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
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
- 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
- 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
- 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’
- 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
- 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
- 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
- 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?
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?
exempt-recipient investors continue to invest in floating NAV funds if there
continues to be no information reporting with respect to them?
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?
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:
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?