Money Market Fund Reform; Amendments to Form PF

698 Pages·2013·3.02 MB·English

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 230, 239, 270, 274 and 279
Release No. 33-9408, IA-3616; IC-30551; File No. S7-03-13
RIN 3235-AK61
Money Market Fund Reform; Amendments to Form PF
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is
proposing two alternatives for amending rules that govern money market mutual funds (or
“money market funds”) under the Investment Company Act of 1940. The two alternatives are
designed to address money market funds’ susceptibility to heavy redemptions, 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, the benefits of money market
funds. The first alternative proposal would require money market 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” net asset value
per share (“NAV”). The second alternative proposal would require money market funds to
impose a liquidity fee (unless the fund’s board determines that it is not in the best interest of the
fund) if a fund’s liquidity levels fell below a specified threshold and would permit the funds to
suspend redemptions temporarily, i.e., to “gate” the fund under the same circumstances. Under
this proposal, we could adopt either alternative by itself or a combination of the two alternatives.
The SEC also is proposing additional amendments that are designed to make money market
funds more resilient by increasing the diversification of their portfolios, enhancing their stress
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testing, and increasing transparency by requiring money market funds to provide additional
information to the SEC and to investors. The proposal also includes amendments requiring
investment advisers to certain unregistered liquidity funds, which can resemble money market
funds, to provide additional information about those funds to the SEC.
DATES: Comments should be received on or before [insert date 90 days after publication in
Federal Register].
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
• Use the Commission’s Internet comment form
(http://www.sec.gov/rules/proposed.shtml); or
• Send an e-mail to [email protected]. Please include File Number S7-03-13 on the
subject line; or
• Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments:
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-03-13. This file number should be included on
the subject line if e-mail is used. To help us process and review your comments more efficiently,
please use only one method. The Commission will post all comments on the Commission’s
Internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for
website viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE,
Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm.
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All comments received will be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Brian
McLaughlin Johnson, Senior Counsel; Kay-Mario Vobis, Senior Counsel; Amanda Hollander
Wagner, Senior Counsel; Thoreau A. Bartmann, Branch Chief; or Sarah G. ten Siethoff, Senior
Special Counsel, 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 proposing for public comment
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 [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] (“Investment Company Act” or “Act”), 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 .................................................................................................................... 12
A. Role of Money Market Funds ................................................................................12

