[Federal Register Volume 78, Number 118 (Wednesday, June 19, 2013)]
[Proposed Rules]
[Pages 36833-37030]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13687]





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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.

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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 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 September 17, 2013.

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 email to rule-comments@sec.gov. 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 email 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 Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site 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 a.m. and 
3:00 p.m. 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 (202) 551-6792, 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\
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    \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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Table of Contents

I. Introduction
II. Background
    A. Role of Money Market Funds
    B. Economics of Money Market Funds
    1. Incentives Created by Money Market Funds' Valuation and 
Pricing Methods
    2. Incentives Created by Money Market Funds' Liquidity Needs
    3. Incentives Created by Imperfect Transparency, Including 
Sponsor Support
    4. Incentives Created by Money Market Funds Investors' Desire To 
Avoid Loss
    5. Effects on Other Money Market Funds, Investors, and the 
Short-Term Financing Markets
    C. The 2007-2008 Financial Crisis
    D. Examination of Money Market Fund Regulation Since the 
Financial Crisis
    1. The 2010 Amendments
    2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasse of 
2011
    3. Our Continuing Consideration of the Need for Additional 
Reforms
III. Discussion
    A. Floating Net Asset Value
    1. Certain Considerations Relating to the Floating NAV Proposal
    2. Money Market Fund Pricing
    3. Exemption to the Floating NAV Requirement for Government 
Money Market Funds
    4. Exemption to the Floating NAV Requirement for Retail Money 
Market Funds
    5. Effect on Other Money Market Fund Exemptions
    6. Tax and Accounting Implications of Floating NAV Money Market 
Funds
    7. Operational Implications of Floating NAV Money Market Funds
    8. Disclosure Regarding Floating NAV
    9. Transition
    B. Standby Liquidity Fees and Gates
    1. Analysis of Certain Effects of Liquidity Fees and Gates
    2. Terms of the Liquidity Fees and Gates
    3. Exemptions To Permit Liquidity Fees and Gates
    4. Amendments to Rule 22e-3
    5. Exemptions From the Liquidity Fees and Gates Requirement
    6. Operational Considerations Relating to Liquidity Fees and 
Gates
    7. Tax Implications of Liquidity Fees
    8. Disclosure Regarding Liquidity Fees and Gates

[[Page 36835]]

    9. Alternative Redemption Restrictions
    C. Potential Combination of Standby Liquidity Fees and Gates and 
Floating Net Asset Value
    1. Potential Benefits of a Combination
    2. Potential Drawbacks of a Combination
    3. Effect of Combination
    4. Operational Issues
    D. Certain Alternatives Considered
    1. Alternatives in the FSOC Proposed Recommendations
    2. Alternatives in the PWG Report
    E. Macroeconomic Effects of the Proposals
    1. Effect on Current Investment in Money Market Funds
    2. Effect on Current Issuers and the Short-Term Financing 
Markets
    F. Amendments to Disclosure Requirements
    1. Financial Support Provided to Money Market Funds
    2. Daily Disclosure of Daily Liquid Assets and Weekly Liquid 
Assets
    3. Daily Web Site Disclosure of Current NAV per Share
    4. Disclosure of Portfolio Holdings
    5. Daily Calculation of Current NAV per Share Under the 
Liquidity Fees and Gates Proposal
    6. Money Market Fund Confirmation Statements
    G. New Form N-CR
    1. Proposed Disclosure Requirements Under Both Reform 
Alternatives
    2. Additional Proposed Disclosure Requirements Under Liquidity 
Fees and Gates Alternative
    3. Economic Analysis
    H. Amendments to Form N-MFP Reporting Requirements
    1. Amendments Related to Rule 2a-7 Reforms
    2. New Reporting Requirements
    3. Clarifying Amendments
    4. Public Availability of Information
    5. Request for Comment on Frequency of Filing
    6. Operational Implications
    I. Amendments to Form PF Reporting Requirements
    1. Overview of Proposed Amendments to Form PF
    2. Utility of New Information, Including Benefits, Costs, and 
Economic Implications
    J. Diversification
    1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's 
Five Percent Issuer Diversification Requirement
    2. Asset-Backed Securities
    3. The Twenty-Five Percent Basket
    4. Additional Diversification Alternatives Considered
    K. Issuer Transparency
    L. Stress Testing
    1. Stress Testing Under the Floating NAV Alternative
    2. Stress Testing Under the Liquidity Fees and Gates Alternative
    3. Economic Analysis
    4. Combined Approach
    M. Clarifying Amendments
    1. Definitions of Daily Liquid Assets and Weekly Liquid Assets
    2. Definition of Demand Feature
    3. Short-Term Floating Rate Securities
    4. Second Tier Securities
    N. Proposed Compliance Date
    1. Compliance Period for Amendments Related to Floating NAV
    2. Compliance Period for Amendments Related to Liquidity Fees 
and Gates
    3. Compliance Period for Other Amendments to Money Market Fund 
Regulation
    4. Request for Comment
    O. Request for Comment and Data
IV. Paperwork Reduction Act Analysis
    A. Alternative 1: Floating Net Asset Value
    1. Rule 2a-7
    2. Rule 22e-3
    3. Rule 30b1-7 and Form N-MFP
    4. Rule 30b1-8 and Form N-CR
    5. Rule 34b-1(a)
    6. Rule 482
    7. Form N-1A
    8. Advisers Act Rule 204(b)-1 and Form PF
    B. Alternative 2: Standby Liquidity Fees and Gates
    1. Rule 2a-7
    2. Rule 22e-3
    3. Rule 30b1-7 and Form N-MFP
    4. Rule 30b1-8 and Form N-CR
    5. Rule 34b-1(a)
    6. Rule 482
    7. Form N-1A
    8. Advisers Act Rule 204(b)-1 and Form PF
    C. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Statutory Authority
Text of Proposed Rules and Forms

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 $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\
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    \2\ Money market funds are also sometimes called ``money market 
mutual funds'' or ``money funds.''
    \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.
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    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 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\

[[Page 36836]]

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\
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    \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).
    \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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    In exchange for the ability to rely on the exemptions provided by 
rule 2a-7, the rule 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\
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    \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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    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 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 \1/2\ 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\
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    \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).
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    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.
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    \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.
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    In the analysis that follows, we begin by reviewing the role of 
money market funds and the benefits they provide investors. We then 
review the economics of money market funds. This includes a discussion 
of several features of money market funds that, when combined, can 
create incentives for fund shareholders to redeem shares during periods 
of stress, as well as the potential impact that such redemptions can 
have on the fund and the markets that provide short-term financing.\20\ 
We then discuss money market funds' experience during the 2007-2008 
financial crisis against this backdrop. We next analyze our 2010 
reforms and their impact on the heightened redemption activity during 
the 2011 Eurozone sovereign debt crisis and U.S. debt ceiling impasse.
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    \20\ Throughout this Release, we generally refer to ``short-term 
financing markets'' to describe the markets for short-term financing 
of corporations, banks, and governments.
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    Based on these analyses as well as other publicly available 
analytical works, some of which are contained in the report responding 
to certain questions posed by Commissioners Aguilar, Paredes and 
Gallagher (``RSFI Study'') \21\ prepared by staff from the Division of 
Risk, Strategy, and Financial Innovation (``RSFI''), we propose two 
alternative frameworks for additional regulation of money market funds. 
Each alternative seeks to preserve the ability of money market funds to 
function as an effective and efficient cash management tool for 
investors, but also address

[[Page 36837]]

certain features in money market funds that can make them susceptible 
to heavy redemptions, provide them with better tools to manage and 
mitigate potential contagion from high levels of redemptions, and 
increase the transparency of their risks. We are also proposing 
amendments that would apply under each alternative that would result in 
additional changes to money market fund disclosure, diversification 
limits, and stress testing, among other reforms.\22\
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    \21\ See Response to Questions Posed by Commissioners Aguilar, 
Paredes, and Gallagher, a report by staff of the Division of Risk, 
Strategy, and Financial Innovation (Nov. 30, 2012), available at 
http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
    \22\ We note that we have consulted and coordinated with the 
Consumer Financial Protection Bureau regarding this proposed 
rulemaking in accordance with section 1027(i)(2) of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act.
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II. Background

