Money Market Fund Reform; Amendments to Form PF (Corrected)

893 Pages·2014·3.91 MB·English

Corrected to conform to Federal Register version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, 270, 274 and 279
Release No. 33-9616, IA-3879; IC-31166; FR-84; File No. S7-03-13
RIN 3235-AK61
Money Market Fund Reform; Amendments to Form PF
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is adopting
amendments to the rules that govern money market mutual funds (or “money market funds”)
under the Investment Company Act of 1940 (“Investment Company Act” or “Act”). The
amendments are designed to address money market funds’ susceptibility to heavy redemptions in
times of stress, improve their ability to manage and mitigate potential contagion from such
redemptions, and increase the transparency of their risks, while preserving, as much as possible,
their benefits. The SEC is removing the valuation exemption that permitted institutional non-
government money market funds (whose investors historically have made the heaviest
redemptions in times of stress) to maintain a stable net asset value per share (“NAV”), and is
requiring those funds to sell and redeem shares based on the current market-based value of the
securities in their underlying portfolios rounded to the fourth decimal place (e.g., $1.0000), i.e.,
transact at a “floating” NAV. The SEC also is adopting amendments that will give the boards of
directors of money market funds new tools to stem heavy redemptions by giving them discretion
to impose a liquidity fee if a fund’s weekly liquidity level falls below the required regulatory
threshold, and giving them discretion to suspend redemptions temporarily, i.e., to “gate” funds,
2

under the same circumstances. These amendments will require all non-government money
market funds to impose a liquidity fee if the fund’s weekly liquidity level falls below a
designated threshold, unless the fund’s board determines that imposing such a fee is not in the
best interests of the fund. In addition, the SEC is adopting amendments designed to make money
market funds more resilient by increasing the diversification of their portfolios, enhancing their
stress testing, and improving transparency by requiring money market funds to report additional
information to the SEC and to investors. Finally, the amendments require investment advisers to
certain large unregistered liquidity funds, which can have many of the same economic features as
money market funds, to provide additional information about those funds to the SEC.
DATES: Effective Date: October 14, 2014

Compliance Dates: The applicable compliance dates are discussed in section
III.N. of the Release titled “Compliance Dates.”
FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Amanda
Hollander Wagner, Senior Counsel; Andrea Ottomanelli Magovern, Senior Counsel; Erin C.
Loomis, Senior Counsel; Kay-Mario Vobis, Senior Counsel; Thoreau A. Bartmann, Branch
Chief; Sara Cortes, Senior Special Counsel; or Sarah G. ten Siethoff, Assistant Director,
Investment Company Rulemaking Office, at [phone], Division of Investment
Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to rules
419 [17 CFR 230.419] and 482 [17 CFR 230.482] under the Securities Act of 1933 [15 U.S.C.
77a – z-3] (“Securities Act”), rules 2a-7 [17 CFR 270.2a-7], 12d3-1 [17 CFR 270.12d3-1], 18f-3
3

[17 CFR 270.18f-3], 22e-3 [17 CFR 270.22e-3], 30b1-7 [17 CFR 270.30b1-7], 31a-1 [17 CFR
270.31a-1], and new rule 30b1-8 [17 CFR 270.30b1-8] under the Investment Company Act of
1940 [15 U.S.C. 80a], Form N-1A under the Investment Company Act and the Securities Act,
Form N-MFP under the Investment Company Act, and section 3 of Form PF under the
Investment Advisers Act [15 U.S.C. 80b], and new Form N-CR under the Investment Company
Act.1
TABLE OF CONTENTS
I. INTRODUCTION .................................................................................................................... 6
II. BACKGROUND .................................................................................................................... 15
A. Role of Money Market Funds ................................................................................15
B. Certain Economic Features of Money Market Funds ............................................16
1. Money Market Fund Investors’ Desire to Avoid Loss .............................. 17
2. Liquidity Risks ........................................................................................... 18
3. Valuation and Pricing Methods ................................................................ 19
4. Investors’ Misunderstanding about the Actual Risk of Investing in Money
Market Funds ............................................................................................ 22
C. Effects on Other Money Market Funds, Investors, and the Short-
Term Financing Markets ........................................................................................25
D. The Financial Crisis ...............................................................................................29
E. Examination of Money Market Fund Regulation since the
Financial Crisis ......................................................................................................33
1. The 2010 Amendments .............................................................................. 33
2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and
2013........................................................................................................... 35
3. Continuing Consideration of the Need for Additional Reforms................ 37
III. DISCUSSION ....................................................................................................................... 39
A. Liquidity Fees and Redemption Gates ...................................................................39
1. Analysis of Certain Effects of Fees and Gates .......................................... 41
2. Terms of Fees and Gates........................................................................... 77
3. Exemptions to Permit Fees and Gates .................................................... 112
4. Amendments to Rule 22e-3 ...................................................................... 114

