board of
directors has otherwise determined not to be reasonably intended to
increase or stabilize the value or liquidity of the fund's
portfolio.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
4. 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, and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *
0
5. Section 270.2a-7 is revised to read as follows:
Sec. 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 method of valuation means the method of
calculating an investment company's net asset value whereby portfolio
securities are valued at the fund's acquisition cost as adjusted for
amortization of premium or accretion of discount rather than at their
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 Sec.
270.5b-3(c)(1) except that Sec. 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;
(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) Demand feature issued by a non-controlled person means a
demand feature 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 demand feature (control means ``control'' 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.
(11) 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
[[Page 47959]]
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.
(12) 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
sub-categories 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)(12)(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).
(13) Event of insolvency has the same meaning as defined in Sec.
270.5b-3(c)(2).
(14) 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)(14)(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.
(15) 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.
(16) Government money market fund means 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) Government security has the same meaning as defined in section
2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).
(18) 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 asset-backed security for
purposes of this section, except paragraphs (a)(12)(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)(7) and (h)(6) of this
section).
(19) Guarantee issued by a non-controlled 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 means ``control'' 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.
(20) 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.
(21) 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.
(22) Rated security means a security that meets the requirements of
paragraphs (a)(22)(i) or (ii) of this section, in each case subject to
paragraph (a)(22)(iii) of this section:
(i) The security has received a short-term rating from a designated
NRSRO, or has been issued by an issuer that has
[[Page 47960]]
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)(22)(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)(22)(ii) of
this section.
(23) Refunded security has the same meaning as defined in Sec.
270.5b-3(c)(4).
(24) 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.
(25) Retail money market fund means a money market fund that has
policies and procedures reasonably designed to limit all beneficial
owners of the fund to natural persons.
(26) Second tier security means any eligible security that is not a
first tier security.
(27) 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.
(28) Tax exempt fund means any money market fund that holds itself
out as distributing income exempt from regular federal income tax.
(29) Total assets means, with respect to a money market fund using
the Amortized Cost Method, the total amortized cost of its assets and,
with respect to any other money market fund, 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.
(30) 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.
(31) United States dollar-denominated 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.
(32) Unrated security means a security that is not a rated
security.
(33) 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.
(34) 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) Holding out. 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) Names. 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) Titles. 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) Pricing and Redeeming Shares--(1) Share price calculation.
(i) The current price per share, for purposes of distribution,
redemption and repurchase, of any redeemable security issued by a
government money market fund or retail money market fund,
notwithstanding the requirements of section 2(a)(41) of the Act (15
U.S.C. 80a-2(a)(41)) and of Sec. Sec. 270.2a-4 and 270.22c-1
thereunder, may be computed by use of the amortized cost method and/or
the penny-rounding method. To use these methods, the board of directors
of the government or retail money market fund must determine, in good
faith, that it is in the best interests of the fund and its
shareholders to maintain a stable net asset value per share or stable
price per share, by virtue of either the amortized cost method and/or
the penny-rounding method. The government or retail money market fund
may continue to use such methods only so long as the board of directors
believes that they fairly reflect the market-based net asset value per
share and the fund complies with the other requirements of this
section.
(ii) Any money market fund that is not a government money market
fund or
[[Page 47961]]
a retail 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 a minimum of the fourth
decimal place in the case of a fund with a $1.0000 share price or an
equivalent or more precise level of accuracy for money market funds
with a different share price (e.g. $10.000 per share, or $100.00 per
share).
(2) Liquidity fees and temporary suspensions of redemptions. Except
as provided in paragraphs (c)(2)(iii) and (v) 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 Sec. 270.22c-1:
(i) Discretionary liquidity fees and temporary suspensions of
redemptions. If, at any time, the money market fund has invested less
than thirty percent of its total assets in weekly liquid assets, the
fund may institute a liquidity fee (not to exceed two percent of the
value of the shares redeemed) or suspend the right of redemption
temporarily, subject to paragraphs (c)(i)(A) and (B) of this section,
if the fund's board of directors, including a majority of the directors
who are not interested persons of the fund, determines that the fee or
suspension of redemptions is in the best interests of the fund.
(A) Duration and application of discretionary liquidity fee. Once
imposed, a discretionary liquidity fee must be applied to all shares
redeemed and must 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 such liquidity
fee is no longer in the best interests of the fund. Provided however,
that if, at 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.