A. Role of Money Market Funds

    The combination of principal stability, liquidity, and short-term 
yields offered by money market funds, which is unlike that offered by 
other types of mutual funds, has made money market funds popular cash 
management vehicles for both retail and institutional investors, as 
discussed above. Retail investors use money market funds for a variety 
of reasons, including, for example, to hold cash for short or long 
periods of time or to take a temporary ``defensive position'' in 
anticipation of declining equity markets. Institutional investors 
commonly use money market funds for cash management in part because, as 
discussed later in this Release, money market funds provide efficient 
diversified cash management due both to the scale of their operations 
and their expertise.\23\
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    \23\ See infra notes 72-73 and accompanying text.
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    Money market funds, due to their popularity with investors, have 
become an important source of financing in certain segments of the 
short-term financing markets, as discussed in more detail in section 
III.E.2 below. Money market funds' ability to maintain a stable share 
price contributes to their popularity. Indeed, the $1.00 stable share 
price has been one of the fundamental features of money market funds. 
As discussed in more detail in section III.A.7 below, the funds' stable 
share price facilitates the funds' role as a cash management vehicle, 
provides tax and administrative convenience to both money market funds 
and their shareholders, and enhances money market funds' attractiveness 
as an investment option.
    Rule 2a-7, in addition to facilitating money market funds' 
maintenance of stable share prices, also benefits investors by making 
available an investment option that provides an efficient and 
diversified means for investors to participate in the short-term 
financing markets through a portfolio of short-term, high quality debt 
securities.\24\ Many investors likely would find it impractical or 
inefficient to invest directly in the short-term financing markets, and 
some investors likely would not want the relatively undiversified 
exposure that can result from investing in those markets on a smaller 
scale or that could be associated with certain alternatives to money 
market funds, like bank deposits.\25\ Although other types of mutual 
funds can and do invest in the short-term financing markets, investors 
may prefer money market funds because the risk the funds may undertake 
is limited under rule 2a-7 (and because of the funds' corresponding 
ability to maintain a stable share price).\26\
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    \24\ See, e.g., Comment Letter of Harvard Business School 
Professors Samuel Hanson, David Scharfstein, & Adi Sunderam (Jan. 8, 
2013) (available in File No. FSOC-2012-0003) (``Harvard Business 
School FSOC Comment Letter'') (explaining that prime money market 
funds, by providing a way for investors to invest in the short-term 
financing markets indirectly, ``provides MMF investors with a 
diversified pool of deposit-like instruments with the convenience of 
a single deposit-like account,'' and that, ``[g]iven the fixed costs 
of managing a portfolio of such instruments, MMFs provide scale 
efficiencies for small-balance savers (e.g., households and small 
and mid-sized nonfinancial corporations) along with a valuable set 
of transactional services (e.g., check-writing and other cash-
management functions).'').
    \25\ Id. See also, e.g., Comment Letter of Investment Company 
Institute (Jan. 24, 2013) (available in File No. FSOC-2012-0003) 
(``ICI Jan. 24 FSOC Comment Letter'') (explaining that although bank 
deposits are an alternative to money market funds, ``corporate cash 
managers and other institutional investors do not view an 
undiversified holding in an uninsured (or underinsured) bank account 
as having the same risk profile as an investment in a diversified 
short-term money market fund subject to the risk-limiting conditions 
of Rule 2a-7'').
    \26\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 
(``The regulatory regime established by Rule 2a-7 has proven to be 
effective in protecting investors' interests and maintaining their 
confidence in money market funds.'').
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    Therefore, although rule 2a-7 permits money market funds to use 
techniques to value and price their shares not permitted to other 
mutual funds (or not permitted to the same extent), the rule also 
imposes additional protective conditions on money market funds. These 
additional conditions are designed to make money market funds' use of 
the pricing techniques permitted by rule 2a-7 consistent with the 
protection of investors, and more generally, to make available an 
investment option for investors that seek an efficient way to obtain 
short-term yields. These conditions thus reflect the differences in the 
way money market funds operate and the ways in which investors use 
money market funds compared to other types of mutual funds.
    We recognize, and considered when developing the reform proposals 
we are putting forward today, that money market funds are a popular 
investment product and that they provide many benefits to investors and 
to the short-term financing markets. Indeed, it is for these reasons 
that we are proposing reforms designed to make the funds more 
resilient, as discussed throughout this Release, while preserving, to 
the extent possible, the benefits of money market funds. These reform 
proposals may, however, make money market funds less attractive to 
certain investors as discussed more fully below.

B. Economics of Money Market Funds

    The combination of several features of money market funds can 
create an incentive for their shareholders to redeem shares heavily in 
periods of financial stress, as discussed in greater detail in the RSFI 
Study. We discuss these factors below, as well as the harm that can 
result from heavy redemptions in money market funds.
1. Incentives Created by Money Market Funds' Valuation and Pricing 
Methods
    Money market funds are unique among mutual funds in that rule 2a-7 
permits them to use the amortized cost method of valuation and the 
penny-rounding method of pricing. As discussed above, these valuation 
and pricing techniques allow 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 that comprise its portfolio, and thus to 
maintain a stable $1.00 share price under most conditions.
    Although the stable $1.00 share price calculated using these 
methods provides a close approximation to market value under normal 
market conditions, differences may exist because market prices adjust 
to changes in interest rates, credit risk, and liquidity. We note that 
the vast majority of money market fund portfolio securities are not 
valued based on market prices obtained through secondary market trading 
because the secondary markets for most portfolio securities such as 
commercial paper, repos, and certificates of deposit are not actively 
traded. Accordingly, most money market fund portfolio securities are 
valued largely through ``mark-to-model'' or ``matrix pricing'' 
estimates.\27\

[[Page 36838]]

The market value of a money market fund's portfolio securities also may 
experience relatively large changes if a portfolio asset defaults or 
its credit profile deteriorates.\28\ Today differences within the 
tolerance defined by rule 2a-7 are reflected only in a fund's shadow 
price, and not the share price at which the fund satisfies purchase and 
redemption transactions.
---------------------------------------------------------------------------

    \27\ See, e.g., Harvard Business School FSOC Comment Letter, 
supra note 24 (``secondary markets for commercial paper and other 
private money market assets such as CDs are highly illiquid. 
Therefore, the asset prices used to calculate the floating NAV would 
largely be accounting or model-based estimates, rather than prices 
based on secondary market transactions with sizable volumes.''); 
Institutional Money Market Funds Association, The Use of Amortised 
Cost Accounting by Money Market Funds, available at http://www.immfa.org/assets/files/IMMFA%20The%20use%20of%20amortised%20cost%20accounting%20by%20MMF.pdf
 (noting that ``investors typically hold money market instruments to 
maturity, and so there are relatively few prices from the secondary 
market or broker quotes,'' that as a result most money market funds 
value their assets using yield curve pricing, discounted cash flow 
pricing, and amortized cost valuation, and surveying several money 
market funds and finding that only U.S. Treasury bills are 
considered ``level one'' assets under the relevant accounting 
standards for which traded or quoted prices are generally 
available).
    \28\ The credit quality standards in rule 2a-7 are designed to 
minimize the likelihood of such a default or credit deterioration.
---------------------------------------------------------------------------

    Deviations that arise from changes in interest rates and credit 
risk are temporary as long as securities are held to maturity, because 
amortized cost values and market-based values converge at maturity. If, 
however, a portfolio asset defaults or an asset sale results in a 
realized capital gain or loss, deviations between the stable $1.00 
share price and the shadow price become permanent. For example, if a 
portfolio experiences a 25 basis point loss because an issuer defaults, 
the fund's shadow price falls from $1.0000 to $0.9975. Even though the 
fund has not broken the buck, this reduction is permanent and can only 
be rebuilt internally in the event that the fund realizes a capital 
gain elsewhere in the portfolio, which generally is unlikely given the 
types of securities in which money market funds typically invest.\29\
---------------------------------------------------------------------------

    \29\ It is important to understand that, in practice, a money 
market fund cannot use future portfolio earnings to rebuild its 
shadow price because Subchapter M of the Internal Revenue Code 
effectively forces money market funds to distribute virtually all of 
their earnings to investors. These restrictions can cause permanent 
reductions in shadow prices to persist over time, even if a fund's 
other portfolio securities are otherwise unimpaired.
---------------------------------------------------------------------------

    If a fund's shadow price deviates far enough from its stable $1.00 
share price, investors may have an economic incentive to redeem money 
market fund shares.\30\ For example, investors may have an incentive to 
redeem shares when a fund's shadow price is less than $1.00.\31\ If 
investors redeem shares when the shadow price is less than $1.00, the 
fund's shadow price will decline even further because portfolio losses 
are spread across a smaller asset base. If enough shares are redeemed, 
a fund can ``break the buck'' due, in part, to heavy investor 
redemptions and the concentration of losses across a shrinking asset 
base. In times of stress, this reason alone provides an incentive for 
investors to redeem shares ahead of other investors: early redeemers 
get $1.00 per share, whereas later redeemers may get less than $1.00 
per share even if the fund experiences no further losses.
---------------------------------------------------------------------------

    \30\ The value of this economic incentive is determined in part 
by the volatility of the fund's underlying assets, which is, in 
turn, affected by the volatility of interest rates, the likelihood 
of default, and the maturities of the underlying assets. Since the 
risk limiting conditions imposed by rule 2a-7 require funds to hold 
high quality assets with short maturities, the volatility of the 
underlying assets is very low (which implies that the corresponding 
value of this economic incentive is low), except when the fund is 
under stress.
    \31\ We recognize that, absent the fund breaking the buck, 
arbitraging fluctuations in a money market fund's shadow price would 
require some effort and may not be compelling in many cases given 
the small dollar value that could be captured. See, e.g., Money 
Market Fund Reform, Investment Company Act Release No. 28807 (June 
30, 2009) [74 FR 32688 (July 8, 2009)] (``2009 Proposing Release''), 
at nn.304-305 and accompanying text (discussing how to arbitrage 
around price changes from rising interest rates, investors would 
need to sell money market fund shares for $1.00 and reinvest the 
proceeds in equivalent short-term debt securities at then-current 
interest rates).
---------------------------------------------------------------------------

    To illustrate the incentive for investors to redeem shares early, 
consider a money market fund that has one million shares outstanding 
and holds a portfolio worth exactly $1 million. Assume the fund's 
stable share price and shadow price are both $1.00. If the fund 
recognizes a $4,000 loss, the fund's shadow price will fall below $1.00 
as follows:
[GRAPHIC] [TIFF OMITTED] TP19JN13.001

    If investors redeem one quarter of the fund's shares (250,000 
shares), the redeeming shareholders are paid $1.00. Because redeeming 
shareholders are paid more than the shadow price of the fund, the 
redemptions further concentrate the loss among the remaining 
shareholders. In this case, the amount of redemptions is sufficient to 
cause the fund to ``break the buck.''
[GRAPHIC] [TIFF OMITTED] TP19JN13.002

    This example shows that if a fund's shadow price falls below $1.00 
and the fund experiences redemptions, the remaining investors have an 
incentive to redeem shares to potentially avoid holding shares worth 
even less, particularly if the fund re-prices its shares below $1.00. 
This incentive exists even if investors do not expect the fund to incur 
further portfolio losses.
    As discussed in greater detail in the RSFI Study and as we saw 
during the 2007-2008 financial crisis as further discussed below, money 
market funds, although generally able to maintain stable share prices, 
remain subject to credit, interest rate, and liquidity risks, all of 
which can cause a fund's shadow price to decline below $1.00 and create 
an incentive for investors to redeem shares ahead of other 
investors.\32\ Although defaults are very low probability events, the 
resulting losses will be most acute if the default occurs in a position 
that is greater than 0.5% of the fund's assets, as was the case in the 
Reserve Primary Fund's investment in Lehman Brothers commercial paper 
in September 2008.\33\ As discussed further in section III.J of this 
Release, we note that money market funds hold significant numbers of 
such larger positions.\34\
---------------------------------------------------------------------------

