Last week, the Securities & Exchange Commission posted its "Money Market Fund Reform Proposal. Today, we begin highlighting what we consider to be important pieces of the proposal. The "Discussion" of the new proposal starts on page 45. It says, "We are proposing alternative amendments to rule 2a-7, and related rules and forms, that would either (i) require money market funds (other than government and retail money market funds)125 to "float" their NAV per share or (ii) require that a money market fund (other than a government fund) whose weekly liquid assets fall below 15% of its total assets be required to impose a liquidity fee of 2% on all redemptions (unless the fund's board determines that the liquidity fee is not in the best interest of the fund). Under the second alternative, once the money market fund crosses this threshold, the fund's board also would have the ability to temporarily suspend redemptions (or "gate") the fund for a limited period of time if the board determines that doing so is in the fund's best interest. We discuss each of these alternative proposals in this section, along with potential tax, accounting, operational, and economic implications. We also discuss a potential combination of our floating NAV proposal and liquidity fees and gates proposal, as well as the potential benefits, drawbacks, and operational issues associated with such a potential combination. We also discuss various alternative approaches that we have considered for money market fund reform."
The SEC's Proposal explains, "In addition, we are proposing a number of other amendments that would apply under either alternative proposal to enhance the disclosure of money market fund operations and risks. Certain of our proposed disclosure requirements would vary depending on the alternative proposal adopted (if any) as they specifically relate to the floating NAV proposal or the liquidity fees and gates proposal. In addition, we are proposing additional disclosure reforms to improve the transparency of risks present in money market funds, including daily website disclosure of funds' daily and weekly liquid assets and market-based NAV per share and historic instances of sponsor support. We also are proposing to establish a new current event disclosure form that would require funds to make prompt public disclosure of certain events, including portfolio security defaults, sponsor support, a fall in the funds' weekly liquid assets below 15% of total assets, and a fall in the market-based price of the fund below $0.9975."
It continues, "We are proposing to amend Form N-MFP to provide additional information relevant to assessing the risk of funds and make this information public immediately upon filing. In addition, we are proposing to require that a large liquidity fund adviser that manages a private liquidity fund provide security-level reporting on Form PF that are substantially the same as those currently required to be reported by money market funds on Form N-MFP. Our proposed amendments also would tighten the diversification requirements of rule 2a-7 by requiring consolidation of certain affiliates for purposes of the 5% issuer diversification requirement, requiring funds to presumptively treat the sponsors of asset-backed securities ("ABSs") as guarantors subject to rule 2a-7's diversification requirements, and removing the so-called "twenty-five percent basket." Finally, we are proposing to amend the stress testing provision of rule 2a-7 to enhance how funds stress test their portfolios and require that money market funds stress test against the fund's level of weekly liquid assets falling below 15% of total assets."
The SEC adds, "We note finally that we are not rescinding our outstanding 2011 proposal to remove references to credit ratings from two rules and four forms under the Investment Company Act, including rule 2a-7 and Form N-MFP, under section 939A of the Dodd-Frank Act, and on which we welcome additional comments. The Commission intends to address this matter at another time and, therefore, this Release is based on rule 2a-7 and Form N-MFP as amended and adopted in 2010."
On the "Floating Net Asset Value" (see page 47), the Commission writes, "Our first alternative proposal -- a floating NAV -- is designed primarily to address the incentive of money market fund shareholders to redeem shares in times of fund and market stress based on the fund's valuation and pricing methods, as discussed in section II.B.1 above. It should also improve the transparency of pricing associated with money market funds. Under this alternative, money market funds (other than government and retail money market funds) would be required to "float" their net asset value. This proposal would amend 132 rule 2a-7 to rescind certain exemptions that have permitted money market funds to maintain a stable price by use of amortized cost valuation and penny-rounding pricing of their portfolios. As a result, the money market funds subject to this reform would sell and redeem shares at prices that reflect the value using market-based factors of their portfolio securities and would not penny round their prices. In other words, the daily share prices of these money market funds would "float," which means that each fund's NAV would fluctuate along with changes, if any, in the value using market-based factors of the fund's underlying portfolio of securities. Money market funds would only be able to use amortized cost valuation to the extent other mutual funds are able to do so -- where the fund's board of directors determines, in good faith, that the fair value of debt securities with remaining maturities of 60 days or less is their amortized cost, unless the particular circumstances warrant otherwise."
They tell us, "Under this approach, the "risk limiting" provisions of rule 2a-7 would continue to apply to money market funds. Accordingly, mutual funds that hold themselves out as money market funds would continue to be limited to investing in short-term, high-quality, dollar-denominated instruments. We would, however, rescind rule 2a-7's provisions that relate to the maintenance of a stable value for these funds, including shadow pricing, and would adopt the other reforms discussed in this Release that are not related to the discretionary standby liquidity fees and gates alternative, as discussed in section III.B below. We also propose to require that all money market funds, other than government and retail money market funds, price their shares using a more precise method of rounding. The proposal would require that each money market fund round prices and transact in its shares at the fourth decimal place in the case of a fund with a $1.00 target share price (i.e., $1.0000) or an equivalent level of precision if a fund prices its shares at a different target level (e.g., a fund with a $10 target share price would price its shares at $10.000). Depending on the degree of fluctuation, this precision would increase the observed sensitivity of a fund's share price to changes in the market values of the fund's portfolio securities, and should better inform shareholders of the floating nature of the fund's value."
The Proposal says, "Finally, we propose a relatively long compliance date of 2 years to provide time for money market funds converting to a floating NAV on a permanent basis to make system modifications and time for funds to respond to redemption requests. The extended compliance date would also allow shareholders time to understand the implications of any reforms, determine if a floating NAV money market fund is an appropriate investment, and if not, redeem their shares in an orderly fashion."