(B) Duration of temporary suspension of redemptions. The temporary
suspension of redemptions must apply to all shares and must 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 that
the temporary suspension of redemptions is no longer in the best
interests of the fund. Provided, however, that the fund must restore
the right of redemption on the earlier of:
(1) The beginning of the next business day following a business day
that ended with the money market fund having invested thirty percent or
more of its total assets in weekly liquid assets; or
(2) The beginning of the next business day following ten business
days after suspending redemptions. The money market fund may not
suspend the right of redemption pursuant to this section for more than
ten business days in any rolling ninety calendar day period.
(ii) Default liquidity fees. If, at the end of a business day, the
money market fund has invested less than ten 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)(ii)(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 interests of the fund.
(A) Amount of default liquidity fee. The default liquidity fee
shall be one 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, at the time of
initial imposition or later, that a higher or lower fee level is in the
best interests of the fund. A liquidity fee may not exceed two percent
of the value of the shares redeemed.
(B) Duration and application of default liquidity fee. Once
imposed, the default liquidity fee must be applied to all shares
redeemed and 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 such liquidity
fee is not in the best interests of the fund. Provided however, that
if, at 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.
(iii) Government money market funds. The requirements of paragraphs
(c)(2)(i) and (ii) of this section shall not apply to a government
money market fund. A government money market fund may, however, choose
to rely on the ability to impose liquidity fees and suspend redemptions
consistent with the requirements of paragraph (c)(2)(i) and/or (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 (Sec. 274.11A of this chapter)).
(iv) Variable contracts. Notwithstanding section 27(i) of the Act
(15 U.S.C. 80a-27(i)), a variable insurance contract issued 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 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.
(v) Master feeder funds. Any money market fund (a ``feeder fund'')
that owns, pursuant to section 12(d)(1)(E) of the Act (15 U.S.C. 80a-
12(d)(1)(E)), shares of another money market fund (a ``master fund'')
may not impose liquidity fees or temporary suspensions of redemptions
under paragraphs (c)(2)(i) and (ii) of this section, provided however,
that if a master fund, in which the feeder fund invests, imposes a
liquidity fee or temporary suspension of redemptions pursuant to
paragraphs (c)(2)(i) and (ii) of this section, then the feeder fund
shall pass through to its investors the fee or redemption suspension on
the same terms and conditions as imposed by the master fund.
(d) Risk-limiting conditions--(1) Portfolio maturity. The money
market fund must maintain a dollar-weighted average portfolio maturity
appropriate to its investment objective; 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
[[Page 47962]]
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--(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.
(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 paragraph (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--(1) General. The
money market fund, when calculating the amount of its total assets
invested in securities issued by any particular issuer for purposes of
[[Page 47963]]
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.
(2) Equity owners of asset-backed commercial paper special purpose
entities. The money market fund is not required to aggregate an asset-
backed commercial paper special purpose entity and its equity owners
under paragraph (d)(3)(ii)(F)(1) of this section provided that a
primary line of business of its equity owners is owning equity
interests in special purpose entities and providing services to special
purpose entities, the independent equity owners' activities with
respect to the SPEs are limited to providing management or
administrative services, and no qualifying assets of the special
purpose entity were originated by the equity owners.
(3) Ten percent obligors. For purposes of determining ten percent
obligors pursuant to paragraph (d)(3)(ii)(D)(1)(i) of this section, the
money market fund must treat as a single person two or more persons
whose obligations in the aggregate constitute ten percent or more of
the principal amount of the qualifying assets of the primary ABS if one
person controls the other, is controlled by the other person, or is
under common control with the person, provided that ``control'' for
this purpose means ownership of more than 50 percent of the person'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, subject to paragraphs (d)(3)(iii)(B) and
(d)(3)(iii)(C) of this section.
(B) Tax exempt funds. 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 (any such acquisition, a ``demand feature or
guarantee acquisition''), a tax exempt fund, with respect to eighty-
five percent of its total assets, 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; provided that any demand feature or
guarantee acquisition in excess of ten percent of the fund's total
assets in accordance with this paragraph must be a demand feature or
guarantee issued by a non-controlled person.
(C) 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 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
[[Page 47964]]
(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
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 (Sec. 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)(18)(ii) of this section is
continuing, without protest, to provide credit, liquidity or other
support as necessary to permit the asset-backed 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) Funds using amortized cost. In the case of a government or
retail money market fund that uses the amortized cost method of
valuation, 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, shall establish written
procedures reasonably designed, taking into account current market
conditions and the money market fund's investment objectives, to
stabilize the money market fund's net asset value per share, as
computed for the purpose of distribution, redemption and repurchase, at
a single value.