    \32\ See generally RSFI Study, supra note 21, at section 4.A.
    \33\ See generally infra section II.C.
    \34\ FSOC, in formulating possible money market reform 
recommendations, solicited and received comments from the public 
(FSOC Comment File, File No. FSOC-2012-0003, available at http://www.regulations.gov/#!docketDetail;D=FSOC-2012-0003), some of which 
have made similar observations about the concentration and size of 
money market fund holdings. See, e.g., Harvard Business School FSOC 
Comment Letter, supra note 24 (noting that ``prime MMFs mainly 
invest in money-market instruments issued by large, global banks'' 
and providing information about the size of the holdings of ``the 50 
largest non-government issuers of money market instruments held by 
prime MMFs as of May 2012'').
---------------------------------------------------------------------------

2. Incentives Created by Money Market Funds' Liquidity Needs
    The incentive for money market fund investors to redeem shares 
ahead of other investors also can be heightened

[[Page 36839]]

by liquidity concerns. Money market funds, by definition and like all 
other mutual funds, offer investors the ability to redeem shares upon 
demand.
    A money market fund has three sources of internal liquidity to meet 
redemption requests: cash on hand, cash from investors purchasing 
shares, and cash from maturing securities. If these internal sources of 
liquidity are insufficient to satisfy redemption requests on any 
particular day, money market funds may be forced to sell portfolio 
securities to raise additional cash.\35\ Since the secondary market for 
many portfolio securities is not deeply liquid (in part because most 
money market fund securities are held to maturity), funds may have to 
sell securities at a discount from their amortized cost value, or even 
at fire-sale prices,\36\ thereby incurring additional losses that may 
have been avoided if the funds had sufficient liquidity.\37\ This, 
itself, can cause a fund's portfolio to lose value. In addition, 
redemptions that deplete a fund's most liquid assets can have 
incremental adverse effects because they leave the fund with fewer 
liquid assets, making it more difficult to avoid selling less liquid 
assets, potentially at a discount, to meet further redemption requests.
---------------------------------------------------------------------------

    \35\ Although the Act permits a money market fund to borrow 
money from a bank, such loans, assuming the proceeds of which are 
paid out to meet redemptions, create liabilities that must be 
reflected in the fund's shadow price, and thus will contribute to 
the stresses that may force the fund to ``break the buck.'' See 
section 18(f) of the Investment Company Act.
    \36\ Money market funds normally meet redemptions by disposing 
of their more liquid assets, rather than selling a pro rata slice of 
all their holdings, which typically include less liquid securities 
such as certificates of deposit, commercial paper, or term 
repurchase agreements (``repo''). See Harvard Business School FSOC 
Comment Letter, supra note 24 (``MMFs forced to liquidate commercial 
paper and bank certificates of deposits are likely to sell them at 
heavily discounted, `fire sale' prices. This creates run risk 
because early investor redemptions can be met with the sale of 
liquid Treasury bills, which generate enough cash to fully pay early 
redeemers. In contrast, late redemptions force the sale of illiquid 
assets at discounted prices, which may not generate enough revenue 
to fully repay late redeemers. Thus, each investor benefits from 
redeeming earlier than others, setting the stage for runs.''); 
Jonathan Witmer, Does the Buck Stop Here? A Comparison of 
Withdrawals from Money Market Mutual Funds with Floating and 
Constant Share Prices, Bank of Canada Working Paper 2012-25 (Aug. 
2012) (``Witmer''), available at http://www.bankofcanada.ca/wp-content/uploads/2012/08/wp2012-25.pdf. ``Fire sales'' refer to 
situations when securities deviate from their information-efficient 
values typically as a result of sale price pressure. For an overview 
of the theoretical and empirical research on asset ``fire sales,'' 
see Andrei Shleifer & Robert Vishny, Fire Sales in Finance and 
Macroeconomics, 25 Journal of Economic Perspectives, Winter 2011, at 
29-48 (``Fire Sales'').
    \37\ The RSFI Study examined whether money market funds are more 
resilient to redemptions following the 2010 reforms and notes that, 
``As expected, the results show that funds with a 30 percent [weekly 
liquid asset requirement] are more resilient to both portfolio 
losses and investor redemptions'' than those funds without a 30 
percent weekly liquid asset requirement. RSFI Study, supra note 21, 
at 37.
---------------------------------------------------------------------------

3. Incentives Created by Imperfect Transparency, Including Sponsor 
Support
    Lack of investor understanding and complete transparency concerning 
the risks posed by particular money market funds can exacerbate the 
concerns discussed above. If investors do not know a fund's shadow 
price and/or its underlying portfolio holdings (or if previous 
disclosures of this information are no longer accurate), investors may 
not be able to fully understand the degree of risk in the underlying 
portfolio.\38\ In such an environment, a default of a large-scale 
commercial paper issuer, such as a bank holding company, could 
accelerate redemption activity across many funds because investors may 
not know which funds (if any) hold defaulted securities and initiate 
redemptions to avoid potential rather than actual losses in a ``flight 
to transparency.'' \39\ Since many money market funds hold securities 
from the same issuer, investors may respond to a lack of transparency 
about specific fund holdings by redeeming assets from funds that are 
believed to be holding highly correlated positions.\40\
---------------------------------------------------------------------------

    \38\ See, e.g., RSFI Study, supra note 21, at 31 (stating that 
although disclosures on Form N-MFP have improved fund transparency, 
``it must be remembered that funds file the form on a monthly basis 
with no interim updates,'' and that ``[t]he Commission also makes 
the information public with a 60-day lag, which may cause it to be 
stale''); Comment Letter of the Presidents of the 12 Federal Reserve 
Banks (Feb. 12, 2013) (available in File No. FSOC-2012-0003) 
(``Federal Reserve Bank Presidents FSOC Comment Letter'') (stating 
that ``[e]ven more frequent and timely disclosure may be warranted 
to increase the transparency of MMFs'' and noting that ``[d]uring 
times of stress, [. . .] uncertainty regarding portfolio composition 
could heighten investors' incentives to redeem in between reporting 
periods [of money market funds' portfolio information], as they will 
not be able to determine if their fund is exposed to certain 
stressed assets''); see also infra section III.H where we request 
comment on whether we should require money market funds to file Form 
N-MFP more frequently.
    \39\ See Nicola Gennaioli, Andrei Shleifer & Robert Vishny, 
Neglected Risks, Financial Innovation, and Financial Fragility, 104 
J. Fin. Econ. 453 (2012) (``A small piece of news that brings to 
investors' minds the previously unattended risks catches them by 
surprise and causes them to drastically revise their valuations of 
new securities and to sell them. . . . When investors realize that 
the new securities are false substitutes for the traditional ones, 
they fly to safety, dumping these securities on the market and 
buying the truly safe ones.'').
    \40\ See infra notes 65-67 and accompanying text. Based on Form 
N-MFP data as of February 28, 2013, there were 27 different issuers 
whose securities were held by more than 100 prime money market 
funds.
---------------------------------------------------------------------------

    Money market funds' sponsors on a number of occasions have 
voluntarily chosen to provide financial support for their money market 
funds \41\ for various reasons, including to keep a fund from re-
pricing below its stable value, but also, for example, to protect the 
sponsors' reputations or brands. Considering that instances of sponsor 
support are not required to be disclosed outside of financial 
statements, and thus were not particularly transparent to investors, 
voluntary sponsor support has played a role in helping some money 
market funds maintain a stable value and, in turn, may have lessened 
investors' perception of the risk in money market funds.\42\ Even those 
investors who were aware of sponsor support could not be assured it 
would be available in the future.\43\ Instances of discretionary 
sponsor support were relatively common during the financial crisis. For 
example, during the period from September 16, 2008 to October 1, 2008, 
a number of money market fund sponsors purchased large amounts of 
portfolio securities from their money market funds or provided capital 
support to the funds (or received staff no-action assurances in order 
to provide

[[Page 36840]]

support).\44\ Commission staff provided no-action assurances to 100 
money market funds in 18 different fund groups so that the fund groups 
could enter into such arrangements.\45\ Although a number of advisers 
to money market funds obtained staff no-action assurances in order to 
provide sponsor support, several did not subsequently provide the 
support because it was no longer necessary.\46\
---------------------------------------------------------------------------

    \41\ Rule 17a-9 currently allows for discretionary support of 
money market funds by their sponsors and other affiliates.
    \42\ See, e.g., Comment Letter of Occupy the SEC (Feb. 15, 2013) 
(available in File No. FSOC-2012-0003) (``Occupy the SEC FSOC 
Comment Letter'') (``The current strategies for maintaining a stable 
NAV--rounding and discretionary fund sponsor support--both serve to 
conceal important market signals of mounting problems within the 
fund's portfolio.''). See also Federal Reserve Bank Presidents FSOC 
Comment Letter, supra note 38 (warning that ``[g]iven the perception 
of stability that discretionary support creates, this practice may 
attract investors that are not willing to accept the underlying 
risks in MMFs and who therefore are more prone to run in times of 
potential stress.'')
    \43\ See, e.g., U.S. Securities and Exchange Commission, 
Roundtable on Money Market Funds and Systemic Risk, unofficial 
transcript (May 10, 2011), available at http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm (``Roundtable 
Transcript'') (Bill Stouten, Thrivent Financial) (``I think the 
primary factor that makes money funds vulnerable to runs is the 
marketing of the stable NAV. And I think the record of money market 
funds and maintaining the stable NAV has largely been the result of 
periodic voluntary sponsor support. I think sophisticated investors 
that understand this and doubt the willingness or ability of the 
sponsor to make that support know that they need to pull their money 
out before a declining asset is sold.''); (Lance Pan, Capital 
Advisors Group) (``over the last 30 or 40 years, [investors] have 
relied on the perception that even though there is risk in money 
market funds, that risk is owned somehow implicitly by the fund 
sponsors. So once they perceive that they are not able to get that 
additional assurance, I believe that was one probable cause of the 
run''); see also Federal Reserve Bank Presidents FSOC Comment 
Letter, supra note 38 (stating that ``[t]hough [sponsor support] 
creates a perception of stability, it may not truly provide 
stability in times of stress. Indeed, events of 2008 showed that 
sponsor support cannot always be relied upon.''); infra section 
III.F.1.
    \44\ See Steffanie A. Brady et al., The Stability of Prime Money 
Market Mutual Funds: Sponsor Support from 2007 to 2011, Federal 
Reserve Bank of Boston Risk and Policy Analysis Unit Working Paper 
No. 12-3 (Aug. 13, 2012), available at http://www.bos.frb.org/bankinfo/qau/wp/2012/qau1203.pdf. Staff in the Federal Reserve Bank 
of Boston's Risk and Policy Analysis Unit examine 341 money market 
funds and find that 78 of the funds disclosed sponsor support on 
Form N-CSR between 2007 and 2011 (some multiple times). This 
analysis excludes Capital Support Agreements and/or Letters of 
Credit that were not drawn upon. Large sponsor support (in 
aggregate) representing over 0.5% of assets under management 
occurred in 31 money market funds, and the primary reasons disclosed 
for such support include losses on Lehman Brothers, AIG, and Morgan 
Stanley securities. Moody's Investors Service Special Comment, 
Sponsor Support Key to Money Market Funds (Aug. 9, 2010) (``Moody's 
Sponsor Support Report''), reported that 62 money market funds 
required sponsor support during 2007-2008.
    \45\ Our staff estimated that during the period from August 2007 
to December 31, 2008, almost 20% of all money market funds received 
some support (or staff no-action assurances concerning support) from 
their money managers or their affiliates. We note that not all of 
such support required no-action assurances from Commission staff 
(for example, fund affiliates were able to purchase defaulted Lehman 
Brothers securities from fund portfolios under rule 17a-9 under the 
Investment Company Act without the need for any no-action 
assurances). See, e.g., http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
    \46\ See, e.g., Comment Letter of The Dreyfus Corporation (Aug. 
7, 2012) (available in File No. 4-619) (stating that no-action 
relief to provide sponsor support ``was sought by many money funds 
as a precautionary measure'').
---------------------------------------------------------------------------

