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It’s Here: SEC Proposes Floating NAV for MMFs

  • By Ira Apfel
  • Published: 2013-06-05

(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 investment options.

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 securities.
  • 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 stress.

  • 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.
  • Redemption 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 time.

Copyright © 2014 Association for Financial Professionals, Inc.
All rights reserved.

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