The Treasury and the IRS received a comment letter from Federated Investors before the October 27th deadline on its proposal to simplify tax accounting on floating rate money fund shares, "Money Market Funds: Method of Accounting for Gains and Losses on Shares and Broker Returns with Respect to Sales of Shares," which accompanied the SEC's July 23 Money Fund Reforms. This is just the second letter that the IRS/Treasury has received on this issue; the first was from the Investment Company Institute, which we wrote about on October 28, "Few Comments on Treasury, IRS Tax Proposal on MMF Gains and Losses."
The proposal by the U.S. Department Treasury and IRS allows floating NAV money market fund investors to use a simplified tax accounting method to track gains and losses and provide relief from the "wash sale" rules for any losses on shares of a floating NAV money market fund. As we wrote in our July 30 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal," this proposal sealed the deal for the passage of money market reform as SEC Commissioner Daniel Gallagher, who turned out to be the swing vote, said he would not have voted in favor without this assurance from the Treasury and IRS.
The latest letter was penned by George Howell with the law firm, Hunton & Williams on behalf of Federated Investors. "This comment letter addresses several technical issues with respect to the Proposed Regulations that, in our view, require revisions or clarifications to the regulations before they are finalized," he wrote. To be exact, Howell suggested 7 revisions. One, the fair market value of an MMF share should equal its published NAV per share. "To make the Proposed Regulations workable from an administrative perspective, it is important to clarify that the fair market value of MMF shares is determined based on the NAV per share information that is published by the applicable MMF. In particular, the Proposed Regulations should state that the fair market value of a floating NAV MMF share for purposes of the Proposed Regulations is the published NAV per share as of the end of the relevant day (or the next trading day if the day in question is not a trading day)."
Two, the "aggregate amount received" for purposes of determining the shareholder's "net investment" should equal the cash proceeds received or, if non-cash property is received, the published NAV per share of the redeemed or exchanged shares. "The regulations should be revised to clarify that the aggregate amount received is equal to: (i) if cash is received, the cash proceeds; (ii) if shares in another MMF are received, the published NAV per share of the shares received as of the end of the day on which the redemption or exchange occurs (or the next trading day if the day in question is not a trading day); and (iii) if other non-cash property is received, the NAV per share of the redeemed or exchanged shares as of the end of the day on which the redemption or exchange occurs (or the next trading day if the day in question is not a trading day or, if the fund will no longer publish NAV per share, its last published NAV per share)."
The letter continues, "Three, if MMF shares are acquired in a carryover basis transaction from a person that itself uses the NAV method, the transferee's "net investment" should be adjusted by the published NAV per share as of the acquisition date. The Proposed Regulations do not address a situation where the shareholder receives a carryover basis in acquired MMF shares. In that situation, if the person from whom the shareholder acquired the shares itself uses the NAV method, then the adjusted basis of the acquired shares should be treated as the published NAV per share applicable to the acquisition date. The regulations should be revised accordingly."
Four, the NAV election should be allowed on an account by account basis. "The Proposed Regulations require a taxpayer who uses the NAV method to use it for all shares held by the taxpayer in floating NAV MMFs. No rationale for this all or nothing approach is provided in either the Proposed Regulations or the preamble. We recommend that taxpayers be permitted to adopt the NAV method on an account by account basis." Five, the Proposed Regulations take the proper approach with respect to basis adjustments. "The preamble to the regulations refers to downward basis adjustments under sections 108(b)(2)(E) and 301(c)(2), but does not provide examples of any upward adjustments.... We recommend that the regulations be revised to provide examples of both upward and downward adjustments."
Six, bifurcation should be permitted for "mixed character" MMF accounts. "Neither the Proposed Regulations nor the preamble provide an explanation as to why all gain or loss should be treated as capital in the case of an account containing MMF shares of mixed character. We recommend that the Proposed Regulations be revised to provide that the character of the gain or loss with respect to a mixed character account be bifurcated based on the portion of the MMF shares that would generate gain of each character."
The letter adds, "Seven, the NAV election and wash sale exemption should be available for shareholders of stable-value NAV funds that have imposed a liquidity fee. Shareholders in a stable-value MMF that has imposed a liquidity fee face the same issue that shareholders in a floating NAV MMF face, namely, that it would be necessary to calculate gain or loss upon each redemption of MMF shares. To avoid this significant tax compliance burden, shareholders in a stable-value MMF that has imposed a liquidity fee should also be permitted to elect the NAV method."
In other news, Fitch Ratings assigned an 'AAAmmf' rating to the Morgan Stanley Institutional Liquidity Fund - Money Market Portfolio managed by Morgan Stanley Investment Management. The press release says, "The 'AAAmmf' rating assignment reflects the fund's extremely strong capacity to achieve its investment objectives of preserving capital and providing shareholder liquidity through limiting credit, market and liquidity risks. The fund seeks a high level of current income consistent with liquidity and the preservation of capital by investing in short-term U.S. dollar-denominated debt obligations, including obligations of domestic and foreign banks, commercial paper, municipal securities and repurchase agreements backed by U.S. Treasury and agency securities or investment grade debt securities."
It explains, "As of Oct. 3, 2014, the fund had $2.5 billion in assets.... The fund seeks to manage its market risk exposure by limiting its dollar-weighted average maturity (WAM) and weighted average life to maturity (WAL) to 60 and 120 days, respectively, consistent with Fitch's 'AAAmmf' rating criteria. The fund must invest at least 10% of total assets in daily liquid assets and at least 30% of total assets in weekly liquid assets. As of this rating assignment, the fund fully met these liquidity requirements. In addition, this is consistent with Fitch's 'AAAmmf' rating criteria. Given the long implementation period for the reforms, Fitch's rating assignment takes into account the current structure and operations of money funds."