    The 2007-2008 financial crisis is not the only instance in which 
some money market funds have come under strain, although it is unique 
in the amount of money market funds that requested or received sponsor 
support.\47\ Interest rate changes, issuer defaults, and credit rating 
downgrades can lead to significant valuation losses for individual 
funds. Table 1 documents that since 1989, in addition to the 2007-2008 
financial crisis, 11 events were deemed to have been sufficiently 
negative that some fund sponsors chose to provide support or to seek 
staff no-action assurances in order to provide support.\48\ The table 
indicates that these events potentially affected 158 different money 
market funds. This finding is consistent with estimates provided by 
Moody's that at least 145 U.S. money market funds received sponsor 
support to maintain either price stability or share liquidity before 
2007.\49\ Note that although these events affected money market funds 
and their sponsors, there is no evidence that these events caused 
systemic problems, most likely because the events were isolated either 
to a single entity or class of security. Table 1 is consistent with the 
interpretation that outside a crisis period, these events did not 
propagate risk more broadly to the rest of the money market fund 
industry. However, a caveat that prevents making a strong inference 
about the impact of sponsor support on investor behavior from Table 1 
is that sponsor support generally was not immediately disclosed, and 
was not required to be disclosed by the Commission, and so investors 
may have been unaware that their money market fund had come under 
stress.\50\
---------------------------------------------------------------------------

    \47\ See Moody's Sponsor Support Report, supra note 44.
    \48\ The table does not comprehensively describe every instance 
of sponsor support of a money market fund or request for no-action 
assurances to provide support, but rather summarizes some of the 
more notable instances of sponsor support.
    \49\ See Moody's Sponsor Support Report, supra note 44, noting 
in particular 13 funds requiring support in 1990 due to credit 
defaults or deterioration at MNC Financial, Mortgage & Realty Trust, 
and Drexel Burnham; 79 funds requiring support in 1994 due to the 
Orange County bankruptcy and holdings of certain floating rate 
securities when interest rates increased; and 25 funds requiring 
support in 1999 after the credit of certain General American Life 
Insurance securities deteriorated.
    \50\ Note that we are proposing changes to our rules and forms 
to require more comprehensive and timely disclosure of such sponsor 
support. See infra sections III.F.1 and III.G.
    \51\ The estimated total numbers of money market funds are from 
Table 38 of the Investment Company Institute's 2013 Fact Book, 
available at http://www.ici.org/pdf/2013_factbook.pdf. The numbers 
of money market funds are as of the end of the relevant year, and 
not necessarily as of the date that any particular money market fund 
received support (or whose sponsor received no-action assurances in 
order to provide support).
    \52\ See Jack Lowenstein, Should the Rating Agencies be 
Downgraded?, Euromoney (Feb. 1, 1990) (noting that Integrated 
Resources had been rated A-2 by Standard & Poor's until two days 
before default); Jonathan R. Laing, Never Say Never--Or, How Safe Is 
Your Money-Market Fund?, Barron's (Mar. 26, 1990) (``Laing''), at 6; 
Randall W. Forsyth, Portfolio Analysis of Selected Fixed-Income 
Funds--Muni Money-Fund Risks, Barron's (July 2, 1990) (``Forsyth''), 
at 33; Georgette Jasen, SEC Is Accelerating Its Inspections of Money 
Funds, Wall St. J. (Dec. 4, 1990) (``Jasen''), at C1. One $630 
million money market fund held a 3.5% position in Integrated 
Resources when it defaulted. See Linda Sandler, Cloud Cast on `Junk' 
IOUs By Integrated Resources, Wall St. J. (June 28, 1989).
    \53\ See Laing, supra note 52; Forsyth, supra note 52; Jasen, 
supra note 52.
    \54\ See Revisions to Rules Regulating Money Market Funds, 
Investment Company Act Release No. 19959 (Dec. 17, 1993) [58 FR 
68585 (Dec. 28, 1993)] at n.12 (``1993 Proposing Release''). See 
also Leslie Eaton, Another Close Call--An Adviser Bails Out Its 
Money Fund, Barron's (Mar. 11, 1991), at 42 (noting that Mercantile 
Bancorp bought out $28 million of MNC Financial notes from its 
affiliated money market fund, which had accounted for 3% of the 
money market fund's assets).

                                 Table 1
------------------------------------------------------------------------
                                     Estimated number
                  Number of money    of money market
                 market funds from   funds supported
      Year        2013 ICI mutual    by affiliate or         Event
                   fund fact book     for which no-
                        \51\        action assurances
                                         obtained
------------------------------------------------------------------------
1989...........                673                  4  Default of
                                                        Integrated
                                                        Resources
                                                        commercial paper
                                                        (rated A-2 by
                                                        Standard &
                                                        Poor's until
                                                        shortly prior to
                                                        default).\52\
1990...........                741                 11  Default of
                                                        Mortgage &
                                                        Realty Trust
                                                        commercial paper
                                                        (rated A-2 by
                                                        Standard &
                                                        Poor's until
                                                        shortly prior to
                                                        default).\53\
1990...........                741                 10  MNC Financial
                                                        Corp. commercial
                                                        paper downgraded
                                                        from being a
                                                        second tier
                                                        security.\54\
1991...........                820                 10  Mutual Benefit
                                                        Life Insurance
                                                        (``MBLI'')
                                                        seized by state
                                                        insurance
                                                        regulators,
                                                        causing it to
                                                        fail to honor
                                                        put obligations
                                                        after those
                                                        holding
                                                        securities with
                                                        these features
                                                        put the
                                                        obligations en
                                                        masse to
                                                        MBLI.\55\
1994...........                963                 40  Rising interest
                                                        rates damaged
                                                        the value of
                                                        certain
                                                        adjustable rate
                                                        securities held
                                                        by money market
                                                        funds.\56\
1994...........                963                 43  Orange County,
                                                        California
                                                        bankruptcy.\57\
1997...........              1,103                  3  Mercury Finance
                                                        Corp. defaults
                                                        on its
                                                        commercial
                                                        paper.

[[Page 36841]]

 
1999...........              1,045                 25  Credit rating
                                                        downgrade of
                                                        General American
                                                        Life Insurance
                                                        Co. triggered a
                                                        wave of demands
                                                        for repayment on
                                                        its funding
                                                        contracts,
                                                        leading to
                                                        liquidity
                                                        problems and
                                                        causing it to be
                                                        placed under
                                                        administrative
                                                        supervision by
                                                        state insurance
                                                        regulators.\58\
2001...........              1,015                  6  Pacific Gas &
                                                        Electric Co. and
                                                        Southern
                                                        California
                                                        Edison Co.
                                                        commercial paper
                                                        went from being
                                                        first tier
                                                        securities to
                                                        defaulting in a
                                                        2-week
                                                        period.\59\
2007...........                805                 51  Investments in
                                                        SIVs.
2008...........                783                109  Investments in
                                                        Lehman Brothers,
                                                        America
                                                        International
                                                        Group, Inc.
                                                        (``AIG'') and
                                                        other financial
                                                        sector debt
                                                        securities.
2010...........                652                  3  British Petroleum
                                                        Gulf oil spill
                                                        affects price of
                                                        BP debt
                                                        securities held
                                                        by some money
                                                        market funds.
2011...........                632                  3  Investments in
                                                        Eksportfinans,
                                                        which was
                                                        downgraded from
                                                        being a first
                                                        tier security to
                                                        junk-bond
                                                        status.
------------------------------------------------------------------------

    It also is important to note that, as discussed above, fund 
sponsors may provide financial support for a number of different 
reasons. Sponsors may support funds to protect their reputations and 
their brands or the credit rating of the fund.\60\ Support also may be 
used to keep a fund from breaking a buck or to increase a fund's shadow 
price if its sponsor believes investors avoid funds that may have low 
shadow prices. We note that the fact that no-action assurances were 
obtained or sponsor support was provided does not necessarily mean that 
a money market fund would have broken the buck without such support or 
assurances.
---------------------------------------------------------------------------

