On July 23, 2014, the Securities and Exchange Commission (“SEC”) completed its multi-year effort on money market fund reform by adopting both structural and operational amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”) (the “2014 Reforms”). The SEC believes that the 2014 Reforms build upon the reforms that were adopted in 2010 and will further reduce the risk of money market funds by decreasing the risk of investor runs on funds during a financial crisis. The Internal Revenue Service also issued guidance to address issues relating to the floating rate NAV discussed below.
Below are some quick highlights of the 2014 Reforms. We will subsequently issue a more in-depth Client Alert on the specifics of the 2014 Reforms.
Floating Rate Net Asset Value (“NAV”) Required for Institutional Prime Money Market Funds
Institutional prime money market funds (which include institutional municipal money market funds but not institutional government money market funds) will no longer be allowed to use amortized cost to maintain a $1.00 NAV; rather, they will now be required to have a floating NAV (“Floating NAV Fund”). Such Floating NAV Funds will have to process purchase and sale transactions at a NAV rounded out to the fourth decimal place.
In connection with the adoption of a floating NAV for institutional money market funds, the SEC has issued a notice of proposed exemptive relief for Floating NAV Funds from the confirmation requirements of Rule 10b-10 under the Securities Exchange Act of 1934.
On the same day, the Treasury Department and the Internal Revenue Service (“IRS”) issued proposed guidance which would allow investors in Floating NAV Funds to utilize a simplified method of tax accounting for calculating capital gains and losses incurred when they purchase and sell shares of these funds. The proposed guidance will be published in the Federal Register for public comment.
In addition, the Treasury Department and the IRS issued a new revenue procedure that provides relief from the “wash sale” rules for investors in Floating NAV Funds.
Discretionary Liquidity Fees and Gates for Non-Government Money Market Funds
Boards of directors of all non-government money market funds, both institutional and retail, will now be able to impose liquidity fees and redemption gates during times of stress. Boards will have considerable discretion in deciding to implement these fees and/or gates and they will not be strictly imposed due to a trigger, as was originally proposed. Pursuant to the 2014 Reforms, boards will be able to impose up to a 2% liquidity fee and/or to utilize redemption gates if a fund’s weekly liquid assets (as defined in Rule 2a-7) falls below 30% of the fund’s assets.
Government Money Market Funds
Government money market funds will be required to invest 99.5%, of their assets in cash, government securities or repurchase agreements that are collateralized by government securities or cash, according to the SEC. Previously, the rule was that 80% of fund assets had to be invested in such instruments.
The 2014 Reforms require money market funds to disclose daily and weekly liquid assets and other information on their websites.
Amendments to Form PF
The SEC also adopted amendments to Form PF which will require large private liquidity fund advisers to provide to the SEC, on a monthly basis, nearly the same information with respect to their holdings as registered money market funds currently provide on Form N-MFP.
Additional Proposed Amendments to Rule 2a-7 and Form N-MFP
On July 23, 2014, the SEC also re-proposed amendments to both Rule 2a-7 under the 1940 Act (“Rule 2a-7”) and to Form N-MFP in order to address certain provisions that reference credit ratings. The re-proposed amendments would allow the SEC to implement section 939A of the Dodd-Frank Wall Street and Consumer Protection Act of 2010, which requires the SEC to review its rules that allow credit ratings to be used as an assessment of credit-worthiness, and replace them with other appropriate standards.
In addition, the SEC is proposing amendments to the issuer diversification provisions of Rule 2a-7 which would eliminate a current exclusion from these provisions for securities subject to a guarantee issued by a non-controlled person.
These re-proposed amendments have a 60-day comment period following their publication in the Federal Register.
Funds will have two years from the date of the final rule being published in the Federal Register to be in full compliance although certain of the 2014 Reforms have earlier compliance dates.