1 Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all
references to rules under the Investment Company Act, including rule 2a-7, will be to Title 17, Part 270 of
the Code of Federal Regulations, 17 CFR Part 270.
4

5. Operational Considerations Relating to Fees and Gates ....................... 116
6. Tax Implications of Liquidity Fees ......................................................... 129
7. Accounting Implications ......................................................................... 133
B. Floating Net Asset Value .....................................................................................135
1. Introduction............................................................................................. 135
2. Summary of the Floating NAV Reform ................................................... 142
3. Certain Considerations Relating to the Floating NAV Reform .............. 144
4. Money Market Fund Pricing ................................................................... 157
5. Amortized Cost and Penny Rounding for Stable NAV Funds ................. 168
6. Tax and Accounting Implications of Floating NAV Money Market Funds
................................................................................................................. 171
7. Rule 10b-10 Confirmations ..................................................................... 179
8. Operational Implications of Floating NAV Money Market Funds ......... 182
9. Transition ................................................................................................ 199
C. Effect on Certain Types of Money Market Funds and Other
Entities .................................................................................................................202
1. Government Money Market Funds ......................................................... 202
2. Retail Money Market Funds.................................................................... 213
3. Municipal Money Market Funds ............................................................. 243
4. Implications for Local Government Investment Pools............................ 258
5. Unregistered Money Market Funds Operating Under Rule 12d1-1 ....... 261
6. Master/Feeder Funds – Fees and Gates Requirements .......................... 267
7. Application of Fees and Gates to Other Types of Funds and Certain
Redemptions ............................................................................................ 268
D. Guidance on the Amortized Cost Method of Valuation and Other
Valuation Concerns ..............................................................................................277
1. Use of Amortized Cost Valuation ............................................................ 278
2. Other Valuation Matters ......................................................................... 281
E. Amendments to Disclosure Requirements ..........................................................288
1. Required Disclosure Statement ............................................................... 288
2. Disclosure of Tax Consequences and Effect on Fund Operations—
Floating NAV .......................................................................................... 300
3. Disclosure of Transition to Floating NAV .............................................. 302
4. Disclosure of the Effects of Fees and Gates on Redemptions ................. 302
5. Historical Disclosure of Liquidity Fees and Gates................................. 306
6. Prospectus Fee Table .............................................................................. 314
7. Historical Disclosure of Affiliate Financial Support .............................. 315
8. Economic Analysis .................................................................................. 325
9. Website Disclosure.................................................................................. 335
F. Form N-CR ..........................................................................................................374
1. Introduction............................................................................................. 374
2. Part B: Defaults and Events of Insolvency ............................................. 376
3. Part C: Financial Support ...................................................................... 379
4. Part D: Declines in Shadow Price .......................................................... 393
5