    \55\ At the time of its seizure, MBLI debt was rated in the 
highest short-term rating category by Standard & Poor's. See 1993 
Proposing Release, supra note 54, at n.28 and accompanying text. The 
money market fund sponsors either repurchased the MBLI-backed 
instruments from the funds at their amortized cost or obtained a 
replacement guarantor in order to prevent shareholder losses. Id.
    \56\ See Money Market Fund Prospectuses, Investment Company Act 
Release No. 21216 (July 19, 1995) [60 FR 38454, (July 26, 1995)], at 
n.17; Investment Company Institute, Report of the Money Market 
Working Group (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI 2009 Report''), at 177; Leslie Wayne, 
Investors Lose Money in `Safe' Fund, N.Y. Times, Sept. 28, 1994; 
Leslie Eaton, New Caution About Money Market Funds, N.Y. Times, 
Sept. 29, 1994.
    \57\ See ICI 2009 Report, supra note 56, at 178; Tom Petruno, 
Orange County in Bankruptcy: Investors Weigh Their Options: Muni 
Bond Values Slump but Few Trade at Fire-Sale Prices, L.A. Times, 
Dec. 8, 1994.
    \58\ See Sandra Ward, Money Good? How some fund managers 
sacrificed safety for yield, Barron's (Aug. 23, 1999), at F3.
    \59\ See Aaron Lucchetti & Theo Francis, Parents Take on Funds' 
Risks Tied to Utilities, Wall St. J. (Feb. 28, 2001), at C1; Lewis 
Braham, Commentary: Money Market Funds Enter the Danger Zone, 
Businessweek (Apr. 8, 2001).
    \60\ See, e.g., Marcin Kacperczyk & Philipp Schnabl, How Safe 
are Money Market Funds?, 128 Q. J. Econ. (forthcoming Aug. 2013) 
(``Kacperczyk & Schnabl'') (``. . . fund sponsors with more non-
money market fund business expect to incur large costs if their 
money market funds fail. Such costs are typically reputational in 
nature, in that an individual fund's default generates negative 
spillovers to the fund's sponsor['s] other business. In practice, 
these costs could be outflows from other mutual funds managed by the 
same sponsor or a loss of business in the sponsor's commercial 
banking, investment banking, or insurance operations.''); Patrick E. 
McCabe, The Cross Section of Money Market Fund Risks and Financial 
Crises, Federal Reserve Board Finance and Economic Discussion Series 
Paper No. 2010-51 (2010) (``Cross Section'') (``Nothing required 
these sponsors to provide support, but because allowing a fund to 
break the buck would have been destructive to a sponsor's reputation 
and franchise, sponsors backstopped their funds voluntarily.''); 
Value Line Posts Loss for 1st Period, Cites Charge of $7.5 Million, 
Wall St. J. (Sept. 18, 1989) (``In discussing the charge in its 
fiscal 1989 annual report [for buying out defaulted commercial paper 
from its money market fund], Value Line said it purchased the fund's 
holdings in order to protect its reputation and the continuing 
income from its investment advisory and money management 
business.''); Comment Letter of James J. Angel (Feb. 6, 2013) 
(available in File No. FSOC-2012-0003) (``Angel FSOC Comment 
Letter'') (``Sponsors have a strong commercial incentive to stand 
behind their funds. Breaking the buck means the immediate and 
catastrophic end of the sponsor's entire asset management 
business.'').
---------------------------------------------------------------------------

    Finally, the government assistance provided to money market funds 
during 2007-2008 financial crisis, discussed in more detail below, may 
have contributed to investors' perceptions that the risk of loss in 
money market funds is low.\61\ If investors perceive money market funds 
as having an implicit government guarantee in times of crisis, any 
potential instability of a money market fund's NAV could be mis-
estimated. Investors will form expectations about the likelihood of a 
potential intervention to support money market funds, either by the 
U.S. government or fund sponsors. To the extent these forecasts are 
based on inaccurate information, investor estimates of potential losses 
will be biased.
---------------------------------------------------------------------------

    \61\ See, e.g, Marcin Kacperczyk & Philipp Schnabl, Money Market 
Funds: How to Avoid Breaking the Buck, in Regulating Wall St: The 
Dodd-Frank Act and the New Architecture of Global Finance (Viral V. 
Acharya, et al., eds., 2011), at 313 (``Given that money market 
funds provide both payment services to investors and refinancing to 
financial intermediaries, there is a strong case for the government 
to support money market funds during a financial crisis by 
guaranteeing the value of money market fund investments. As a result 
of such support, money market funds have an ex ante incentive to 
take on excessive risk, similarly to other financial institutions 
with explicit or implicit government guarantees . . . after the 
[government] guarantees were provided in September 2008 [to money 
market funds], most investors will expect similar guarantees during 
future financial crises. . . .''). But see Comment Letter of 
Fidelity (Apr. 26, 2012) (available in File No. 4-619) (``Fidelity 
April 2012 PWG Comment Letter'') (citing a survey of Fidelity's 
retail customers in which 75% of responding customers did not 
believe that money market funds are guaranteed by the government and 
25% either believed that they were guaranteed or were not sure 
whether they were guaranteed). We note that investor belief that 
money market funds are not guaranteed by the government does not 
necessarily mean that investors do not believe that the government 
will support money market funds if there is another run on money 
market funds.
---------------------------------------------------------------------------

4. Incentives Created by Money Market Funds Investors' Desire To Avoid 
Loss
    In addition to the incentives described above, other 
characteristics of money market funds create incentives to redeem in 
times of stress. Investors in money market funds have varying 
investment goals and tolerances for risk. Many investors use money 
market funds for principal preservation and as a cash management tool, 
and, consequently, these funds can attract investors who are unable or 
unwilling to tolerate even small losses. These investors may seek to 
minimize possible losses, even at the cost of forgoing higher 
returns.\62\ Such

[[Page 36842]]

investors may be very loss averse for many reasons, including general 
risk tolerance, legal or investment restrictions, or short-term cash 
needs.\63\ These overarching considerations may create incentives for 
money market investors to redeem and would be expected to persist, even 
if valuation and pricing incentives were addressed.
---------------------------------------------------------------------------

    \62\ See, e.g., Comment Letter of Investment Company Institute 
(Apr. 19, 2012) (available in File No. 4-619) (``ICI Apr 2012 PWG 
Comment Letter'') (enclosing a survey commissioned by the Investment 
Company Institute and conducted by Treasury Strategies, Inc. 
finding, among other things. that 94% of respondents rated safety of 
principal as an ``extremely important'' factor in their money market 
fund investment decision and 64% ranked safety of principal as the 
``primary driver'' of their money market fund investment).
    \63\ See, e.g., Comment Letter of County Commissioners Assoc. of 
Ohio (Dec. 21, 2012) (available in File No. FSOC-2012-0003) 
(``County governments in Ohio operate under legal constraints or 
other policies that limit them from investing in instruments without 
a stable value.'').
---------------------------------------------------------------------------

    The desire to avoid loss may cause investors to redeem from money 
market funds in times of stress in a ``flight to quality.'' For 
example, as discussed in the RSFI Study, one explanation for the heavy 
redemptions from prime money market funds and purchases in government 
money market fund shares during the financial crisis may be a flight to 
quality, given that most of the assets held by government money market 
funds have a lower default risk than the assets of prime money market 
funds.\64\
---------------------------------------------------------------------------

    \64\ One study documented that investors redirected assets from 
prime money market funds into government money market funds during 
September 2008. See Russ Wermers et al., Runs on Money Market Funds 
(Jan. 2, 2013), available at http://www.rhsmith.umd.edu/cfp/pdfs_docs/papers/WermersMoneyFundRuns.pdf (``Wermers Study''). Another 
study found that redemption activity in money market funds during 
the financial crisis was higher for riskier money market funds. See 
Cross Section, supra note 60.
---------------------------------------------------------------------------

5. Effects on Other Money Market Funds, Investors, and the Short-Term 
Financing Markets
    The analysis above generally describes how potential losses may 
create shareholder incentives to redeem at a specific money market 
fund. We now discuss how stress at one money market fund can be 
positively correlated across funds in at least two ways. Some market 
observers have noted that if a money market fund suffers a loss on one 
of its portfolio securities--whether because of a deterioration in 
credit quality, for example, or because the fund sold the security at a 
discount to its amortized-cost value--other money market funds holding 
the same security may have to reflect the resultant discounts in their 
shadow prices.\65\ Any resulting decline in the shadow prices of other 
funds could, in turn, lead to a contagion effect that could spread even 
further.\66\ For example, a number of commenters have observed that 
many money market fund holdings tend to be highly correlated, making it 
more likely that multiple money market funds will experience 
contemporaneous decreases in share prices.\67\
---------------------------------------------------------------------------

    \65\ See generally Douglas W. Diamond & Raghuram G. Rajan, Fear 
of Fire Sales, Illiquidity Seeking, and Credit Freezes, 126 Q. J. 
Econ. 557 (May 2011); Fire Sales, supra note 36; Markus Brunnermeier 
et al., The Fundamental Principles of Financial Regulation, in 
Geneva Reports on the World Economy 11 (2009).
    \66\ For example, supra Table 1, which identifies certain 
instances in which money market fund sponsors supported their funds 
or sought staff no-action assurances to do so, tends to show that 
correlated holdings across funds resulted in multiple funds 
experiencing losses that appeared to motivate sponsors to provide 
support or seek staff no-action assurances in order to provide 
support.
    \67\ See, e.g., Comment Letter of Better Markets, Inc. (Feb. 15, 
2013) (available in File No. FSOC-2012-0003) (``Better Markets FSOC 
Comment Letter'') (agreeing with FSOC's analysis and stating that 
``MMFs tend to have similar exposures due to limits on the nature of 
permitted investments. As a result, losses creating instability and 
a crisis of confidence in one MMF are likely to affect other MMFs at 
the same time.''); Comment Letter of Robert Comment (Dec. 31. 2012) 
(available in File No. FSOC-2012-0003) (``Robert Comment FSOC 
Comment Letter'') (discussing correlation in money market funds' 
portfolios and stating, among other things, that ``now that 
bank[hyphen]issued money market instruments have come to comprise 
half the holdings of the typical prime fund, the SEC should 
acknowledge correlated credit risk by requiring that prime funds 
practice sector diversification (in addition to issuer 
diversification)''); Occupy the SEC FSOC Comment Letter, supra note 
42 (discussing concentration of risk across money market funds).
---------------------------------------------------------------------------

