The Securities and Exchange Commission’s proposed money market reforms have generated hundreds of mostly negative comments from government organizations and others.
The reforms, which could impact the defined contribution retirement plans that offer money-market funds, were introduced in June as a reaction to how the industry dealt with the 2008 financial crisis. The SEC wants to make investments in mutual funds safer for those individuals who rely on them for their future retirement income.
The proposal includes two ideas that the SEC said could be adopted alone or in combination. Under the first, municipal money market funds would have to move away from a stable, $1 per share price, to a floating net asset value, or NAV. Under this scenario, current amortized cost valuation and penny rounding rules would be eliminated, requiring that money market funds mark their NAV daily.
The second idea would allow the use of liquidity fees and redemption gates in times of stress. Under this alternative, if a money market fund’s weekly liquid assets falls below 15 percent of total assets, the fund would be required to impose a liquidity fee of 2 percent on all redemptions unless the board determines that imposing such a fee would not be in the best interest of the fund, according to Chicago-based consulting firm October Three.
The SEC’s proposal also includes additional diversification and disclosure measures that would apply under either alternative, including advertising materials, prospectuses, registration statements and information posted on websites.
Under the SEC’s current rules, the price of money market fund shares is stable, but under the floating NAV alternative, the value of fund shares would fluctuate daily. If short-term rates rose, share value would go down. The only entities exempt from this rule change would be government funds and retail funds — those that don’t permit shareholders to redeem more than $1 million in a single business day — which would continue to use penny rounding but would not be able to use amortized cost valuation, according to October Three. The $1 million rules would be imposed on the underlying shareholders in omnibus accounts.
That means that a defined contribution plan’s interest in a money market fund would be treated as an omnibus account and individual participants would be treated as the underlying shareholders, the firm said.
Some say implementation of this rule would cost plan sponsors more at the plan level, while the complexity of the omnibus arrangement also could increase costs.
“A retail exemption to the floating NAV requirement could involve operational costs, with the extent of those costs likely being higher for funds sold primarily through intermediaries than for funds sold directly to investors,” according to October Three. “These operational costs, depending on their magnitude, might affect capital formation and also competition, depending on the different ability of funds to absorb these costs.”
Trade organizations and local and state governments have expressed concern about the floating net asset value changes because they present significant accounting, tax and operational implications.
In a comment letter to the SEC, the Association for Financial Professionals, the U.S. Chamber Commerce and National Association of Manufacturers, along with four other trade associations, encouraged the SEC to convene a roundtable to discuss these implications.
Scott Smith, president of the U.S. Conference of Mayors, wrote a letter opposing the changes to the NAV rules. He said that the conference supports changes to strengthen the market and improve the quality of securities, but some of the changes being discussed would undermine the value and utility of money market mutual funds as well as the municipal bond market.
Forcing funds to float their value would “likely eliminate the market for those products by forcing investors, including state and local governments, to divest their MMMF holdings as well as discourage others from using these funds,” according to the Conference of Mayors’ resolution on the subject.
Many state and local governments use money market mutual funds as an integral part of their cash management practice because they are highly regulated, have minimal risk and are easily booked. According to the group’s resolution, state and local governments held $119 billion in money market mutual funds in the fourth quarter of 2012.