5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees and Gates. 398
6. Part H: Optional Disclosure ................................................................... 407
7. Timing of Form N-CR ............................................................................. 408
8. Economic Analysis .................................................................................. 413
G. Amendments to Form N-MFP Reporting Requirements .....................................435
1. Amendments Related to Rule 2a-7 Reforms ............................................ 437
2. New Reporting Requirements ................................................................. 443
3. Clarifying Amendments ........................................................................... 458
4. Public Availability of Information .......................................................... 462
5. Operational Implications of the N-MFP Amendments ........................... 464
H. Amendments to Form PF Reporting Requirements .............................................466
1. Overview of Proposed Amendments to Form PF ................................... 469
2. Utility of New Information, Including Benefits, Costs, and Economic
Implications............................................................................................. 475
I. Diversification......................................................................................................486
1. Treatment of Certain Affiliates for Purposes of Rule 2a-7’s Five Percent
Issuer Diversification Requirement ........................................................ 488
2. ABS – Sponsors Treated as Guarantors ................................................. 506
3. The Twenty-Five Percent Basket ............................................................ 517
J. Amendments to Stress Testing Requirements .....................................................552
1. Overview of Current Stress Testing Requirements and Proposed
Amendments ............................................................................................ 553
2. Stress Testing Metrics ............................................................................. 556
3. Hypothetical Events Used in Stress Testing............................................ 566
4. Board Reporting Requirements............................................................... 583
5. Dodd-Frank Mandated Stress Testing ................................................... 587
6. Economic Analysis .................................................................................. 588
K. Certain Macroeconomic Consequences of the New Amendments ......................593
1. Effect on Current Investors in Money Market Funds ............................. 596
2. Efficiency, Competition and Capital Formation Effects on the Money
Market Fund Industry ............................................................................. 616
3. Effect of Reforms on Investment Alternatives, and the Short-Term
Financing Markets .................................................................................. 622
L. Certain Alternatives Considered ..........................................................................643
1. Liquidity Fees, Gates, and Floating NAV Alternatives........................... 644
2. Alternatives in the FSOC Proposed Recommendations.......................... 665
3. Alternatives in the PWG Report .............................................................. 687
M. Clarifying Amendments .......................................................................................701
1. Definitions of Daily Liquid Assets and Weekly Liquid Assets ................ 703
2. Definition of Demand Feature ................................................................ 707
3. Short-Term Floating Rate Securities ...................................................... 709
4. Second Tier Securities............................................................................. 712
N. Compliance Dates ................................................................................................713
1. Compliance Date for Amendments Related to Liquidity Fees and Gates713
6

2. Compliance Date for Amendments Related to Floating NAV ................. 715
3. Compliance Date for Rule 30b1-8 and Form N-CR ............................... 716
4. Compliance Date for Diversification, Stress Testing, Disclosure, Form
PF, Form N-MFP, and Clarifying Amendments ..................................... 718
IV. PAPERWORK REDUCTION ACT ......................................................................................... 720
A. Rule 2a-7 ..............................................................................................................722
1. Asset-Backed Securities .......................................................................... 723
2. Retail and Government Funds ................................................................ 727
3. Board Determinations – Fees and Gates ................................................ 730
4. Notice to the Commission ....................................................................... 733
5. Stress Testing .......................................................................................... 734
6. Website Disclosure.................................................................................. 740
7. Total Burden for Rule 2a-7 ..................................................................... 754
B. Rule 22e-3 ............................................................................................................755
C. Rule 30b1-7 and Form N-MFP ............................................................................757
1. Discussion of Final Amendments ............................................................ 757
2. Current Burden ....................................................................................... 759
3. Change in Burden ................................................................................... 759
D. Rule 30b1-8 and Form N-CR ...............................................................................763
1. Discussion of New Reporting Requirements ........................................... 763
2. Estimated Burden .................................................................................... 765
E. Rule 34b-1(a) .......................................................................................................779
F. Rule 482 ...............................................................................................................780
G. Form N-1A ...........................................................................................................782
H. Advisers Act Rule 204(b)-1 and Form PF ...........................................................791
1. Discussion of Amendments ..................................................................... 792
2. Current Burden ....................................................................................... 793
3. Change in Burden ................................................................................... 794
V. REGULATORY FLEXIBILITY ACT CERTIFICATION ............................................................ 797
VI. UPDATE TO CODIFICATION OF FINANCIAL REPORTING POLICIES ..................................... 800
VII. STATUTORY AUTHORITY ................................................................................................. 801
TEXT OF RULES AND FORMS ............................................................................................... 802

I. INTRODUCTION
Money market funds are a type of mutual fund registered under the Investment Company
Act and regulated pursuant to rule 2a-7 under the Act.2 Money market funds generally pay
dividends that reflect prevailing short-term interest rates, are redeemable on demand, and, unlike

