The clock is now officially ticking on the countdown to money market reforms as the Securities and Exchange Commission's proposal reached its "effective date" on October 14. That means that money market funds may now begin to start complying with the new rules before they take effect, explained the attorneys at Stroock & Stroock & Lavan, in the most recent issue of the Stroock Bulletin, entitled, "Effective Date for Money Market Fund Reforms Arrives: Implications for Funds, their Boards and Advisers." Stroock Partner and former SEC Associate Director of the Division of Investment Management Robert Plaze, and Partner Nicole Runyan, write, "It is imperative for sponsors and boards of money market funds to utilize this compliance period to develop an operational and oversight process to transition money market funds to the new regulatory regime."

The compliance dates vary, and range from nine months to two years for the SEC's recent Money Fund Reforms. The compliance date for floating NAV and fees and gates requirements, including any related disclosure amendments, is October 14, 2016. The compliance date for reporting on Form NCR is July 14, 2015, while the compliance date for the amendments relating to the diversification and stress testing requirements, as well as the revised disclosure and reporting requirements not related to the floating NAV or liquidity fees and gates requirements, is April 14, 2016.

The article provides an overview of the amendments, adopted on July 23, 2014. The introduction of the 45-page report says, "The SEC explained that the Amendments are designed to address money funds' susceptibility to shareholder runs, 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. In adopting the Amendments, the SEC essentially combined the two separate regulatory alternatives it proposed in June 2013. The first proposed alternative would have required "institutional prime money funds" to "float" their net asset value ("NAV") per share instead of using a stable NAV per share (generally, $1.00). The second proposed alternative would have permitted all money funds to continue to transact at a stable share price, but would have (i) required money funds (other than as-defined government money funds) to impose a liquidity fee in times of market and/or fund stress and (ii) authorized money fund boards of directors/trustees ("boards") to temporarily suspend redemptions of fund shares (i.e., impose a "gate") in similar circumstances."

It continues, "The Amendments require all money funds that do not qualify as "retail money market funds" or "government money market funds" to price and transact in their shares at NAVs reflecting current market-based values of their portfolio securities (i.e., at a "floating NAV") no later than October 14, 2016. The exclusion of retail money funds from the Amendments' floating NAV requirements reflects a major victory for sponsors of funds primarily offered to retail investors, who had argued that those investors did not participate in the 2008 runs on money funds and, as a result, their funds did not pose a systemic risk to the broader financial system. The Amendments, however, reflect a loss for sponsors of tax-exempt money funds that invest in municipal securities, who had made similar arguments that failed to persuade the SEC. Under amended Rule 2a-7, municipal money funds must adopt a floating NAV unless they qualify as retail money funds."

Further, "The Amendments also require both institutional money funds (which must use a floating NAV) and retail money funds (which may continue to use a stable NAV) that otherwise do not qualify as government money funds to make provision for imposing liquidity fees and gates in the event of a shortfall of fund liquidity no later than October 14, 2016. In a change from the Proposing Release, however, the SEC gave money fund boards discretion to impose liquidity fees and gates under the Amendments. This grant of broad discretion almost ensures that money fund boards will find themselves in the middle of any future money fund crisis."

It goes on, "In addition, while the potential loss of the exemptions in Rule 2a-7 that facilitated money funds' maintenance of stable NAVs animated much of the debate since the financial crisis in 2008, it was the liquidity fees and gates alternative in the Proposing Release that stirred the most controversy as the SEC was rounding the last turn of its marathon rulemaking effort. A number of economists, including staff of the Federal Reserve Bank of New York, and some money fund sponsors expressed concerns that investors seeking to avoid paying liquidity fees or having their assets locked up in a gated fund would engage in preemptive runs on money funds at the first indication of market or portfolio stress."

The Stroock piece continues, "They argued that the liquidity fees and gates proposed by the SEC would operate to increase, rather than decrease, the instability of money funds. In the Adopting Release, however, the SEC asserted that the final version of the liquidity fees and gates requirements contained in the Amendments would address those concerns by making the imposition of liquidity fees less certain and permitting the imposition of gates for a shorter period. The changes did not satisfy these critics, including SEC Commissioner Stein who voted against the Amendments citing similar concerns."

Finally, it adds, "Subsequently, the Financial Stability Oversight Council (FSOC) issued a statement suggesting it had similar concerns about the SEC's adopted approach and stated that, while it would not take any current action on its proposed recommendations to the SEC, it would monitor the effectiveness of the Amendments to better understand any "unintended consequences" of liquidity fees and gates. Former SEC Chair Mary Schapiro also recently echoed those concerns." To read the full report, visit Stroock.com.

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