Money Market Funds Reform
The U.S. Securities and Exchange Commission (SEC) approved new regulations in July of 2014 that will affect the users of all U.S. money market mutual funds (MMFs). From the time the SEC proposed some of these rules last year, AFP has expressed concerns regarding regulations that would to eliminate the stable NAV and introduce the possibility of redemption fees and gates.
The new regulations, which are slated to take effect in 2016, include the following provisions:
- Floating the NAV: Prime institutional funds will be subject to market-based price fluctuations and no longer be granted amortized cost valuation.
- Price Fluctuation: Prime institutional funds must be priced with greater precision to show more exact fund value fluctuation. Instead of current methods of pricing shares to the nearest one percent (or 'penny rounding'), prime institution funds will be required to employ “basis point rounding” – that is, rounding their value to the nearest 1/100th of one percent.
- Liquidity Fees: If the weekly liquid assets of a fund decline below 30% of total assets, the money market fund will be allowed to impose a liquidity fee of up to 2% on redemptions at its discretion. If the weekly liquid assets decline below 15% of total assets, a 1% redemption fee would be required unless the fund’s board determines that a different fee – including no fee at all – is in the best interest of the fund and its shareholders.
- Redemption Gates: At the discretion of a fund's board of directors, a temporary suspension of redemptions may be imposed, if weekly liquid assets fall below the 30% threshold. Gates cannot exceed 10 business days in any 90-day calendar period.
- Fund Disclosure: Funds must publicly disclose in a timely manner any decline below the 10% “weekly liquid asset” threshold whereby fees become mandatory unless the board votes otherwise. The new rules specify a range of other disclosure requirements as well.
- Exemptions for Government and Retail Funds: Government and retail money market funds maintain current pricing and valuation methods, including a stable net asset value. They are, however, subject to redemption fees and gates. Retail funds are now defined as funds whose shares are owned by individuals, rather than organizations. Government funds are now defined as those investing more than 99.5% of their assets in US government securities, cash, or government repurchase agreements.
AFP believes that these rules will greatly reduce investors’ interest in utilizing MMFs as a cash management and investment tool. This holds for both retail and institutional investors. For purchasers of MMFs, the return of principal is a much greater driver of the investment decision than return on principal. For a large number of institutional investors, the potential of principal loss would preclude floating-NAV MMFs from being an internally approved investment alternative.
For more information, view the AFP webinar "Regulatory Update: Newly Adopted Money-Market Fund Rules" from July 31, 2014 (sign-in required).
AFP Coalition Partners’ Activity
The U.S. Chamber of Commerce has organized a comprehensive campaign to ensure that the SEC’s proposed rule to reform money market mutual funds does not adversely impact organizations’ ability to manage and raise the capital necessary to drive job creation and economic growth. Click here to learn more about the Chamber’s efforts.
The Investment Company Institute (ICI) has also launched a website dedicated to advocating again additional SEC reforms. Click here to learn more about their efforts.
Comment Letters and Testimonies