    As discussed above, in times of stress if investors do not wish to 
be exposed to a distressed issuer (or correlated issuers) but do not 
know which money market funds own these distressed securities at any 
given time, investors may redeem from any money market funds that could 
own the security (e.g., redeeming from all prime funds).\68\ A fund 
that did not own the security and was not otherwise under stress could 
nonetheless experience heavy redemptions which, as discussed above, 
could themselves ultimately cause the fund to experience losses if it 
does not have adequate liquidity.
---------------------------------------------------------------------------

    \68\ See, e.g., Wermers Study, supra note 64 (based on an 
empirical analysis of data from the 2008 run on money market funds, 
finding that, during 2008, ``[f]unds that cater to institutional 
investors, which are the most sophisticated and informed investors, 
were hardest hit,'' and that ``investor flows from money market 
funds seem to have been driven both by strategic externalities . . . 
and information.'').
---------------------------------------------------------------------------

    As was experienced during the financial crisis, the potential for 
liquidity-induced contagion may have negative effects on investors and 
the markets for short-term financing of corporations, banks, and 
governments. This is in large part because of the significance of money 
market funds' role in such short-term financing markets.\69\ Indeed, 
money market funds had experienced steady growth before the financial 
crisis, driven in part by growth in the size of institutional cash 
pools,\70\ which grew from under $100 billion in 1990 to almost $4 
trillion just before the 2008 financial crisis.\71\ Money market funds' 
suitability for cash management operations also has made them popular 
among corporate treasurers, municipalities, and other institutional 
investors, some of whom rely on money market funds for their cash 
management operations because the funds provide diversified cash 
management more efficiently due both to the scale of their operations 
and their expertise.\72\ For example, according to

[[Page 36843]]

one survey, approximately 19% of organizations' short-term investments 
were allocated to money market funds (and, according to this observer, 
this figure is down from almost 40% in 2008 due in part to the 
reallocation of cash investments to bank deposits following temporary 
unlimited Federal Deposit Insurance Corporation deposit insurance for 
non-interest bearing bank transaction accounts, which recently 
expired).\73\
---------------------------------------------------------------------------

    \69\ See infra Panels A, B, and C in section III.E for 
statistics on the types and percentages of outstanding short-term 
debt obligations held by money market funds.
    \70\ See Zoltan Pozsar, Institutional Cash Pools and the Triffin 
Dilemma of the U.S. Banking System, IMF Working Paper 11/190 (Aug. 
2011) (``Pozsar''); Gary Gorton & Andrew Metrick, Securitized 
Banking and the Run on Repo, 104 J. Fin. Econ. 425 (2012) (``Gorton 
& Metrick''); Jeremy C. Stein, Monetary Policy as Financial 
Stability Regulation, 127 Q. J. Econ. 57 (2012); Nicola Gennaioli, 
Andrei Shleifer & Robert W. Vishny, A Model of Shadow Banking, J. 
Fin. (forthcoming 2013). The Pozsar paper defines institutional cash 
pools as ``large, centrally managed, short-term cash balances of 
global non-financial corporations and institutional investors such 
as asset managers, securities lenders and pension funds.'' Pozsar, 
at 4.
    \71\ See Pozsar, supra note 70, at 5-6. These institutional cash 
pools can come from corporations, bank trust departments, securities 
lending operations of brokerage firms, state and local governments, 
hedge funds, and other private funds. The rise in institutional cash 
pools increased demand for investments that were considered to have 
a relatively low risk of loss, including, in addition to money 
market funds, Treasury bonds, insured deposit accounts, repurchase 
agreements, and asset-backed commercial paper. See Ben S. Bernanke, 
Carol Bertaut, Laurie Pounder DeMarco & Steven Kamin, International 
Capital Flows and the Returns to Safe Assets in the United States, 
2003-2007, Board of Governors of the Federal Reserve System 
International Finance Discussion Paper No. 1014 (Feb. 2011); Pozsar, 
supra note 70; Gorton & Metrick, supra note 70; Daniel M. Covitz, 
Nellie Liang & Gustavo A. Suarez, The Evolution of a Financial 
Crisis: Collapse of the Asset-Backed Commercial Paper Market, J. 
Fin. (forthcoming 2013) (``Covitz''). The incentive among these cash 
pools to search for alternate ``safe'' investments was only 
heightened by factors such as limits on deposit insurance coverage 
and historical bans on banks paying interest on institutional demand 
deposit accounts, which limited the utility of deposit accounts for 
large pools of cash. See Pozsar, supra note 70; Gary Gorton & Andrew 
Metrick, Regulating the Shadow Banking System, Brookings Papers on 
Economic Activity (Fall 2010), at 262-263 (``Gorton Shadow 
Banking'').
    \72\ See, e.g., Roundtable Transcript, supra note 43 (Travis 
Barker, Institutional Money Market Funds Association) (``[money 
market funds are] there to provide institutional investors with 
greater diversification than they could otherwise achieve''); (Lance 
Pan, Capital Advisors Group) (noting diversification benefits of 
money market funds and investors' need for a substitute to bank 
products to mitigate counterparty risk); (Kathryn L. Hewitt, 
Government Finance Officers Association) (``Most of us don't have 
the time, the energy, or the resources at our fingertips to analyze 
the credit quality of every security ourselves. So we're in essence, 
by going into a pooled fund, hiring that expertise for us . . . it 
gives us diversification, it gives us immediate cash management 
needs where we can move money into and out of it, and it satisfies 
much of our operating cash investment opportunities.''); (Brian 
Reid, Investment Company Institute) (``there's a very clear stated 
demand out there on the part of investors for a non-bank product 
that creates a pooled investment in short-term assets . . . banks 
can't satisfy this because an undiversified exposure to a single 
bank is considered to be far riskier. . . .''); (Carol A. DeNale, 
CVS Caremark) (``I think that it would be very small investment [in] 
deposits in banks. I don't think there's--you know, the ratings of 
some of the banks would make me nervous, also; [sic] they're not 
guaranteed. I'm not going to put a $20 million investment in some 
banks.'').
    \73\ See 2012 Association for Financial Professionals Liquidity 
Survey, at 15, available at http://www.afponline.org/liquidity 
(subscription required) (``2012 AFP Liquidity Survey''). The size of 
this allocation to money market funds is down substantially from 
prior years. For example, prior AFP Liquidity Surveys show higher 
allocations of organizations' short-term investments to money market 
funds: Almost 40% in the 2008 survey, approximately 25% in the 2009 
and 2010 surveys, and almost 30% in the 2011 survey. This shift has 
largely reflected a re-allocation of cash investments to bank 
deposits, which rose from representing 25% of organizations' short-
term investment allocations in the 2008 Association for Financial 
Professionals Liquidity Survey, available at http://www.afponline.org/pub/pdf/2008_Liquidity_Survey.pdf (``2008 AFP 
Liquidity Survey''), to 51% of organizations' short-term investment 
allocations in the 2012 survey. The 2012 survey notes that some of 
this shift has been driven by the temporary unlimited FDIC deposit 
insurance coverage for non-interest bearing bank transaction 
accounts (which expired at the end of 2012) and the above-market 
rate that these bank accounts are able to offer in the low interest 
rate environment through earnings credits. See 2012 AFP Liquidity 
Survey, this note. As of August 14, 2012, approximately 66% of money 
market fund assets were held in money market funds or share classes 
intended to be sold to institutional investors according to 
iMoneyNet data. All of the AFP Liquidity Surveys are available at 
http://www.afponline.org.
---------------------------------------------------------------------------

    Money market funds' size and significance in the short-term 
markets, together with their features that can create an incentive to 
redeem as discussed above, have led to concerns that money market funds 
may contribute to systemic risk. Heavy redemptions from money market 
funds during periods of financial stress can remove liquidity from the 
financial system, potentially disrupting the secondary market. Issuers 
may have difficulty obtaining capital in the short-term markets during 
these periods because money market funds are focused on meeting 
redemption requests through internal liquidity generated either from 
maturing securities or cash from subscriptions, and thus may be 
purchasing fewer short-term debt obligations.\74\ To the extent that 
multiple money market funds experience heavy redemptions, the negative 
effects on the short-term markets can be magnified. Money market funds' 
experience during the 2007-2008 financial crisis illustrates the impact 
of heavy redemptions, as we discuss in more detail below.
---------------------------------------------------------------------------

    \74\ See supra text preceding and accompanying n.35. Although 
money market funds also can build liquidity internally by retaining 
(rather than investing) cash from investors purchasing shares, this 
is not likely to be a material source of liquidity for a distressed 
money market fund experiencing heavy redemptions.
---------------------------------------------------------------------------

    Heavy redemptions in money market funds may disproportionately 
affect slow-moving shareholders because, as discussed further below, 
redemption data from the 2007-2008 financial crisis show that some 
institutional investors are likely to redeem from distressed money 
market funds more quickly than other investors and to redeem a greater 
percentage of their prime fund holdings.\75\ Slower-to-redeem 
shareholders may be harmed because, as discussed above, redemptions at 
a money market fund can concentrate existing losses in the fund or 
create new losses if the fund must sell assets at a discount. In both 
cases, redemptions leave the fund's portfolio more likely to lose 
value, to the detriment of slower-to-redeem investors.\76\ Retail 
investors--who tend to be slower moving--also could be harmed if market 
stress begins at an institutional money market fund and spreads to 
other funds, including funds composed solely or primarily of retail 
investors.\77\
---------------------------------------------------------------------------

    \75\ This likely is because some institutional investors 
generally have more capital at stake, sophisticated tools, and 
professional staffs to monitor risk. See 2009 Proposing Release, 
supra note 31, at nn.46-48 and 178 and accompanying text.
    \76\ See, e.g., RSFI Study, supra note 21, at 10 (``Investor 
redemptions during the 2008 financial crisis, particularly after 
Lehman's failure, were heaviest in institutional share classes of 
prime money market funds, which typically hold securities that are 
illiquid relative to government funds. It is possible that 
sophisticated investors took advantage of the opportunity to redeem 
shares to avoid losses, leaving less sophisticated investors (if co-
mingled) to bear the losses.'').
    \77\ As discussed further below, retail money market funds 
experienced a lower level of redemptions in 2008 than institutional 
money market funds, although the full predictive power of this 
empirical evidence is tempered by the introduction of the Treasury 
Department's temporary guarantee program for money market funds, 
which may have prevented heavier shareholder redemptions among 
generally slower moving retail investors. See infra n.91.
---------------------------------------------------------------------------

