On April 22, 2015, the staff of the Division of Investment Management of the SEC released guidance in the form of 53 frequently asked questions relating to various interpretive issues arising from the release adopting money market fund rule amendments issued in July 2014 (the “Adopting Release”). Set forth below are certain of the notable issues addressed by the staff.
Funds that Invest only in Securities that Mature in 60 Days or Less
- A money market fund that is subject to a floating net asset value (“NAV”) may not state in its advertising, sales literature or prospectus that it will seek to maintain a stable NAV by limiting its portfolio securities to only those securities with a remaining maturity of 60 days or less and valuing those securities using amortized cost. Such a statement, in the staff’s view, would be misleading or confusing to investors.
- The staff explains that a floating NAV money market fund’s share price may fluctuate in certain market conditions, regardless of how the fund seeks to limit its investment duration or its use of amortized cost for certain portfolio securities. Thus, as directed in the Adopting Release, all floating NAV money market funds must state in their advertisements, sales materials and prospectus that their share price will fluctuate.
- The staff also cites the SEC’s guidance in the Adopting Release as to the allowance for a floating NAV money market fund to use amortized cost to value individual portfolio securities under certain circumstances. The staff cautions that “if a disparity were to arise between the amortized price of a security that matures in 60 days or less and the fair value of such a security that was large enough that it would affect the fund’s NAV, then the staff believes that the use of amortized cost in that situation would not be compatible with the guidance provided in the Adopting Release” since the amortized cost value of the portfolio security would not be “approximately the same” as the fair value of the security determined without the use of amortized cost valuation.
Retail Money Market Funds
- An estate of a natural person qualifies as a natural person for purposes of qualifying as a retail money market fund.
- However, the staff also states that when the estate’s money market fund shares are transferred to the ultimate beneficiaries, those ultimate beneficiaries must be natural persons if they are to remain invested in the retail money market fund.
- Life insurance separate account contract owners qualify as natural persons.
Consistent with the SEC’s look-through approach for determination of beneficial ownership, a retail money market fund can look through life insurance separate accounts to the contract owners for purposes of natural person eligibility. However, insurance company funds-of-funds do not qualify as natural persons. Retail money market funds must have policies and procedures in place that address how they may look through to the beneficial owners.
- A retail money market fund may have non-natural person affiliates that beneficially own shares of the fund in order to facilitate fund operations (e.g., providing initial seed capital or financial support).
The staff states that it would not object so long as the investments are solely intended to facilitate fund administration and operations. The determination as to whether an investment is solely intended to facilitate fund administration and operations would depend on the particular facts and circumstances of each separate investment.
- The staff would not object if a retail money market fund involuntarily redeemed investors who no longer met the disclosed eligibility requirements of the fund, even outside the context of the exemptive relief provided by the SEC in the Adopting Release for involuntary redemptions as part of a one-time reorganization.
- Retail money market funds may involuntarily redeem ineligible investors subject to 60 days’ prior written notice; however, an ineligible investor may not have his or her shares automatically reinvested into shares of another money market fund, as that fund’s investment policies may not be consistent with those of the current investment.
Fees and Gates
- If a shareholder of a money market fund submits a redemption order while a gate is in effect, that shareholder must submit a new redemption order after the gate is lifted for the order to be effective.
The staff states that while redemptions are suspended, the fund and its agents may not accept redemption orders.
- A fund should implement a fee or gate immediately after the board’s determination to impose one.
The staff recognized that it may take some time to notify shareholders and intermediaries that a fee or gate is in place and that the transfer agent and intermediaries may need some time to implement the fee or gate. The staff notes that directors will need to consider whether it would be consistent with their fiduciary duty to allow for a material lapse of time between their determination and the implementation of the fee or gate.
- If a liquidity fee is imposed intraday, an intermediary that receives both purchase and redemption orders from a single underlying accountholder may apply the liquidity fee to the net amount of redemptions made by that same accountholder, even if the purchase order was received before the time the liquidity fee was implemented.
The staff states that intermediaries may choose to collect a liquidity fee on a shareholder’s net redemption amounts, even if orders for some purchases netted against the redemptions were received prior to the time the liquidity fee went into effect.
- If a redemption request was verifiably submitted to the fund’s agent before a gate or fee is imposed, but is received by a money market fund (or its agent) after such an action is taken, the fund may pay the proceeds of the redemption request despite the gate or, similarly, not impose a liquidity fee on the redemption associated with the payment.
The staff states that it would not object if the fund can verify that the order was submitted to the fund’s agent before the suspension of redemptions or imposition of the liquidity fee.
Government Money Market Funds
- A “government security” does not have to be backed by the full faith and credit of the U.S. government.
The Adopting Release requires government money market funds to hold at least 99.5% of their portfolios in government securities. The staff’s guidance confirms that a “government security” may be issued or guaranteed by the United States or a person controlled or supervised by and acting as an instrumentality of the U.S. government. As a result, government agency securities, such as Fannie Mae and Freddie Mac securities, which are issued but not guaranteed by the U.S. government, qualify as “government securities.” In addition, the New York Federal Reserve Bank, which issues overnight reverse repurchase agreements, may be considered an instrumentality of the U.S. government and thus its repos satisfy the definition of “government security.” Trade receivables arising from the sale of government securities also qualify as “government securities.”
- Bank certificates of deposit, which are insured up to the $250,000 FDIC insurance limit, are not “government securities” for purposes of the definition of a government money market fund.
The staff has previously declined to provide no-action assurance that FDIC-insured bank certificates of deposit are “government securities” within the meaning of Section 2(a)(16) of the 1940 Act.
- A fund should test that it meets the definition of a “government money market fund” each time it acquires a portfolio security.
The staff confirmed that the time of acquisition of a security is the point at which the 99.5% government securities investment minimum is tested. Accordingly, a sale of securities that results in a government money market fund falling below the 99.5% threshold will not disqualify the fund as a “government money market fund,” but such a fund may not purchase additional non-qualifying securities until it has reached the 99.5% minimum threshold.
- A money market fund that relies on the retail exception to maintain a stable NAV cannot invest at least 80% of its total assets in government securities, but less than 99.5%, and call itself a “government money market fund.”
The money market fund reform FAQs, which the staff noted it expects to update from time to time, are available at: http://www.sec.gov/divisions/investment/guidance/2014-money-market-fund-reform- frequently-asked-questions.shtml