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 270].
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B. Economics of Money Market Funds ......................................................................14
1. Incentives Created by Money Market Funds’ Valuation and Pricing
Methods ..................................................................................................... 14
2. Incentives Created by Money Market Funds’ Liquidity Needs ................. 18
3. Incentives Created by Imperfect Transparency, including Sponsor Support
................................................................................................................... 19
4. Incentives Created by Money Market Funds Investors’ Desire to Avoid
Loss ........................................................................................................... 26
5. Effects on Other Money Market Funds, Investors, and the Short-Term
Financing Markets .................................................................................... 27
C. The 2007-2008 Financial Crisis .............................................................................31
D. Examination of Money Market Fund Regulation since the
Financial Crisis ......................................................................................................35
1. The 2010 Amendments .............................................................................. 35
2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasse of 2011 ......... 37
3. Our Continuing Consideration of the Need for Additional Reforms ........ 40
III. DISCUSSION ....................................................................................................................... 45
A. Floating Net Asset Value .......................................................................................47
1. Certain Considerations Relating to the Floating NAV Proposal ............. 51
2. Money Market Fund Pricing ..................................................................... 61
3. Exemption to the Floating NAV Requirement for Government Money
Market Funds ............................................................................................ 65
4. Exemption to the Floating NAV Requirement for Retail Money Market
Funds......................................................................................................... 71
5. Effect on Other Money Market Fund Exemptions .................................. 108
6. Tax and Accounting Implications of Floating NAV Money Market Funds
................................................................................................................. 115
7. Operational Implications of Floating NAV Money Market Funds ......... 124
8. Disclosure Regarding Floating NAV ...................................................... 136
9. Transition ................................................................................................ 149
B. Standby Liquidity Fees and Gates .......................................................................153
1. Analysis of Certain Effects of Liquidity Fees and Gates ........................ 156
2. Terms of the Liquidity Fees and Gates ................................................... 172
3. Exemptions to Permit Liquidity Fees and Gates..................................... 192
4. Amendments to Rule 22e-3 ...................................................................... 195
5. Exemptions from the Liquidity Fees and Gates Requirement ................. 196
6. Operational Considerations Relating to Liquidity Fees and Gates........ 202
7. Tax Implications of Liquidity Fees ......................................................... 206
8. Disclosure Regarding Liquidity Fees and Gates .................................... 208
9. Alternative Redemption Restrictions....................................................... 228
C. Potential Combination of Standby Liquidity Fees and Gates and
Floating Net Asset Value .....................................................................................235
1. Potential Benefits of a Combination ....................................................... 237
2. Potential Drawbacks of a Combination .................................................. 238
3. Effect of Combination ............................................................................. 240
4. Operational Issues .................................................................................. 241
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D. Certain Alternatives Considered ..........................................................................250
1. Alternatives in the FSOC Proposed Recommendations.......................... 250
2. Alternatives in the PWG Report .............................................................. 269
E. Macroeconomic Effects of the Proposals ............................................................281
1. Effect on Current Investment in Money Market Funds ........................... 283
2. Effect on Current Issuers and the Short-Term Financing Markets ........ 304
F. Amendments to Disclosure Requirements ...........................................................314
1. Financial Support Provided to Money Market Funds ............................ 315
2. Daily Disclosure of Daily Liquid Assets and Weekly Liquid Assets ....... 326
3. Daily Website Disclosure of Current NAV per Share ............................. 334
4. Disclosure of Portfolio Holdings ............................................................ 341
5. Daily Calculation of Current NAV per Share under the Liquidity Fees and
Gates Proposal........................................................................................ 346
6. Money Market Fund Confirmation Statements ....................................... 351
G. New Form N-CR ..................................................................................................353
1. Proposed Disclosure Requirements under Both Reform Alternatives .... 354
2. Additional Proposed Disclosure Requirements under Liquidity Fees and
Gates Alternative .................................................................................... 362
3. Economic Analysis .................................................................................. 367
H. Amendments to Form N-MFP Reporting Requirements .....................................373
1. Amendments Related to Rule 2a-7 Reforms ............................................ 374
2. New Reporting Requirements ................................................................. 378
3. Clarifying Amendments ........................................................................... 390
4. Public Availability of Information .......................................................... 393
5. Request for Comment on Frequency of Filing ........................................ 395
6. Operational Implications ........................................................................ 397
I. Amendments to Form PF Reporting Requirements .............................................398
1. Overview of Proposed Amendments to Form PF ................................... 400
2. Utility of New Information, Including Benefits, Costs, and Economic
Implications............................................................................................. 403
J. Diversification......................................................................................................420
1. Treatment of Certain Affiliates for Purposes of Rule 2a-7’s Five Percent
Issuer Diversification Requirement ........................................................ 422
2. Asset-Backed Securities .......................................................................... 439
3. The Twenty-Five Percent Basket ............................................................ 447
4. Additional Diversification Alternatives Considered ............................... 459
K. Issuer Transparency .............................................................................................465
L. Stress Testing .......................................................................................................468
1. Stress Testing under the Floating NAV Alternative ................................ 471
2. Stress Testing under the Liquidity Fees and Gates Alternative .............. 481
3. Economic Analysis .................................................................................. 484
4. Combined Approach ............................................................................... 488
M. Clarifying Amendments .......................................................................................489
1. Definitions of Daily Liquid Assets and Weekly Liquid Assets ................ 489
2. Definition of Demand Feature ................................................................ 493
3. Short-Term Floating Rate Securities ...................................................... 494
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4. Second Tier Securities............................................................................. 497
N. Proposed Compliance Date ..................................................................................498
1. Compliance Period for Amendments Related to Floating NAV .............. 498
2. Compliance Period for Amendments Related to Liquidity Fees and Gates
................................................................................................................. 499
3. Compliance Period for other Amendments to Money Market Fund
Regulation ............................................................................................... 500
4. Request for Comment .............................................................................. 500
O. Request for Comment and Data ...........................................................................501
IV. PAPERWORK REDUCTION ACT ANALYSIS ........................................................................ 502
A. Alternative 1: Floating Net Asset Value .............................................................504
1. Rule 2a-7 ................................................................................................. 504
2. Rule 22e-3 ............................................................................................... 522
3. Rule 30b1-7 and Form N-MFP ............................................................... 524
4. Rule 30b1-8 and Form N-CR .................................................................. 529
5. Rule 34b-1(a) .......................................................................................... 532
6. Rule 482 .................................................................................................. 532
7. Form N-1A .............................................................................................. 535
8. Advisers Act Rule 204(b)-1 and Form PF .............................................. 541
B. Alternative 2: Standby Liquidity Fees and Gates ...............................................547
1. Rule 2a-7 ................................................................................................. 548
2. Rule 22e-3 ............................................................................................... 557
3. Rule 30b1-7 and Form N-MFP ............................................................... 558
4. Rule 30b1-8 and Form N-CR .................................................................. 558
5. Rule 34b-1(a) .......................................................................................... 560
6. Rule 482 .................................................................................................. 561
7. Form N-1A .............................................................................................. 562
8. Advisers Act Rule 204(b)-1 and Form PF .............................................. 568
C. Request for Comments .........................................................................................569
V. REGULATORY FLEXIBILITY ACT CERTIFICATION ............................................................. 570
VI. STATUTORY AUTHORITY ................................................................................................. 574
TEXT OF PROPOSED RULES AND FORMS .......................................................................... 576