C. The 2007-2008 Financial Crisis

    There are many possible explanations for the redemptions from money 
market funds during the 2007-2008 financial crisis.\78\ Regardless of 
the cause (or causes), money market funds' experience in the 2007-2008 
financial crisis demonstrates the harm that can result from such rapid 
heavy redemptions in money market funds.\79\ As explained in the RSFI 
study, on September 16, 2008, the day after Lehman Brothers Holdings 
Inc. announced its bankruptcy, The Reserve Fund announced that as of 
that afternoon, its Primary Fund--which held a $785 million (or 1.2% of 
the fund's assets) position in Lehman Brothers commercial paper--would 
``break the buck'' and price its securities at $0.97 per share.\80\ At 
the same time, there was turbulence in the market for financial sector 
securities as a result of the bankruptcy of Lehman Brothers and the 
near failure of American International Group (``AIG''), whose 
commercial paper was held by many prime money market funds. In addition 
to Lehman Brothers and AIG, there were other stresses in the market as 
well, as discussed in greater detail in the RSFI Study.\81\
---------------------------------------------------------------------------

    \78\ See generally RSFI Study, supra note 21, at section 3.
    \79\ See generally RSFI Study, supra note 21, at section 3. See 
also 2009 Proposing Release supra note 31, at section I.D; infra 
section II.D.2 (discussing the financial distress in 2011 caused by 
the Eurozone sovereign debt crisis and U.S. debt ceiling impasse and 
money market funds' experience during that time).
    \80\ See also 2009 Proposing Release, supra note 31, at n.44 and 
accompanying text. We note that the Reserve Primary Fund's assets 
have been returned to shareholders in several distributions made 
over a number of years. We understand that assets returned 
constitute approximately 99% of the fund's assets as of the close of 
business on September 15, 2008, including the income earned during 
the liquidation period. Any final distribution to former Reserve 
Primary Fund shareholders will not occur until the litigation 
surrounding the fund is complete. See Consolidated Class Action 
Complaint, In Re The Reserve Primary Fund Sec. & Derivative Class 
Action Litig., No. 08-CV-8060-PGG (S.D.N.Y. Jan. 5, 2010).
    \81\ See generally RSFI Study, supra note 21, at section 3.
---------------------------------------------------------------------------

    Redemptions in the Primary Fund were followed by redemptions from 
other Reserve money market funds.\82\ Prime institutional money market 
funds more generally began experiencing heavy redemptions.\83\ During 
the week of September 15, 2008, investors withdrew approximately $300 
billion

[[Page 36844]]

from prime money market funds or 14% of the assets in those funds.\84\ 
During that time, fearing further redemptions, money market fund 
managers began to retain cash rather than invest in commercial paper, 
certificates of deposit, or other short-term instruments.\85\ 
Commenters have stated that money market funds were not the only 
investors in the short-term financing markets that reduced or halted 
investment in commercial paper and other riskier short-term debt 
securities during the 2008 financial crisis.\86\ Short-term financing 
markets froze, impairing access to credit, and those who were still 
able to access short-term credit often did so only at overnight 
maturities.\87\
---------------------------------------------------------------------------

    \82\ See 2009 Proposing Release, supra note 31, at Section I.D.
    \83\ See RSFI Study, supra note 21, at section 3.
    \84\ See INVESTMENT COMPANY INSTITUTE, REPORT OF THE MONEY 
MARKET WORKING GROUP, at 62 (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI REPORT'') (analyzing data 
from iMoneyNet). The latter figure describes aggregate redemptions 
from all prime money market funds. Some money market funds had 
redemptions well in excess of 14% of their assets. Based on 
iMoneyNet data (and excluding the Reserve Primary Fund), the maximum 
weekly redemptions from a money market fund during the 2008 
financial crisis was over 64% of the fund's assets.
    \85\ See Philip Swagel, ``The Financial Crisis: An Inside 
View,'' Brookings Papers on Economic Activity, at 31 (Spring 2009) 
(conference draft), available at http://www.brookings.edu/economics/
bpea/~/media/Files/Programs/ES/BPEA/2009--spring--bpea--papers/
2009--spring--bpea--swagel.pdf; Christopher Condon & Bryan Keogh, 
Funds' Flight from Commercial Paper Forced Fed Move, BLOOMBERG, Oct. 
7, 2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5hvnKFCC_pQ.
    \86\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25.
    \87\ See 2009 Proposing Release, supra note 31, at nn.51-53 & 
65-68 and accompanying text (citing to minutes of the Federal Open 
Market Committee, news articles, Federal Reserve Board data on 
commercial paper spreads over Treasury bills, and books and academic 
articles on the financial crisis).
---------------------------------------------------------------------------

    Figure 1, below, provides context for the redemptions that occurred 
during the financial crisis. Specifically, it shows daily total net 
assets over time, where the vertical line indicates the date that 
Lehman Brothers filed for bankruptcy, September 15, 2008. Investor 
redemptions during the 2008 financial crisis, particularly after 
Lehman's failure, were heaviest in institutional share classes of prime 
money market funds, which typically hold securities that are less 
liquid and of lower credit quality than those typically held by 
government money market funds. The figure shows that institutional 
share classes of government money market funds, which include Treasury 
and government funds, experienced heavy inflows.\88\ The aggregate 
level of retail investor redemption activity, in contrast, was not 
particularly high during September and October 2008, as shown in Figure 
1.\89\
---------------------------------------------------------------------------

    \88\ As discussed in section III.A.3, government money market 
funds historically have faced different redemption pressures in 
times of stress and have different risk characteristics than other 
money market funds because of their unique portfolio composition, 
which typically has lower credit default risk and greater liquidity 
than non-government portfolio securities typically held by money 
market funds.
    \89\ We understand that iMoneyNet differentiates retail and 
institutional money market funds based on factors such as minimum 
initial investment amount and how the fund provider self-categorizes 
the fund.
[GRAPHIC] [TIFF OMITTED] TP19JN13.003

    On September 19, 2008, the U.S. Department of the Treasury 
(``Treasury'') announced a temporary guarantee program (``Temporary 
Guarantee Program''), which would use the $50 billion Exchange 
Stabilization Fund to support more than $3 trillion in shares of money 
market funds, and the Board of Governors of the Federal Reserve System 
authorized the temporary extension of credit to banks to finance their 
purchase of high-quality asset-backed commercial paper from money 
market funds.\90\ These programs successfully slowed redemptions in 
prime money market funds and provided additional liquidity to money 
market funds. The disruptions to the short-term markets detailed above 
could have continued for a longer period of time but for these 
programs.\91\
---------------------------------------------------------------------------

    \90\ See 2009 Proposing Release, supra note 31, at nn.55-59 and 
accompanying text for a fuller description of the various forms of 
governmental assistance provided to money market funds during this 
time.
    \91\ Treasury used the $50 billion Exchange Stabilization Fund 
to fund the Temporary Guarantee Program, but legislation has since 
been enacted prohibiting Treasury from using this fund again for 
guarantee programs for money market funds. See Emergency Economic 
Stabilization Act of 2008 Sec.  131(b), 12 U.S.C. Sec.  5236 (2008). 
The $50 billion Exchange Stabilization Fund was never drawn upon by 
money market funds under this program and the Temporary Guarantee 
Program expired on September 18, 2009. The Federal Reserve Board 
also established the Asset-Backed Commercial Paper Money Market 
Mutual Fund Liquidity Facility (``AMLF''), through which credit was 
extended to U.S. banks and bank holding companies to finance 
purchases of high-quality asset-backed commercial paper (``ABCP'') 
from money market funds, and it may have mitigated fire sales to 
meet redemptions requests. See Burcu Duygan-Bump et al., How 
Effective Were the Federal Reserve Emergency Liquidity Facilities? 
Evidence from the Asset-Backed Commercial Paper Money Market Mutual 
Fund Liquidity Facility, 68 J. Fin. 715 (Apr. 2013) (``Our results 
suggest that the AMLF provided an important source of liquidity to 
MMMFs and the ABCP market, as it helped to stabilize MMMF asset 
flows and to reduce ABCP yields.''). The AMLF expired on February 1, 
2010. Given the significant decline in money market investments in 
ABCP since 2008, reopening the AMLF would provide little benefit to 
money market funds today. For example, ABCP investments accounted 
for over 20% of Moody's-rated U.S. prime money market fund assets at 
the end of August 2008, but accounted for less than 10% of those 
assets by the end of August 2011. See Moody's Investors Service, 
Money Market Funds: ABCP Investments Decrease, Dec. 7, 2011, at 2. 
Form N-MFP data shows that as of February 28, 2013, prime money 
market funds held 6.9% of their assets in ABCP.