2 Money market funds are also sometimes called “money market mutual funds” or “money funds.”
7

other investment companies, seek to maintain a stable NAV, typically $1.00.3 This combination
of principal stability, liquidity, and payment of short-term yields has made money market funds
popular cash management vehicles for both retail and institutional investors. As of February 28,
2014, there were approximately 559 money market funds registered with the Commission, and
these funds collectively held over $3.0 trillion of assets.4
Absent an exemption, as required by the Investment Company Act, all registered mutual
funds must price and transact in their shares at the current NAV, calculated by valuing portfolio
instruments at market value or, if market quotations are not readily available, at fair value as
determined in good faith by the fund’s board of directors (i.e., use a floating NAV).5 In 1983,
the Commission codified an exemption to this requirement allowing money market funds to
value their portfolio securities using the “amortized cost” method of valuation and to use the
“penny-rounding” method of pricing.6 Under the amortized cost method, a money market fund’s

3 See generally Valuation of Debt Instruments and Computation of Current Price Per Share by Certain
Open-End Investment Companies (Money Market Funds), Investment Company Act Release No. 13380
(July 11, 1983) [48 FR 32555 (July 18, 1983)] (“1983 Adopting Release”). Most money market funds seek
to maintain a stable NAV of $1.00, but a few seek to maintain a stable NAV of a different amount, e.g.,
$10.00. For convenience, throughout this Release, the discussion will simply refer to the stable NAV of
$1.00 per share.
4 Based on Form N-MFP data. SEC regulations require that money market funds report certain portfolio
information on a monthly basis to the SEC on Form N-MFP. See rule 30b1-7.
5 See section 2(a)(41)(B) of the Act and rules 2a-4 and 22c-1. The Commission, however, has stated that it
would not object if a mutual fund board of directors determines, in good faith, that the value of debt
securities with remaining maturities of 60 days or less is their amortized cost, unless the particular
circumstances warrant otherwise. See Accounting Series Release No. 219, Valuation of Debt Instruments
by Money Market Funds and Certain Other Open- End Investment Companies, Financial Reporting
Codification (CCH) section 404.05.a and .b (May 31, 1977) (“ASR 219”). We further discuss the use of
amortized cost valuation by mutual funds in section III.B.5 below.
6 See 1983 Adopting Release, supra note 3. Section 6(c) of the Investment Company Act provides the
Commission with broad authority to exempt persons, securities or transactions from any provision of the
Investment Company Act, or the regulations thereunder, if, and to the extent that such exemption is in the
public interest and consistent with the protection of investors and the purposes fairly intended by the policy
and provisions of the Investment Company Act. See Commission Policy and Guidelines for Filing of
8

portfolio securities generally are valued at cost plus any amortization of premium or
accumulation of discount, rather than at their value based on current market factors.7 The penny
rounding method of pricing permits a money market fund when pricing its shares to round the
fund’s NAV to the nearest one percent (i.e., the nearest penny).8 Together, these valuation and
pricing techniques create a “rounding convention” that permits a money market fund to sell and
redeem shares at a stable share price without regard to small variations in the value of the
securities in its portfolio.9 Other types of mutual funds not regulated by rule 2a-7 generally must
calculate their daily NAVs using market-based factors and cannot use penny rounding.
When the Commission initially established the regulatory framework allowing money
market funds to maintain a stable share price through use of the amortized cost method of
valuation and/or the penny rounding method of pricing (so long as they abided by certain risk-
limiting conditions), it did so understanding the benefits that stable value money market funds
provided as a cash management vehicle, particularly for smaller investors, and focused on
minimizing dilution of assets and returns for shareholders.10 At that time, the Commission was

Applications for Exemption, SEC Release No. IC-14492 (Apr. 30, 1985).
7 See current rule 2a-7(a)(2). See also supra note 5. Throughout this Release when we refer to a rule as it
exists prior to any amendments we are making today it is described as a “current rule” while references to a
rule as amended (or one that is not being amended today) are to “rule.”
8 See current rule 2a-7(a)(20).
9 Today, money market funds use a combination of the two methods so that, under normal circumstances,
they can use the penny rounding method to maintain a price of $1.00 per share without pricing to the third
decimal place like other mutual funds, and use the amortized cost method so that they need not strike a
daily market-based NAV to facilitate intra-day transactions. See infra section III.A.1.a.
10 See Proceedings before the Securities and Exchange Commission in the Matter of InterCapital Liquid Asset
Fund, Inc. et al., 3-5431, Dec. 28, 1978, at 1533 (Statement of Martin Lybecker, Division of Investment
Management at the Securities and Exchange Commission) (stating that Commission staff had learned over
the course of the hearings the strong preference of money market fund investors to have a stable share price
and that with the right risk-limiting conditions, the Commission could limit the likelihood of a deviation
9