I. INTRODUCTION
Money market funds are a type of mutual fund registered under the Investment Company
Act and regulated under rule 2a-7 under the Act.2 Money market funds pay dividends that reflect
prevailing short-term interest rates, generally are redeemable on demand, and, unlike other
investment companies, seek to maintain a stable net asset value per share (“NAV”), typically

2 Money market funds are also sometimes called “money market mutual funds” or “money funds.”
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$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, 2013, there were approximately 586 money market funds
registered with the Commission, and these funds collectively held over $2.9 trillion of assets.4
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.5 They also rely on exemptions provided in rule 2a-7 that permit them 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
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 net asset value 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

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 net asset value per share of $1.00, but a few seek to maintain a stable net asset value
per share of a different amount, e.g., $10.00. For convenience, throughout this Release, the discussion will
simply refer to the stable net asset value 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 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.
6 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
point like other mutual funds, and the amortized cost method so that they need not strike a daily market-
based NAV. See infra text accompanying nn.163, 177.
7 See rule 2a-7(a)(2). See also infra note 10.
8 See rule 2a-7(a)(20).
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fund to sell and redeem shares at a stable share price without regard to small variations in the
value of the securities that comprise its portfolio.9 Other types of mutual funds not regulated by
rule 2a-7, must calculate their daily NAVs using market-based factors (with some exceptions)
and do not use penny rounding.10 We note, however, that banks and other companies also make
wide use of amortized cost accounting to value certain of their assets.11
In exchange for the ability to rely on the exemptions provided by rule 2a-7, the rule