(i) Specific procedures. Included within the procedures adopted by
the board of directors shall be the following:
(A) Shadow pricing. Written procedures shall provide:
(1) That the extent of deviation, if any, of the current net asset
value per share calculated using available market quotations (or an
appropriate substitute that reflects current market conditions) from
the money market fund's amortized cost price per share, shall be
calculated at least daily, and at such other intervals that the board
of directors determines appropriate and reasonable in light of current
market conditions;
(2) For the periodic review by the board of directors of the amount
of the deviation as well as the methods used to calculate the
deviation; and
(3) For the maintenance of records of the determination of
deviation and the board's review thereof.
(B) Prompt consideration of deviation. In the event such deviation
from the money market fund's amortized cost price per share exceeds \1/
2\ of 1 percent, the board of directors shall promptly consider what
action, if any, should be initiated by the board of directors.
(C) Material dilution or unfair results. Where the board of
directors believes the extent of any deviation from the money market
fund's amortized cost price per share may result in material dilution
or other unfair results to investors or existing shareholders, it shall
cause the fund to take such action as it deems appropriate to eliminate
or reduce to the extent reasonably practicable such dilution or unfair
results.
(ii) [Reserved]
(2) Funds using penny rounding. In the case of a government or
retail money market fund that uses the penny rounding method of
pricing, 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 single price established by the board of directors.
(3) 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
[[Page 47965]]
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.
(4) 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.
(5) 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.
(6) Ten percent obligors of asset-backed 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.
(7) 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.
(8) Stress Testing. Written procedures must provide for:
(i) General. The periodic stress 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 ten percent of its total assets in weekly liquid
assets, and the fund's ability to minimize principal volatility (and,
in the case of a money market fund using the amortized cost method of
valuation or penny rounding method of pricing as provided in paragraph
(c)(1) 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, in
combination with various levels of an increase in shareholder
redemptions;
(B) A downgrade or default of particular portfolio security
positions, each representing various portions of the fund's portfolio
(with varying assumptions about the resulting loss in the value of the
security), in combination with various levels of an increase in
shareholder redemptions;
(C) A widening of spreads compared to the indexes to which
portfolio securities are tied in various sectors in the fund's
portfolio (in which a sector is a logically related subset of portfolio
securities, such as securities of issuers in similar or related
industries or geographic region or securities of a similar security
type), in combination with various levels of an increase in shareholder
redemptions; and
(D) Any additional combinations of events that the adviser deems
relevant.
(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 an
assessment of the money market fund's ability to have invested at least
ten percent of its total assets in weekly liquid assets and to minimize
principal volatility (and, in the case of a money market fund using the
amortized cost method of valuation or penny rounding method of pricing
as provided in paragraph (c)(1) of this section to maintain 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. The fund adviser must include a summary of
the significant assumptions made when performing the stress tests.
(h) Recordkeeping and reporting--(1) Written procedures. For a
period of not less than six years following the replacement of existing
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 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)(5) 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
[[Page 47966]]
preserved and maintained, in an easily accessible place, of the
determinations required by paragraph (g)(6) 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 asset-backed 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 asset-backed 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)(7) 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)(4) 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)(8)(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 identifies
the instrument from among the following: U.S. Treasury Debt; U.S.
Government Agency Debt; Non-U.S. Sovereign, Sub-Sovereign and Supra-
National debt; Certificate of Deposit; Non-Negotiable Time Deposit;
Variable Rate Demand Note; Other Municipal Security; Asset Backed
Commercial Paper; Other Asset Backed Securities; U.S. Treasury
Repurchase Agreement, if collateralized only by U.S. Treasuries
(including Strips) and cash; U.S. Government Agency Repurchase
Agreement, collateralized only by U.S. Government Agency securities,
U.S. Treasuries, and cash; Other Repurchase Agreement, if any
collateral falls outside Treasury, Government Agency and cash;
Insurance Company Funding Agreement; Investment Company; Financial
Company Commercial Paper; and Non-Financial Company Commercial Paper.
If Other Instrument, include a brief description);
(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 amortized
cost or penny-rounding method, if used), rounded to the fourth decimal
place in the case of funds with a $1.000 share price or an equivalent
level of accuracy for funds with a different share price (e.g., $10.00
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 Sec. 270.30b1-
7.
