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Questions About the Floating NAV

  • By Jeanine H. Arnett, Director, Government Relations & Policy, AFP
  • Published: 2013-06-27

The Securities and Exchange Commission (SEC) recently proposed changes to the rules governing money-market funds (MMFs) and, as part of the regulatory process, is seeking public comments. To help focus its proposal, the SEC has a number of questions it would like answered—particularly about the proposed floating net asset value (NAV), which would allow MMF shares to fluctuate on prime institutional funds.

  • Treasury and finance professionals can submit comments here after reading the proposal and the SEC’s questions.
  • You can read other public comments here.

Specifically, the SEC would like treasury and finance professionals to address the following questions: 

  • Do commenters agree that floating a money market fund’s NAV would lessen the incentive to redeem shares in times of fund and market stress that can result from use of amortized cost valuation and penny rounding pricing by money market funds today?
  • What would be the effect of the other incentives to redeem that would remain under a floating NAV with basis point pricing requirement?
  • Would floating a money market fund’s NAV provide sufficient transparency to cause investors to estimate more accurately the investment risks of money market funds?
  • Do commenters believe that daily disclosure of shadow prices on fund websites would accomplish the same goal without eliminating the stable share price at which fund investors purchase and redeem shares? Why or why not?
  • Is daily disclosure of a fund’s shadow price without transacting at that price likely to lead to higher or lower risks of large redemptions in times of stress?
  • If the enhanced disclosure requirements proposed elsewhere in this Release were in place, what would be the incremental benefit of the enhanced transparency of a floating NAV?
  • Are there other places to disclose the shadow price that would make the disclosure more effective in enhancing transparency?
  • If the fluctuations in money market funds’ NAVs remained relatively small even with a $1.0000 share price, would investors become accustomed only to experiencing  small gains and losses, and therefore be inclined to redeem heavily if a fund experienced a loss in excess of investors’ expectations?
  • Would investors in a floating NAV money market fund that appears likely to suffer a loss be less inclined to redeem because the loss would be shared pro rata by all shareholders?
  • Would a floating NAV make investors in a fund more likely to redeem at the first sign of potential stress because any loss would be immediately reflected in the floating NAV?
  • Would floating NAV money market funds treat non-redeeming shareholders, and particularly slower-to-redeem shareholders, more equitably in times of stress?
  • To the extent that some investors choose not to invest in money market funds due to the prospect of even a modest loss through a floating NAV, would the funds’ resiliency to heightened redemptions be improved?
  • Would money market fund sponsors voluntarily make cash contributions or use other available means to support their money market funds and thereby prevent their NAVs from actually floating?
  • Would larger fund sponsors or those sponsors with more access to capital have a competitive advantage over other fund sponsors?
  • Do commenters believe that a floating NAV is sufficient to address the incentive to redeem caused by liquidity concerns in times of market stress? Would other tools, such as redemption gates or liquidity fees, also be necessary?
  • Do commenters believe that money market funds as currently structured present unique risks as compared with other mutual funds, all of which may face some degree of liquidity pressure during times of market stress? Would the floating NAV proposal suffice to address those risks?
  • Did the 2010 amendments, including new daily and weekly liquid asset requirements, address sufficiently the incentive to redeem in periods of illiquidity?

In addition, the SEC raised the following questions regarding the performance of other floating NAV investment products during the 2008 financial crisis:

  • Do commenters agree with the preceding assertion of what may have caused investors to heavily redeem shares in some floating value money market funds in other jurisdictions and in U.S. ultra-short bond funds during the 2008 financial crisis? Are there other possible factors that we should consider?
  • Do commenters agree with the distinctions we identified between money market funds under our proposed floating NAV and money market funds in other jurisdictions and U.S. ultra-short bond funds? Are there similarities or differences we have not identified?
  • Do commenters believe that the risk limiting requirements of rule 2a-7 would deter heavy redemptions in money market funds with a floating NAV because of the restrictions on the underlying assets?
  • Do commenters believe that money market funds attract very risk averse investors? If so, are these investors more or less likely to rapidly redeem in times of stress to avoid even small losses?

According to the SEC, “basis point” rounding should help stabilize funds in times of market stress by deterring redemptions from investors that would otherwise seek to take advantage of less precise pricing. In this regard, the SEC is requesting comments to address these specific questions:

  • What level of precision in calculating a fund’s share price would best convey to investors that floating NAV funds are different from stable price funds? Is “basis point” rounding too precise? Would “10 basis point rounding” ($1.000 for a fund with a $1.00 target share price) provide sufficient price transparency? Or another measure?
  • Would requiring funds to price their shares at $1.0000 per share effectively alter investor expectations regarding a fund’s NAV gains and losses? Would this in turn make investors less likely to redeem heavily when faced with potential or actual losses?
  • Would “basis point” rounding better reflect gains and losses? Would it help eliminate incentives for investors to redeem shares ahead of other investors when prices are less than $1.0000?

The SEC also is requesting comments on the burdens of tax compliance for money market fund shareholders.  Specifically, the agency wants to understand:

  • If any shareholders of a floating NAV money market fund are not exempt recipients (and thus receive the information reporting that other non-exempt recipient shareholders of other mutual funds currently receive), how difficult would it be for those shareholders to use that information to determine and report taxable gains and losses? Would it be any more difficult for floating NAV money market fund shareholders than other mutual fund shareholders? What kinds of costs, by type and amount, would be involved?
  • In the case of floating NAV fund shareholders that are exempt recipients (which are not required recipients of information reporting), what types and amounts of costs would those shareholders incur to track their share purchases and sales and report any taxable gains or losses?
  • Further, mutual funds and intermediaries are not required to provide information reporting for exempt recipients, including virtually all institutional investors. Do mutual funds and intermediaries provide this information to shareholders even if tax law does not require them to do so? If not, would money market funds and intermediaries be able to use their existing systems and processes to access this information if investors request it as a result of our floating NAV proposal? Would doing so involve systems modifications or other costs in addition to those we estimate in section III.A.7, below? Would institutions or other exempt recipients find it useful or more efficient to receive this information from funds rather than to develop it themselves?
  • Would exempt-recipient investors continue to invest in floating NAV funds if there continues to be no information reporting with respect to them?
  • Would exempt-recipient investors invest in floating NAV money market funds if there is no administrative relief related to summary reporting of capital gains and losses, as discussed above? What would be the effect on the utility of floating NAV money market funds if the anticipated administrative relief is not provided? Would investors be able to use floating NAV money market funds in the same way or for the same purposes absent the anticipated administrative relief?
  • Would investors continue to invest in floating NAV money market funds absent administrative relief from the Treasury Department and IRS? What would be the effect on the utility of floating NAV money market funds if the anticipated administrative relief is not provided? Would investors be able to use floating NAV money market funds in the same way or for the same purposes absent the anticipated administrative relief?

The SEC also is requesting comment on the treatment of MMFs as a cash equivalent. Specifically, the agency would like to know:

  • Would shareholders be less likely to invest in floating NAV money market funds if the shares held were classified for financial statement purposes as an “investment” rather than “cash and cash equivalent?”
  • Are there any other accounting-related costs or burdens that money market fund shareholders would incur if we require money market funds to use floating NAVs?

 

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All rights reserved.

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