We continue trying to make our way through the Securities & Exchange Commission's massive 698-page "Money Market Fund Reform Proposal." While the summary "Fact Sheet" made it seem like the proposal was a welcome compromise, we're beginning to have second thoughts on the measure. The disclosure and new transparency requirements alone could overwhelm funds with costs and drown investors in information. The Proposal's "Amendments to Disclosure Requirements" explains (on page 314), "We are proposing amendments to rule 2a-7 and Form N-1A that would require money market funds to provide additional disclosure in certain areas to provide greater transparency regarding money market funds, so that investors have an opportunity to better evaluate the risks of investing in a particular fund and that the Commission and other financial regulators obtain important information needed to administer their regulatory programs. As discussed in more detail below, these amendments would require enhanced registration statement and website disclosure about: (i) any type of financial support provided to a money market fund by the fund's sponsor or an affiliated person of the fund; (ii) the fund's daily and weekly liquidity levels; and (iii) the fund's daily current NAV per share, rounded to the fourth decimal place in the case of funds with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price (e.g., $10.000 or $100.00 per share)."
They write, "In addition, we are considering whether to require more frequent disclosure of money market funds' portfolio holdings. We are also proposing amendments to rule 2a-7 that would require stable price money market funds to calculate their current NAV per share (rounded to the fourth decimal place in the case of funds with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price) daily, as a corollary to the proposed requirement for money market funds to disclose their daily current NAV per share. In addition, we are proposing a new rule that would require money market funds to file new Form N-CR with the Commission when certain events (such as instances of portfolio security default, sponsor support of funds, and other similar significant events) occur."
Under "Financial Support Provided to Money Market Funds, Proposed Disclosure Requirements," the proposal tells us, "Throughout the history of money market funds, and in particular during the 2007-2008 financial crisis, money market fund sponsors and other fund affiliates have, on occasion, provided financial support to money market funds. Indeed, one study estimates that during the period from 2007 to 2011, direct sponsor support to money market funds totaled at least $4.4 billion, for 78 of the 314 funds the study reviewed. We continue to believe that sponsor support will provide fund sponsors with the flexibility to protect shareholder interests."
It adds, "Additionally, if we ultimately adopt the liquidity fees and gates alternative, sponsor support would allow sponsors the flexibility to prevent a money market fund from breaching the 15% weekly liquid asset threshold that would otherwise require the board to impose a liquidity fee (absent a board finding that doing so would not be in the fund's best interest) and permit the board to impose a gate. However, we believe that if money market fund investors do not understand the nature and extent that the fund's sponsor has discretionarily supported the fund, they may not fully appreciate the risks of investing in the fund. For these reasons, we propose requiring money market funds to disclose current and historical instances of sponsor support."
The SEC comments, "Accordingly, we are proposing amendments to Form N-1A that would require money market funds to provide SAI disclosure regarding historical instances in which the fund has received financial support from a sponsor or fund affiliate. Specifically, the proposed amendments would require each money market fund to disclose any occasion during the last ten years on which an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, provided any form of financial support to the fund."
They then discuss "Daily Disclosure of Daily Liquid Assets and Weekly Liquid Assets," saying, "We are proposing amendments to rule 2a-7 that would require money market funds to disclose prominently on their websites the percentage of the fund's total assets that are invested in daily and weekly liquid assets, as well as the fund's net inflows or outflows, as of the end of the previous business day. The proposed amendments would require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its investments in daily liquid assets and weekly liquid assets, as well as the fund's net inflows or outflows, for the previous 6 months, and would require the fund to update this historical information each business day, as of the end of the preceding business day. These amendments would complement the proposed requirement, as discussed elsewhere in this Release, for money market funds to provide on their monthly reports on Form N-MFP the percentage of total assets invested in daily liquid assets and weekly liquid assets broken out on a weekly basis."
The release explains, "We believe that daily disclosure of money market funds' daily liquid assets and weekly liquid assets would promote transparency regarding how money market funds are managed, and thus may permit investors to make more efficient and informed investment decisions. Additionally, we believe that this enhanced disclosure may impose external market discipline on portfolio managers, in that it may encourage fund managers to carefully manage their daily and weekly liquid assets, which may decrease portfolio risk and promote stability in the short-term financing markets."
Regarding "Daily Website Disclosure of Current NAV per Share, the SEC writes, "We are proposing amendments to rule 2a-7 that would require each money market fund to disclose daily, prominently on its website, the fund's current NAV per share, rounded to the fourth decimal place in the case of a fund with a $1.0000 share price of an equivalent level of accuracy for funds with a different share price (the fund's "current NAV") as of the end of the previous business day. The proposed amendments would require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its daily current NAV per share for the previous 6 months, and would require the fund to update this historical information each business day as of the end of the preceding business day. If we were to adopt the floating NAV alternative, the proposed amendments would effectively require a money market fund to publish historical information about the sale and redemption price of its shares each business day as of the end of each preceding business day."
They add, "Whether we adopt either of the proposed reform alternatives, we believe that daily disclosure of money market funds' current NAV per share would increase money market funds' transparency and permit investors to better understand money market funds' risks. While Form N-MFP information about money market funds' month-end shadow prices is currently publicly available with a 60-day lag, the proposed amendments would permit shareholders to reference funds' current NAV per share in near real time to assess the effect of market events on their portfolios."
The "Disclosure of Portfolio Holdings discuss the "Harmonization of Rule 2a-7 and Form N-MFP Portfolio Holdings Disclosure Requirements," saying, "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 website each month with 60-day delay. We are proposing amendments to rule 2a-7 in order to harmonize the specific portfolio holdings information that rule 2a-7 currently requires funds to disclose on the fund's website with the corresponding portfolio holdings information proposed to be reported on Form N-MFP pursuant to proposed amendments to Form N-MFP. We believe that these proposed amendments would benefit money market fund investors by providing additional, and more precise, information about portfolio holdings information, which could allow investors better to evaluate the current risks of the fund's portfolio investments."
They tell us, "Specifically, we are proposing amendments to the categories of portfolio investments reported on Form N-MFP, and are therefore also proposing amendments to the categories of portfolio investments currently required to be reported on a money market fund's website. We are also proposing an amendment to Form N-MFP that would require funds to report the maturity date for each portfolio security using the maturity date used to calculate the dollar-weighted average life maturity, and therefore we are also proposing amendments to the current website disclosure requirements regarding portfolio securities' maturity dates." The SEC also has a long list of additional information on portfolio securities. (Note that Crane Data collects and publishes monthly and weekly Money Fund Portfolio Holdings, and that we plan on adapting to the final disclosure rules once they're approved and implemented, probably late in 2014.)
The SEC adds, "Because certain money market funds have high portfolio turnover rates, the monthly disclosure requirement described above may not permit fund investors to fully understand a fund's portfolio composition and its attendant risks. For this reason, during times of stress, uncertainty regarding portfolio composition could increase investors' incentives to redeem in between reporting periods, as they would not be able to determine if their fund is exposed to certain stressed assets. We are considering whether to require more frequent disclosure of money market funds' portfolio holdings on a fund's website."
Finally, they say, "We also propose to require that funds disclose the total percentage of shares outstanding, to the nearest tenth of one percent, held by the twenty largest shareholders of record. This information would help us (and investors) identify funds with significant potential redemption risk stemming from shareholder concentration, and evaluate the likelihood that a significant market or credit event might result in a run on the fund or the imposition of a liquidity fee or gate, if we were to adopt that aspect of our proposal. Investors may avoid overly concentrated funds and this preference may incentivize some funds to avoid becoming too concentrated."