(v) For a period of not less than one year, beginning no later than
the same business day on which the money market fund files an initial
report on Form N-CR (Sec. 274.222 of this chapter) in response to the
occurrence of any event specified in Parts C, E, F, or G of Form N-CR,
the same information that the money market fund is required to report
to the Commission on Part C (Items C.1, C.2, C.3, C.4, C.5, C.6, and
C.7), Part E (Items E.1, E.2, E.3, and E.4), Part F (Items F.1 and
F.2), or Part G of Form N-CR concerning such event, along with the
following statement: ``The Fund was required to disclose additional
information about this event [or ``these events,'' as appropriate] on
Form N-CR and to file this form with the Securities and Exchange
Commission. Any Form N-CR filing submitted by the Fund is available on
the EDGAR Database on the Securities and Exchange Commission's Internet
site at http://www.sec.gov.''
(11) Processing of transactions. A government money market fund and
a retail 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 Sec.
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
[[Page 47967]]
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 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)(11)(i) (designation of NRSROs), (c)(1)
(board findings), (c)(2)(i) and (ii) (determinations related to
liquidity fees and temporary suspensions of redemptions), (f)(2)
(defaults and other events), (g)(1) and (g)(2) (amortized cost and
penny rounding procedures), and (g)(8) (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 (Sec. 274.222 of this chapter)) to
assure that the guidelines and procedures are being followed.
0
6. Section 270.12d3-1(d)(7)(v) is amended by removing ``Sec. Sec.
270.2a-7(a)(8) and 270.2a-7(a)(15)'' and adding in its place
``Sec. Sec. 270.2a-7(a)(9) and 270.2a-7(a)(18)''.
0
7. 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
Sec. 270.2a-7'' and adding in its place ``that operates in compliance
with Sec. 270.2a-7''.
0
8. Section Sec. 270.22e-3 is amended by revising paragraph (a)(1) and
adding paragraph (d).
The revisions and additions read as follows.
Sec. 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
ten percent of its total assets in weekly liquid assets or, in the case
of a fund that is a government money market fund, as defined in Sec.
270.2a-7(a)(16) or a retail money market fund, as defined in Sec.
270.2a-7(a)(25), 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 Sec. 270.2a-7.
0
9. Section 270.30b1-7 is revised to read as follows:
Sec. 270.30b1-7 Monthly report for money market funds.
Every registered open-end management investment company, or series
thereof, that is regulated as a money market fund under Sec. 270.2a-7
must file with the Commission a monthly report of portfolio holdings on
Form N-MFP (Sec. 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.
0
10. Section 270.30b1-8 is added to read as follows:
Sec. 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 Sec. 270.2a-7,
[[Page 47968]]
that experiences any of the events specified on Form N-CR (274.222 of
this chapter), must file with the Commission a current report on Form
N-CR within the period specified in that form.
0
11. Section 270.31a-1(b)(1) is amended by removing ``Sec. 270.2a-
7(a)(8) or Sec. 270.2a-7(a)(15)'' and adding in its place ``Sec.
270.2a-7(a)(9) or Sec. 270.2a-7(a)(18)''.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
12. 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, 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, 80a-37, and Pub. L. 111-203, sec. 939A, 124
Stat. 1376 (2010), unless otherwise noted.
* * * * *
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
13. 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, 80a-29, and Pub. L. 111-203,
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
14. Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) is amended
by:
0
a. Revising paragraph 2(b) of the instructions to Item 3;
0
b. Revising paragraph (b)(1)(ii) of Item 4; and
0
c. 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.
Form N-1A
* * * * *
Item 3. Risk/Return Summary: Fee Table
* * * * *
Instructions.
* * * * *
2. Shareholder Fees.
* * * * *
(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 that is not a
government Money Market Fund, as defined in Sec. 270.2a-7(a)(16) or a
retail Money Market Fund, as defined in Sec. 270.2a-7(a)(25), include
the following statement:
You could lose money by investing in the Fund. Because the share
price of the Fund will fluctuate, when you sell your shares they may
be worth more or less than what you originally paid for them. The
Fund may impose a fee upon sale of your shares or may temporarily
suspend your ability to sell shares if the Fund's liquidity falls
below required minimums because of market conditions or other
factors. 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 a government Money
Market Fund, as defined in Sec. 270.2a-7(a)(16), or a retail Money
Market Fund, as defined in Sec. 270.2a-7(a)(25), and that is subject
to the requirements of Sec. Sec. 270.2a-7(c)(2)(i) and/or (ii) of this
chapter (or is not subject to the requirements of Sec. Sec. 270.2a-
7(c)(2)(i) and/or (ii) of this chapter pursuant to Sec. 270.2a-
7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to
impose liquidity fees and suspend redemptions consistent with the
requirements of Sec. Sec. 270.2a-7(c)(2)(i) and/or (ii)), include the
following statement:
You could lose money by investing in the Fund. Although the Fund
seeks to preserve the value of your investment at $1.00 per share,
it cannot guarantee it will do so. The Fund may impose a fee upon
sale of your shares or may temporarily suspend your ability to sell
shares if the Fund's liquidity falls below required minimums because
of market conditions or other factors. 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.
