(Updated at 4:49 PM, June 5):
The Securities and Exchange Commission today ended months of
speculation by unanimously voting to float the net asset value of
money-market mutual funds, ending a practice of a stable NAV and
potentially sending corporate treasurers scrambling for new
The five-member SEC issued two proposals for public
consideration. The following proposals come from a fact sheet SEC
released to the media. The fact sheet was not immediately available
at the SEC's website.
Alternative One: Floating NAV -
Under the first alternative, prime institutional money market funds
would be required to transact at a floating net asset value (NAV),
not at a $1.00 stable share price. The floating NAV alternative is
designed primarily to address the heightened incentive shareholders
have to redeem shares in times of financial stress. It also is
intended to improve the transparency of money market fund risks
through more visible valuation and pricing methods.
- Floating the NAV - Prime
institutional money market funds would no longer be able to use
amortized cost to value their portfolio securities except to the
limited extent all mutual funds are able to do so. Daily share
prices of these money market funds would fluctuate along with
changes, if any, in the market-based value of their portfolio
- Showing Fluctuations in Price - Under
the first alternative, prime institutional money market funds would
be required to price their shares using a more precise method so
that investors are more likely to see fluctuations in value.
Currently, money market funds "penny round" their share price to
the nearest one percent (to the nearest penny in the case of a fund
with a $1.00 share price). Under the floating NAV proposal, prime
institutional money market funds instead would be required to
"basis point round" their share price to the nearest 1/100th of one
percent (the fourth decimal place in the case of a fund with a
$1.0000 share price).
- Exempting Government and Retail Money Market Funds
- Government and retail money market funds would
be allowed to continue using the penny rounding method of pricing
and maintain a stable share price. A government money market fund
would be defined as any money market fund that holds at least 80
percent of its assets in cash, government securities, or repurchase
agreements collateralized with government securities. A retail
money market fund would be defined as a money market fund that
limits each shareholder's redemptions to no more than $1 million
per business day.
Alternative Two: Liquidity Fees and Redemption
Gates - Under the second alternative, money market
funds would continue to transact at a stable share price, but would
be able to use liquidity fees and redemption gates in times of
- Liquidity Fees - If a money
market fund's level of "weekly liquid assets" were to fall below 15
percent of its total assets (half the required amount), the money
market fund would have to impose a 2 percent liquidity fee on all
redemptions. However, such a fee would not be imposed if the fund's
board of directors determines that such a fee is not in the best
interest of the fund or that a lesser liquidity fee is in the best
interest of the fund. Weekly liquid assets generally include cash,
U.S. Treasury securities, certain other government securities with
remaining maturities of 60 days or less, and securities that
convert into cash within one week.
Gates - Once a money market fund
had crossed this threshold, its board of directors also would be
able to impose a temporary suspension of redemptions (or "gate"). A
money market fund that imposes a gate would need to lift that gate
within 30 days, although the board of directors could determine to
lift the gate earlier. Money market funds would not be able to
impose a gate for more than 30 days in any 90-day period.
- Prompt Public
Disclosure - Money market funds
would be required to promptly and publicly disclose the fund
crossing of the 15 percent weekly liquid asset threshold, the
imposition and removal of any liquidity fee or gate, and a
discussion of the board's analysis in determining whether or not to
impose a fee or gate.
- Exemption for Government Money Market
Funds - Government money market
funds would be exempt from the fees and gates requirement. However,
these funds could voluntarily opt into this new requirement.
The SEC also is considering the following:
- Potentially combing both proposals
- Enhanced disclosure requirements
- Immediate reporting of fund portfolio holdings
- Improved private liquidity fund reporting
- Stronger diversification requirements
- Enhanced stress testing.
The SEC's floating NAV only is for prime MMFs that invest in
corporate debt, not those that invest in government and municipal
debt. Prime MMFs were subject to investor runs during the 2008
financial crisis and the SEC is hoping that ending the stable NAV
for these investments will prevent future runs.
AFP staff will continue to closely monitor this issue and
anticipates offering extensive formal comments at the appropriate