Although money market fund reforms don't kick in until October 2016, Goldman Sachs Asset Management announced this week that it intends to comply with the new rules for government money market funds now, nearly two years early. Goldman, the 3rd largest MMF manager in the world with $246.6B in global MMF assets (and 8th largest in the US), has already made changes to four of its MMFs to comply with the reforms. Their press release explains, "Though compliance with the new government money market fund definition is not required until October 2016, GSAM will comply with the new definition and its requirements early in response to investor demand to help ease the transition to new money market fund rules."

"We hope that by confirming that our government money market funds will comply with the new definition of "government money market fund" today, we will simplify one aspect of implementation during this transition period," said Jim McNamara, Global Head of Third Party Distribution. "Government money market funds will remain an important liquidity solution, and we want to make it clear that we are committed to offering government money market funds with a stable net asset value and without liquidity fees or redemption gates."

The release continues, "On December 18, 2014, the Goldman Sachs Funds' Board of Directors approved changes that clarify that the funds will comply with the new definition of "government money market fund," which requires that a fund invest 99.5% or more of its assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized fully by cash or U.S. government securities. In addition, the Board did not elect to implement "liquidity fees" and/or "gates" at this time. "Government money market funds" meeting this definition are neither required to float their net asset values (NAVs) nor required to impose a "liquidity fee" and/or "gate" that temporarily restricts redemptions from the funds when liquidity levels fall to certain levels."

The changes will not impact any of the Treasury or government fund's investment profiles. "We've historically limited the investments of these funds only to U.S. government securities, because investors generally seek out government money market funds for their explicit investment in government-only strategies," said McNamara. "These updates are merely designed to give investors assurance about the funds' compliance with the new rules. We recognize that implementation of the new rule set will be a phased process for most investors, and could require a reevaluation of all available liquidity options with large-scale policy, operational, and technological changes in order to implement." The four GSAM MMFs impacted are the Goldman Sachs Financial Square Government Fund; the Goldman Sachs Financial Square Federal Fund; the Goldman Sachs Financial Square Treasury Obligations Fund; and the Goldman Sachs Financial Square Treasury Instruments Fund.

On the topic of reforms, Invesco posted some videos on its website that succinctly explain the key provisions of the pending changes. On "New Definitions," Esther Chance, Head of Credit Liquidity/Asia-Pacific Portfolio Management at Invesco, says, "One of the things to come out of these rules is the creation of a new distinction between retail and institutional funds. Government funds will continue to transact at a stable NAV. The retail and institutional distinction will apply to prime and municipal money market funds. A retail money market fund would be allowed to price and transact at a share price of $1 as it does today. Institutional money market funds will need to maintain a floating net asset value based on the current market value of the securities. The definition of a retail money market fund will be amended to "a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons.""

Chance continues, "It's important to clarify that in its release accompanying the final rules, the SEC states that money market funds will have flexibility in how they choose to comply with the natural persons test including developing policies and procedures that best suit a funds investor base. The SEC expects that many funds will rely on social security numbers to confirm beneficial ownership by a natural person. However, a money market fund or the appropriate intermediary could determine that the beneficial ownership of a non U.S. natural person be obtained by government issued Identification; one example would be a passport. Some examples of a retail account could include participant directed defined contribution plans, individual retirement accounts, or college savings plans. Some examples of institutional accounts could include small businesses, defined benefit plans, or endowments. It's important to reiterate that the funds will have the flexibility in how they choose to comply with the natural person test."

On "New Liquidity Fees and Redemption Gates," Chance says, "Under the current rules, money market funds are required to hold 30% in weekly liquidity. Under these new rules, if a money market fund's level of weekly liquid assets falls below 30% of its total assets, the money market fund's board would be allowed to impose these new tools of fees and gates. If weekly liquid assets fall below 30%, money market funds would be allowed to impose a liquidity fee of up to 2% on all redemptions. In contrast, if weekly liquid assets fall below 10%, money market funds would be required to impose a liquidity fee of 1% on all redemptions. In both cases, a money market fund's board of directors has the discretion to determine if such a fee is in the best interest of the fund."

She adds, "If weekly liquid assets fall below 30%, money market funds could temporarily suspend redemptions or gate a fund. To impose a gate, the fund's board of directors would find that imposing a gate is in a money market fund's best interest. A money market fund that imposes a gate would be required to lift that gate within 10 business days. The board could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90 day period. It's important to remember that a fund's board of directors maintains discretion over what is in the best interest of the shareholders so that fees and gates are really additional tools that the board has to protect investors in times of stress. The SEC stated that it expects fees and gates only rarely and in extreme circumstances."

A man who played a key role in developing the MMF reforms, Norm Champ, the SEC's Director of the Division of Investment Management, will leave the agency later this month. "The Commission has benefited greatly from Norm's expertise and sound judgment and we have been very fortunate to have had him work on behalf of U.S. investors and our markets," said SEC Chair Mary Jo White. "His efforts on important rulemakings and the organizational changes he has put in place will leave a lasting mark on the Commission."

Champ, who has been with the SEC for 5 years, said, "It has been a privilege to serve with the talented people of the SEC in both the Division of Investment Management and the Office of Compliance Inspections and Examinations as we worked together to fulfill the agency's mission. Together, we were able to restructure both organizations to increase transparency, increase cooperation across Divisions and offices, provide staff with more opportunities and improve the agency's use of data while at the same time accomplishing significant policy goals." Champ will be a Visiting Scholar for Spring Term 2015 at Harvard Law School, where he also is a lecturer, teaching a course on investment management law.

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