(C) If the Fund is a Money Market Fund that is a government Money
Market Fund, as defined in Sec. 270.2a-7(a)(16), that is not subject
to the requirements of Sec. Sec. 270.2a-7(c)(2)(i) and/or (ii) of this
chapter pursuant to Sec. 270.2a-7(c)(2)(iii) of this chapter, and that
has not chosen to rely on the ability to impose liquidity fees and
suspend redemptions consistent with the requirements of Sec. Sec.
270.2a-7(c)(2)(i) and/or (ii)), include the following statement:
You could lose money by investing in the Fund. Although the Fund
seeks to preserve the value of your investment at $1.00 per share,
it cannot guarantee it will do so. 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
contractually committed 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 statement
specified in Item 4(b)(1)(ii)(A), Item 4(b)(1)(ii)(B), or Item
4(b)(1)(ii)(C) 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 purposes of this Instruction, the term
``financial support'' includes any capital contribution, purchase of a
security from the Fund in reliance on Sec. 270.17a-9, purchase of any
defaulted or devalued security at par, execution of letter of credit or
letter of indemnity, capital support agreement (whether or not the Fund
ultimately received support), performance guarantee, or any other
similar action reasonably intended to increase or stabilize the value
or liquidity of the fund's portfolio; however, the term ``financial
support'' excludes any routine waiver of fees or reimbursement of fund
expenses, routine inter-fund lending, routine inter-fund purchases of
fund shares, or any action that would qualify as financial support as
defined above, that the board of directors has otherwise determined not
to be reasonably intended to increase or stabilize the value or
liquidity of the fund's portfolio.
* * * * *
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
[[Page 47969]]
that is not subject to the requirements of Sec. Sec. 270.2a-7(c)(2)(i)
and/or (ii) of this chapter pursuant to Sec. 270.2a-7(c)(2)(iii) of
this chapter, and has not chosen to rely on the ability to impose
liquidity fees and suspend redemptions consistent with the requirements
of Sec. Sec. 270.2a-7(c)(2)(i) and/or (ii)) disclose, as applicable,
the following events:
(1) Imposition of Liquidity Fees and Temporary Suspensions of Fund
Redemptions.
(i) During the last 10 years, any occasion on which the Fund has
invested less than ten percent of its total assets in weekly liquid
assets (as provided in Sec. 270.2a-7(c)(2)(ii)), and with respect to
each such occasion, whether the Fund's board of directors determined to
impose a liquidity fee pursuant to Sec. 270.2a-7(c)(2)(ii) and/or
temporarily suspend the Fund's redemptions pursuant to Sec. 270.2a-
7(c)(2)(i).
(ii) During the last 10 years, any occasion on which the Fund has
invested less than thirty percent, but more than ten percent, of its
total assets in weekly liquid assets (as provided in Sec. 270.2a-
7(c)(2)(i)) and the Fund's board of directors has determined to impose
a liquidity fee pursuant to Sec. 270.2a-7(c)(2)(i) and/or temporarily
suspend the Fund's redemptions pursuant to Sec. 270.2a-7(c)(2)(i).
Instructions
1. With respect to each such occasion, disclose: the dates and
length of time for which the Fund invested less than ten percent (or
thirty percent, as applicable) 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 Sec.
270.2a-7(c)(2)(i) or Sec. 270.2a-7(c)(2)(ii), and/or temporarily
suspend the Fund's redemptions pursuant to Sec. 270.2a-7(c)(2)(i); and
the size of any liquidity fee imposed pursuant to Sec. 270.2a-
7(c)(2)(i) or Sec. 270.2a-7(c)(2)(ii).
2. The disclosure required by Item 16(g)(1) should incorporate, as
appropriate, any information that the Fund is required to report to the
Commission on Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR
[17 CFR 274.222].
