Floating NAV and Accounting Software
Wall Street and Technology posted an article by James Sanford, portfolio manager and financial advisor for Sag Harbor Advisors called "SEC Reforms: What Floating NAVs Mean for Money Market Funds and Accounting Software." Writes Sanford, "The SEC just passed a rule that changes the way money market accounts are valued, but it's not just investors that will be impacted. It could also change the way accounting software keeps track of capital gains and losses. Money market funds used to be treated as fixed prices equal to $1 per share -- similar to savings accounts where a dollar is worth a dollar, regardless of time. But under the new SEC rule, money market funds will be priced on a floating system that reflects market movements. In simple terms, the accounts will have capital gains and losses that must be accounted for under the current tax code. The SEC voted July 23 to implement a floating net asset value (NAV) for prime institutional money market funds, as opposed to the previous NAV that remained fixed at $1. This is an attempt at providing more transparency into a fund's underlying market value. Since mutual funds are currently fixed at "$1 par," there is technically no capital gains/losses, but that will change once the floating system is implemented. Accounting software will need to reflect the 1099Bs capital gains and losses unless this tax code is changed. The SEC has discussed with the Treasury Department how to make these gains/losses nontaxable, but as of now, the issue isn't resolved [sic]. This change could soon force all accounting firms to embed tax accounting software that reflects these new gains and losses. Money market accounts are a $2.6 trillion industry that impacts nearly every investor who parks cash, so this new SEC rule has large ramifications for a large number of investors, as well." [`Note: The article sppears to be unaware of the tax relief granted by the Treasury and IRS for floating rate funds, once they go live in late 2016.] Also, Employee Benefit News published a piece called, "What Plan Sponsors Need to Know About Money Fund Changes." Author Robert Lawton, Lawton Retirement Plan Consultants, offers some advice for plan sponsors, "Since it is likely that your 401(k) plan uses a prime money market fund, you will need to explain this change to plan participants. Most are under the impression that they can't lose any money in your money market fund. In other words, participants tend to believe these funds are like savings accounts. That may no longer be true. Ask your investment adviser to investigate the underlying credit quality of the investments in the money market fund you use. If it is weak, you may wish to consider changing your money market fund."