9 When the Commission initially established its 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 focusing on minimizing inappropriate dilution of assets and returns
for shareholders. 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 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.”). At that time, the Commission was persuaded that deviations to an extent that would cause
material dilution generally would not occur given the risk limiting conditions of the rule. See id., at nn.41-
42 and accompanying text (noting that testimony from the original money market fund exemptive order
hearings alleged 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).
10 For a mutual fund not regulated under rule 2a-7, the Investment Company Act and applicable rules
generally require that it price its securities at the current net asset value per share 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. 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 Valuation of Debt
Instruments by Money Market Funds and Certain Other Open-End Investment Companies, Investment
Company Act Release No. 9786 (May 31, 1977) [42 FR 28999 (June 7, 1977)] (“1977 Valuation Release”).
In this regard, the Commission has stated that the “fair value of securities with remaining maturities of 60
days or less may not always be accurately reflected through the use of amortized cost valuation, due to an
impairment of the credit worthiness of an issuer, or other factors. In such situations, it would appear to be
incumbent upon the directors of a fund to recognize such factors and take them into account in determining
‘fair value.’” Id.
11 See FASB ASC paragraph 320-10-35-1c indicating investments in debt securities classified as held-to-
maturity shall be measured subsequently at amortized cost in the statement of financial position. See also
Vincent Ryan, FASB Exposure Draft Alarms Bank CFOs (June 2, 2010) available at
http://www.cfo.com/article.cfm/14502294.
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imposes important conditions designed to limit deviations between the fund’s $1.00 share price
and the market value of the fund’s portfolio. It requires money market funds to maintain a
significant amount of liquid assets and to invest in securities that meet the rule’s credit quality,
maturity, and diversification requirements.12 For example, a money market fund’s portfolio
securities must meet certain credit quality requirements, such as posing minimal credit risks.13
The rule also places limits 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, and 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.14 Money market funds also must maintain sufficient liquidity to meet reasonably
foreseeable redemptions, and 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.15 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.16
Rule 2a-7 also includes certain procedural requirements overseen by the fund’s board of
directors. These include the requirement that the fund periodically calculate the market-based

12 See rule 2a-7(c)(2), (3), (4), and (5).
13 See rule 2a-7(a)(12), (c)(3)(ii).
14 Rule 2a-7(c)(2).
15 See rule 2a-7(c)(5). The 10% daily liquid asset requirement does not apply to tax exempt funds.
16 See rule 2a-7(c)(4).
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value of the portfolio (“shadow price”)17 and compare it to the fund’s stable share price; if the
deviation between these two values exceeds ½ of 1 percent (50 basis points), the fund’s board of
directors must consider what action, if any, should be initiated by the board, including whether to
re-price the fund’s securities above or below the fund’s $1.00 share price (an event colloquially
known as “breaking the buck”).18
Different types of money market funds have been introduced to meet the differing needs
of money market fund investors. Historically, most investors have invested in “prime money
market funds,” which hold a variety of taxable short-term obligations issued by corporations and
banks, as well as repurchase agreements and asset-backed commercial paper.19 “Government
money market funds” principally hold obligations of the U.S. government, including obligations
of the U.S. Treasury and federal agencies and instrumentalities, as well as repurchase agreements
collateralized by government securities. Some government money market funds limit
themselves to holding only U.S. Treasury obligations or repurchase agreements collateralized by
U.S. Treasury securities and are called “Treasury money market funds.” Compared to prime
funds, government and Treasury money market funds generally offer greater safety of principal
but historically have paid lower yields. “Tax-exempt money market funds” primarily hold
obligations of state and local governments and their instrumentalities, and pay interest that is
generally exempt from federal income tax for individual taxpayers.

17 See rule 2a-7(c)(8)(ii)(A).
18 See rule 2a-7(c)(8)(ii)(A) and (B). Regardless of the extent of the deviation, rule 2a-7 imposes on the board
of a money market fund a duty to take appropriate action whenever the board believes the extent of any
deviation may result in material dilution or other unfair results to investors or current shareholders. Rule
2a-7(c)(8)(ii)(C). In addition, the money market fund can use the amortized cost or penny-rounding
methods only as long as the board of directors believes that they fairly reflect the market-based net asset
value per share. See rule 2a-7(c)(1).
19 See INVESTMENT COMPANY INSTITUTE, 2013 INVESTMENT COMPANY FACT BOOK, at 178, Table 37 (2013),
available at http://www.ici.org/pdf/2013_factbook.pdf.