3. The disclosure required by Item 16(g)(1) should conclude with
the following statement: ``The Fund was required to disclose additional
information about this event [or ``these events,'' as appropriate] on
Form N-CR and to file this form with the Securities and Exchange
Commission. Any Form N-CR filing submitted by the Fund is available on
the EDGAR Database on the Securities and Exchange Commission's Internet
site at http://www.sec.gov.''
(2) Financial Support Provided to Money Market Funds. 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, date support provided, amount of support, security
supported (if applicable), and the value of security supported on date
support was initiated (if applicable).
Instructions
1. The term ``financial support'' includes any capital
contribution, purchase of a security from the Fund in reliance on Sec.
270.17a-9, purchase of any defaulted or devalued security at par,
execution of letter of credit or letter of indemnity, capital support
agreement (whether or not the Fund ultimately received support),
performance guarantee, or any other similar action reasonably intended
to increase or stabilize the value or liquidity of the Fund's
portfolio; excluding, however, any routine waiver of fees or
reimbursement of Fund expenses, routine inter-fund lending, routine
inter-fund purchases of Fund shares, or any action that would qualify
as financial support as defined above, that the board of directors has
otherwise determined not to be reasonably intended to increase or
stabilize the value or liquidity of the Fund's portfolio.
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. If the person
or entity that previously provided financial support to a merging
investment company is not currently an affiliated person, promoter, or
principal underwriter of the Fund, the Fund need not provide the
information required by Item 16(g)(2) with respect to that merging
investment company.
3. The disclosure required by Item 16(g)(2) should incorporate, as
appropriate, any information that the Fund is required to report to the
Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR
[17 CFR 274.222].
4. The disclosure required by Item 16(g)(2) should conclude with
the following statement: ``The Fund was required to disclose additional
information about this event [or ``these events,'' as appropriate] on
Form N-CR and to file this form with the Securities and Exchange
Commission. Any Form N-CR filing submitted by the Fund is available on
the EDGAR Database on the Securities and Exchange Commission's Internet
site at http://www.sec.gov.''
0
15. Form N-MFP (referenced in Sec. 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.
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
[[Page 47970]]
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 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 two-tiered arrangement in which one
or more Funds (or registered or unregistered pooled investment
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
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.
a. SEC file number of each sub-adviser.
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 identifies the money
market fund from among the following: Treasury, Government/Agency,
Exempt Government, Prime, Single State, or Other Tax Exempt.
a. Is this fund an exempt retail fund as defined in 270.2a-
7(a)(25)[Y/N]?
[[Page 47971]]
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, 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 to the nearest cent:
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 Assets (including Daily Liquid
Assets) to the nearest cent:
i. Friday, week 1:
ii. Friday, week 2:
iii. Friday, week 3:
iv. Friday, week 4:
v. Friday, week 5 (if applicable):
c. Percentage of Total Assets invested in 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):
d. Percentage of Total Assets invested in Weekly Liquid 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.)
i. If any portfolio securities are valued using amortized cost, the
total value of the portfolio securities valued at amortized cost.
c. Total Value of other assets (excluding amounts provided in
A.14.a-c.)
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 fund seeks to maintain.
Item A.19 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.20 Net asset value per share. Provide the net asset value per
share, calculated using available market quotations (or an appropriate
substitute that reflects current market conditions) 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), 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):
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, calculated using available market quotations (or an appropriate
substitute that reflects current market conditions), 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), 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:
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):
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 (Sec. 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).
[[Page 47972]]
Part C: Schedule of Portfolio Securities
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 (including coupon, if applicable).
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, Sub-
Sovereign and Supra-National debt; Certificate of Deposit; Non-
Negotiable Time Deposit; Variable Rate Demand Note; Other Municipal
Security; Asset Backed Commercial Paper; Other Asset Backed Securities;
U.S. Treasury Repurchase Agreement, if collateralized only by U.S.