persuaded that deviations of a magnitude that would cause material dilution generally would not
occur given the risk-limiting conditions of the exemptive rule.11 As discussed throughout this
Release, our historical experience with these funds, and the events of the 2007-2009 financial
crisis12, has led us to re-evaluate the exemptive relief provided under rule 2a-7, including the
exemption from the statutory floating NAV for some money market funds.
Under rule 2a-7, money market funds seek to maintain a stable share price by limiting
their investments to short-term, high-quality debt securities that fluctuate very little in value
under normal market conditions. In exchange for the ability to rely on the exemptions provided
by rule 2a-7, money market funds are subject to conditions designed to limit deviations between
the fund’s $1.00 stable share price and the market-based NAV of the fund’s portfolio.13 Rule 2a-
7 requires that money market funds maintain a significant amount of liquid assets and invest in
securities that meet the rule’s credit quality, maturity, and diversification requirements.14 For
example, a money market fund’s portfolio securities must meet certain credit quality standards,

from that stable value, addressing Commission concerns about dilution); 1983 Adopting Release, supra
note 3, at nn.42-43 and accompanying text (“[T]he provisions of the rule impose obligations on the board
of directors to assess the fairness of the valuation or pricing method and take appropriate steps to ensure
that shareholders always receive their proportionate interest in the money market fund.”).
11 See id., at nn.41-42 and accompanying text (noting that witnesses from the original money market fund
exemptive order hearings testified that the risk-limiting conditions, short of extraordinarily adverse
conditions in the market, should ensure that a properly managed money market fund should be able to
maintain a stable price per share and that rule 2a-7 is based on that representation).
12 Throughout this release, unless indicated otherwise, when we use the term “financial crisis” we are
referring to the financial crisis that took place between 2007 and 2009.
13 Throughout this Release, we generally use the term “stable share price” to refer to the stable share price
that money market funds seek to maintain and compute for purposes of distribution, redemption, and
repurchases of fund shares.
14 See current rule 2a-7(c)(2), (3), (4), and (5).
10

such as posing minimal credit risks.15 The rule also places restrictions on the remaining maturity
of securities in the fund’s portfolio to limit the interest rate and credit spread risk to which a
money market fund may be exposed. A money market fund generally may not acquire any
security with a remaining maturity greater than 397 days, the dollar-weighted average maturity
of the securities owned by the fund may not exceed 60 days, and the fund’s dollar-weighted
average life to maturity may not exceed 120 days.16 Money market funds also must maintain
sufficient liquidity to meet reasonably foreseeable redemptions, generally must invest at least
10% of their portfolios in assets that can provide daily liquidity, and invest at least 30% of their
portfolios in assets that can provide weekly liquidity, as defined under the rule.17 Finally, rule
2a-7 also requires money market funds to diversify their portfolios by generally limiting the
funds to investing no more than 5% of their portfolios in any one issuer and no more than 10% of
their portfolios in securities issued by, or subject to guarantees or demand features (i.e., puts)
from, any one institution.18
Rule 2a-7 also includes certain procedural standards overseen by the fund’s board of
directors. These include the requirement that the fund periodically calculate the market-based
value of the portfolio (“shadow price”)19 and compare it to the fund’s stable share price; if the

15 See current rule 2a-7(a)(12), (c)(3)(i).
16 Current Rule 2a-7(c)(2).
17 See current rule 2a-7(c)(5). As we discussed when we amended rule 2a-7 in 2010, the 10% daily liquid
asset requirement does not apply to tax-exempt funds. See Money Market Fund Reform, Investment
Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (“2010 Adopting
Release”). See infra section III.E.3.
18 See current rule 2a-7(c)(4). Because of limited availability of the securities in which they invest,
tax-exempt funds have different diversification requirements under rule 2a-7 than other money market
funds.
19 See current rule 2a-7(c)(8)(ii)(A).