July 25, 2014
Additional Money Market Fund Rules, Guidance Released
As we previously reported, the Securities and Exchange Commission (SEC) voted in a July 23 open meeting to adopt final amendments to the rules governing money market mutual funds (MMFs) that will require institutional prime money market funds to use a floating net asset value (NAV) and allow boards of non-government MMFs to impose new liquidity fees and/or “redemption gates” (which prohibit redemptions for a time period) in certain circumstances.
MMFs are commonly used by both defined contribution and defined benefit plans as stable, liquid investment options. While MMFs in defined contribution plans likely will not be subject to the floating NAV requirement, MMFs used by defined benefit plans likely will be (unless they use government MMFs).
The SEC also voted to propose two new rules, now available on the Council website:
- a proposed exemptive order allowing floating NAV MMF exemptions to the mutual fund transaction confirmation rules; and
- proposed regulations to replace references to ratings agencies in the rules with a subjective valuation by the fund’s board.
As previewed by SEC Chair Mary Jo White at the SEC open meeting, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued related guidance on July 23 to address certain tax issues caused by the change to the floating NAV. The IRS proposed rule provides guidance on simplified tax reporting, while Revenue Procedure 2014-15 covers exceptions to the “wash sale” rules (which prohibits a taxpayer from claiming a loss when selling and then buying substantially similar securities in a 61-day window).
The new floating NAV provision approved by the SEC will require institutional prime money market funds to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. This will replace the current special pricing and valuation rules that allow institutional prime MMFs to maintain a constant share price of one dollar. The final SEC rules make clear that the floating NAV requirement will not apply to “retail” MMFs but that the new liquidity fees and redemption gate requirements would apply. Government funds can implement liquidity fees and redemption gates if they choose to do so and make appropriate disclosures to shareholders. “Retail” MMFs must have policies and procedures in place that are reasonably designed to limit all beneficial owners of the fund to “natural persons” (i.e., a living human being).
Under the new rules, if the weekly liquid assets of the MMF fall below 30 percent of the total assets of the MMF, the board of the MMF can impose fees for redemption and/or redemption gates. If the weekly liquid assets of the MMF fall below 10 percent of the total assets of the MMF, the board of the MMF must impose fees and/or gates unless the board determines that it in the best interests of the MMF not to impose them.
The final rule also:
- Indicates that MMFs will have flexibility in how they choose to comply with the natural person requirement but gives an example of using Social Security numbers.
- Indicates that intermediaries using omnibus accounts can be shareholders of record if the beneficial owners are natural persons and the MMF has a contractual arrangement or obtains periodic certifications from the intermediary that all beneficial owners are natural persons.
- Provides parenthetical examples of the types of intermediaries that could meet the natural person requirement and lists defined contribution plan accounts (perhaps implying that defined benefit plans would not meet the requirements for the exception).
The Council is seeking member input for possible comment letters to both the SEC and IRS. We also plan to schedule a webinar on the new MMF guidance in late August or September. For more information, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.