Treasuries (including Strips) and cash; U.S. Government Agency
Repurchase Agreement, collateralized only by U.S. Government Agency
securities, U.S. Treasuries, and cash; Other Repurchase Agreement, if
any collateral falls outside Treasury, Government Agency and cash;
Insurance Company Funding Agreement; Investment Company; Financial
Company Commercial Paper; Non-Financial Company Commercial Paper; or
Tender Option Bond. 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 diversification under rule 2a-7? [Y/N]
Item C.8 For 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. LEI (if available).
d. Maturity date.
e. Coupon or yield.
f. The principal amount, to the nearest cent.
g. Value of collateral, to the nearest cent.
h. The category of investments that most closely represents the
collateral, selected from among the following:
Asset-Backed Securities; Agency Collateralized Mortgage Obligations;
Agency Debentures and Agency Strips; Agency Mortgage-Backed Securities;
Private Label Collateralized Mortgage Obligations; Corporate Debt
Securities; Equities; Money Market; U.S. Treasuries (including strips);
Other Instrument. If Other Instrument, include a brief description,
including, if applicable, whether it is a collateralized debt
obligation, municipal debt, whole loan, or international debt.
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 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 ultimate
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
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).
[[Page 47973]]
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 yield of the security as of the reporting date.
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 Is the security categorized at level 3 in the fair value
hierarchy under U.S. Generally Accepted Accounting Principles (ASC 820,
Fair Value Measurement) [Y/N]?
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]
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.
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.
-----------------------------------------------------------------------
(Registrant)
-----------------------------------------------------------------------
Date
-----------------------------------------------------------------------
(Signature)*
*Print name and title of the signing officer under his/her signature.
0
16. Section 274.222 and Form N-CR are added to read as follows:
Sec. 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 Sec. 270.2a-7 of this chapter to
file current reports pursuant to Sec. 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 N-CR in its
regulatory, disclosure review, inspection, and policymaking roles.
General Instructions
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-H 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-H 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-H
of the form.
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 has reviewed this collection of
information under the clearance requirements of 44 U.S.C. 3507.
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.
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
[[Page 47974]]
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. Disclose the name of the
issuer, the title of the issue (including coupon or yield, if
applicable) and at least two identifiers, if available (e.g., CUSIP,
ISIN, CIK, LEI).
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, or has taken,
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
asset-backed 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.
A report responding to Items B.1 through B.4 is to be filed within
one business day after occurrence of an event contemplated in this Part
B. An amended report responding to Item B.5 is to be filed within four
business days after occurrence of an event contemplated in this Part B.
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 any (i) capital contribution,
(ii) purchase of a security from the fund in reliance on Sec. 270.17a-
9, (iii) purchase of any defaulted or devalued security at par, (iv)
execution of letter of credit or letter of indemnity, (v) capital
support agreement (whether or not the fund ultimately received
support), (vi) performance guarantee, or (vii) any other similar action
reasonably intended to increase or stabilize the value or liquidity of
the fund's portfolio; excluding, however, any (i) routine waiver of
fees or reimbursement of fund expenses, (ii) routine inter-fund lending
(iii) routine inter-fund purchases of fund shares, or (iv) any action
that would qualify as financial support as defined above, that the
board of directors has otherwise determined not to be reasonably
intended to increase or stabilize the value or liquidity of the fund's
portfolio), 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 Date support provided.
Item C.5 Amount of support.
Item C.6 Security supported (if applicable). Disclose the name of the
issuer, the title of the issue (including coupon or yield, if
applicable) and at least two identifiers, if available (e.g., CUSIP,
ISIN, CIK, LEI).
Item C.7 Value of security supported on date support was initiated (if
applicable).
Item C.8 Brief description of reason for support.
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 Sec. 270.17a-9, the
fund must provide the purchase price of the security in responding to
Item C.6.
A report responding to Items C.1 through C.7 is to be filed within
one business day after occurrence of an event contemplated in this Part
C. An amended report responding to Items C.8 through C.10 is to be
filed within four business days after occurrence of an event
contemplated in this Part C.
Part D: Deviation Between Current Net Asset Value per Share and
Intended Stable Price per Share
If a retail money market fund's or a government money market 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 downward 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 or reasons 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. For any such security, disclose the name of the issuer, the
title of the issue (including coupon or yield, if applicable) and at
least two identifiers, if available (e.g., CUSIP, ISIN, CIK, LEI).
Instruction. A report responding to Items D.1 and D.2 is to be
filed within one business day after occurrence of an event contemplated
in this Part D. An amended report responding to Items D.3 is to be
filed within four business days after occurrence of an event
contemplated in this Part D.
Part E: Imposition of Liquidity Fee
If a fund (except a government money market fund that is relying on
the exemption in rule 2a-7(c)(2)(iii)): (i) At the end of a business
day, has invested less than ten percent of its total assets in weekly
liquid assets or (ii) has invested less than thirty percent of its
total assets in weekly liquid assets and imposes a liquidity fee
pursuant to rule 2a-7(c)(2)(i) or (ii), disclose the following
information:
Item E.1 Initial date on which the fund invested less than ten percent
of its total assets in weekly liquid assets, if applicable.
Item E.2 If the fund imposes a liquidity fee pursuant to rule 2a-
7(c)(2), date on which the fund instituted the liquidity fee.
Item E.3 Percentage of the fund's total assets invested in weekly
liquid assets as of the dates reported in items E.1 and E.2, as
applicable.
Item E.4 Size of the liquidity fee, if any.
Item E.5 Brief description of the facts and circumstances leading to
the fund's investing in the amount of weekly liquid assets reported in
Item E.3.
[[Page 47975]]
Item E.6 Brief discussion of the primary considerations or factors
taken in account by the board of directors in its decision to impose
(or not impose) a liquidity fee.
Instruction. A report responding to Items E.1 though E.4 is to be
filed within one business day after occurrence of an event contemplated
in this Part E. An amended report responding to Items E.5 and E.6 is to
be filed within four business days after occurrence of an event
contemplated in this Part E.
Part F: Suspension of Fund Redemptions
If a fund suspends redemptions pursuant to rule 2a-7(c)(2)(i),
disclose the following information:
Item F.1 Percentage of the fund's total assets invested in weekly
liquid assets as of the date on which the fund suspended redemptions.
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 in the amount of weekly liquid assets stated in
Item F.1.
Item F.4 Brief discussion of the primary considerations or factors
taken in account by the board of directors in its decision to suspend
the fund's redemptions.
Instruction. A report responding to Items F.1 and F.2 is to be
filed within one business day after occurrence of an event contemplated
in this Part F. An amended report responding to Items F.3 and F.4 is to
be filed within four business days after occurrence of an event
contemplated in this Part F.
Part G: Removal of Liquidity Fees and/or Resumption of Fund Redemptions
If a fund 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:
Item G.1 Date on which the fund removed the liquidity fee and/or
resumed fund redemptions.
Part H: Optional Disclosure
If a fund chooses, at its option, to disclose any other events or
information not otherwise required by this form, it may do so under
this Item H.1.
Item H.1 Optional disclosure.
Instruction. Item H.1 is intended to provide a fund with additional
flexibility, if it so chooses, to disclose any other events or
information not otherwise required by this form, or to supplement or
clarify any of the disclosures required elsewhere in this form. Part H
does not impose on funds any affirmative obligation. A fund may file a
report on Form N-CR responding to Part H at any time.
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.
-----------------------------------------------------------------------
(Registrant)
-----------------------------------------------------------------------
Date
-----------------------------------------------------------------------
(Signature)*
*Print name and title of the signing officer under his/her signature.
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
17. 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.
0
18. Form PF (referenced in Sec. 279.9) is amended by:
0
a. In General Instruction 15, removing the reference to Question 57
from the last bulleted sentence;
0
b. Revising section 3;
0
c. In the Glossary of Terms, adding and revising certain terms.
0
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
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* * * * *
Glossary of Terms
* * * * *
Conditional demand feature Has the meaning provided in rule 2a-7.
* * * * *
Credit rating agency Any nationally recognized statistical rating
organizations, as that term is defined in section 3(a)(62) of the
Securities Exchange Act of 1934.
* * * * *
Demand feature Has the meaning provided in rule 2a-7.
* * * * *
Guarantee For purposes of Question 63, has the meaning provided in
paragraph (a)(16)(i) of rule 2a-7.
Guarantor For purposes of Question 63, the provider of any
guarantee.
* * * * *
Illiquid security Has the meaning provided in rule 2a-7.
* * * * *
Maturity The maturity of the relevant asset, determined without
reference to the maturity shortening provisions contained in paragraph
(i) of rule 2a-7 regarding interest rate readjustments.
* * * * *
Risk limiting conditions The conditions specified in paragraph (d)
of rule 2a-7.
* * * * *
WAL Weighted average portfolio maturity of a liquidity fund
calculated taking into account the maturity shortening provisions
contained in paragraph (i) of rule 2a-7, but determined without
reference to the exceptions in paragraph (i) of rule 2a-7 regarding
interest rate readjustments.
WAM Weighted average portfolio maturity of a liquidity fund
calculated taking into account the maturity shortening provisions
contained in paragraph (i) of rule 2a-7.
By the Commission.
Dated: July 23, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17747 Filed 8-13-14; 8:45 a.m.]
BILLING CODE 8011-01-C