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[[Page 36845]]

D. Examination of Money Market Fund Regulation Since the Financial 
Crisis

1. The 2010 Amendments
    In March 2010, we adopted a number of amendments to rule 2a-7.\92\ 
These amendments were designed to make money market funds more 
resilient by reducing the interest rate, credit, and liquidity risks of 
fund asset portfolios. More specifically, the amendments decreased 
money market funds' credit risk exposure by further restricting the 
amount of lower quality securities that funds can hold.\93\ The 
amendments, for the first time, also require that money market funds 
maintain liquidity buffers in the form of specified levels of daily and 
weekly liquid assets.\94\ These liquidity buffers provide a source of 
internal liquidity and are intended to help funds withstand high 
redemptions during times of market illiquidity. Finally, the amendments 
reduce money market funds' exposure to interest rate risk by decreasing 
the maximum weighted average maturities of fund portfolios from 90 to 
60 days.\95\
---------------------------------------------------------------------------

    \92\ Money Market Fund Reform, Investment Company Act Release 
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (``2010 
Adopting Release'').
    \93\ Specifically, the amendments placed tighter limits on a 
money market fund's ability to acquire ``second tier'' securities by 
(1) restricting a money market fund from investing more than 3% of 
its assets in second tier securities (rather than the previous limit 
of 5%), (2) restricting a money market fund from investing more than 
\1/2 \of 1% of its assets in second tier securities issued by any 
single issuer (rather than the previous limit of the greater of 1% 
or $1 million), and (3) restricting a money market fund from buying 
second tier securities that mature in more than 45 days (rather than 
the previous limit of 397 days). See rule 2a-7(c)(3)(ii) and 
(c)(4)(i)(C). Second tier securities are eligible securities that, 
if rated, have received other than the highest short-term term debt 
rating from the requisite NRSROs or, if unrated, have been 
determined by the fund's board of directors to be of comparable 
quality. See rule 2a-7(a)(24) (defining ``second tier security''); 
rule 2a-7(a)(12) (defining ``eligible security''); rule 2a-7(a)(23) 
(defining ``requisite NRSROs'').
    \94\ The requirements are that, for all taxable money market 
funds, at least 10% of assets must be in cash, U.S. Treasury 
securities, or securities that convert into cash (e.g., mature) 
within one day and, for all money market funds, at least 30% of 
assets must be in cash, U.S. Treasury securities, certain other 
Government securities with remaining maturities of 60 days or less, 
or securities that convert into cash within one week. See rule 2a-
7(c)(5)(ii) and (iii).
    \95\ The 2010 amendments also introduced a weighted average life 
requirement of 120 days, which limits the money market fund's 
ability to invest in longer-term floating rate securities. See rule 
2a-7(c)(2)(ii) and (iii).
---------------------------------------------------------------------------

    In addition to reducing the risk profile of the underlying money 
market fund portfolios, the reforms increased the amount of information 
that money market funds are required to report to the Commission and 
the public. Money market funds are now required to submit to the SEC 
monthly information on their portfolio holdings using Form N-MFP.\96\ 
This information allows the Commission, investors, and third parties to 
monitor compliance with rule 2a-7 and to better understand and monitor 
the underlying risks of money market fund portfolios. Money market 
funds are now required to post portfolio information on their Web sites 
each month, providing investors with important information to help them 
make better-informed investment decisions and helping them impose 
market discipline on fund managers.\97\
---------------------------------------------------------------------------

    \96\ See rule 30b1-7.
    \97\ See rule 2a-7(c)(12).
---------------------------------------------------------------------------

    Finally, money market funds must undergo stress tests under the 
direction of the board of directors on a periodic basis.\98\ Under this 
stress testing requirement, each fund must periodically test its 
ability to maintain a stable NAV per share based upon certain 
hypothetical events, including an increase in short-term interest 
rates, an increase in shareholder redemptions, a downgrade of or 
default on portfolio securities, and widening or narrowing of spreads 
between yields on an appropriate benchmark selected by the fund for 
overnight interest rates and commercial paper and other types of 
securities held by the fund. This reform was intended to provide money 
market fund boards and the Commission a better understanding of the 
risks to which the fund is exposed and give fund managers a tool to 
better manage those risks.\99\
---------------------------------------------------------------------------

    \98\ See rule 2a-7(c)(10)(v).
    \99\ See 2009 Proposing Release, supra note 31, at section 
II.C.3.
---------------------------------------------------------------------------

2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasse of 2011
    One way to evaluate the efficacy of the 2010 reforms is to examine 
redemption activity during the summer of 2011. Money market funds 
experienced substantial redemptions during this time as the Eurozone 
sovereign debt crisis and impasse over the U.S. debt ceiling unfolded. 
As a result of concerns about exposure to European financial 
institutions, prime money market funds began experiencing substantial 
redemptions.\100\ Assets held by prime money market funds declined by 
approximately $100 billion (or 6%) during a three-week period beginning 
June 14, 2011.\101\ Some prime money market funds had redemptions of 
almost 20% of their assets in each of June, July, and August 2011, and 
one fund lost 23% of its assets during that period after articles began 
to appear in the financial press that warned of indirect exposure of 
money market funds to Greece.\102\ Figures 2 and 3 below show the 
redemptions from prime money market funds during this time, and also 
show that investors purchased shares of government money market funds 
in late June and early July in response to these concerns, but then 
began redeeming government money market fund shares in late July and 
early August, likely as a result of concerns about the U.S. debt 
ceiling impasse and possible ratings downgrades of government 
securities.\103\
---------------------------------------------------------------------------

    \100\ See RSFI Study, supra note 21, at 32.
    \101\ Id.
    \102\ Id.
    \103\ See also id. at 33.

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[[Page 36846]]

[GRAPHIC] [TIFF OMITTED] TP19JN13.004

    While it is difficult to isolate the effects of the 2010 
amendments, these events highlight the potential increased resilience 
of money market funds after the reforms were adopted. Most 
significantly, no money market fund had to re-price below its stable 
$1.00 share price. As discussed in greater detail in the RSFI Study, 
unlike September 2008, money market funds did not experience 
significant capital losses that summer, and the funds' shadow prices 
did not deviate significantly from the funds' stable share prices; also 
unlike in 2008, money market funds in the summer of 2011 had sufficient 
liquidity to satisfy investors' redemption requests, which were made 
over a longer period than in 2008, suggesting that the 2010 amendments 
acted as intended to enhance the resiliency of money market funds.\104\ 
The redemptions in the summer of 2011 also did not take place against 
the backdrop of a broader financial crisis, and therefore may have 
reflected more targeted concerns by investors (concern about exposure 
to the Eurozone and U.S. government securities as the debt ceiling 
impasse unfolded). Money market funds' experience in 2008, in contrast, 
may have reflected a broader range of concerns as reflected in the RSFI 
Study, which discusses a number of possible explanations for 
redemptions during the financial crisis.\105\
---------------------------------------------------------------------------

    \104\ Id. at 33-34.
    \105\ Id. at 7-13.
---------------------------------------------------------------------------

    Although money market funds' experiences differed in 2008 and the 
summer of 2011, the heavy redemptions money market funds experienced in 
the

[[Page 36847]]

summer of 2011 appear to have negatively affected the markets for 
short-term financing. Academics researching these issues have found, as 
detailed in the RSFI Study, that ``creditworthy issuers may encounter 
financing difficulties because of risk taking by the funds from which 
they raise financing''; ``local branches of foreign banks reduced 
lending to U.S. entities in 2011''; and that ``European banks that were 
more reliant on money funds experienced bigger declines in dollar 
lending.'' \106\ Thus, while such redemptions often exemplify rational 
risk management by money market fund investors, they can also have 
certain contagion effects on the short-term financing markets.
---------------------------------------------------------------------------

    \106\ See id. at 34-35 (``It is important to note, however, 
investor redemptions has a direct effect on short-term funding 
liquidity in the U.S. commercial paper market. Chernenko and 
Sunderam (2012) report that `creditworthy issuers may encounter 
financing difficulties because of risk taking by the funds from 
which they raise financing.' Similarly, Correa, Sapriza, and Zlate 
(2012) finds U.S. branches of foreign banks reduced lending to U.S. 
entities in 2011, while Ivashina, Scharfstein, and Stein (2012) 
document European banks that were more reliant on money funds 
experienced bigger declines in dollar lending.'') (internal 
citations omitted); Sergey Chernenko & Adi Sunderam, Frictions in 
Shadow Banking: Evidence from the Lending Behavior of Money Market 
Funds, Fisher College of Business Working Paper No. 2012-4 (Sept. 
2012); Ricardo Correa et al., Liquidity Shocks, Dollar Funding 
Costs, and the Bank Lending Channel During the European Sovereign 
Crisis, Federal Reserve Board International Finance Discussion Paper 
No. 2012-1059 (Nov. 2012); Victoria Ivashina et al., Dollar Funding 
and the Lending Behavior of Global Banks, National Bureau of 
Economic Research Working Paper No. 18528 (Nov. 2012).
---------------------------------------------------------------------------

3. Our Continuing Consideration of the Need for Additional Reforms
    When we proposed and adopted the 2010 amendments, we acknowledged 
that money market funds' experience during the 2007-2008 financial 
crisis raised questions of whether more fundamental changes to money 
market funds might be warranted.\107\ We solicited and received input 
from a number of different sources analyzing whether or not additional 
reforms may be necessary, and we began to solicit and evaluate 
potential options for additional regulation of money market funds to 
address these vulnerabilities. In the 2009 Proposing Release we 
requested comment on certain options, including whether money market 
funds should be required to move to the ``floating net asset value'' 
used by all other mutual funds or satisfy certain redemptions in-
kind.\108\ We received over 100 comments on this aspect of the 2009 
Proposing Release.\109\ In adopting the 2010 amendments, we noted that 
we would continue to explore more significant regulatory changes in 
light of the comments we received.\110\ At the time, we stated that we 
had not had the opportunity to fully explore possible alternatives and 
analyze the potential costs, benefits, and consequences of those 
alternatives.
---------------------------------------------------------------------------

    \107\ See 2009 Proposing Release, supra note 31, at section III; 
2010 Adopting Release, supra note 92, at section I.
    \108\ See 2009 Proposing Release, supra note 31, at section 
III.A.
    \109\ Comments on the 2009 Proposing Release can be found at 
http://www.sec.gov/comments/s7-11-09/s71109.shtml.
    \110\ See 2010 Adopting Release, supra note 92, at section I.
---------------------------------------------------------------------------

    Our subsequent consideration of money market funds has been 
informed by the work of the President's Working Group on Financial 
Markets, which published a report on money market fund reform options 
in 2010 (the ``PWG Report'').\111\ We solicited comment on the features 
of money market funds that make them susceptible to heavy redemptions 
and potential options for reform both through our request for comment 
on the PWG Report and by hosting a May 2011 roundtable on Money Market 
Funds and Systemic Risk (the ``2011 Roundtable'').\112\
---------------------------------------------------------------------------

    \111\ Report of the President's Working Group on Financial 
Markets, Money Market Fund Reform Options (Oct. 2010) (``PWG 
Report''), available at http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf. The members of 
the PWG included the Secretary of the Treasury Department (as 
chairman of the PWG), the Chairman of the Board of Governors of the 
Federal Reserve System, the Chairman of the SEC, and the Chairman of 
the Commodity Futures Trading Commission.
    \112\ See President's Working Group Report on Money Market Fund 
Reform, Investment Company Act Release No. 29497 (Nov. 3, 2010) [75 
FR 68636 (Nov. 8, 2010)]. See also Roundtable Transcript, supra note 
43.
---------------------------------------------------------------------------

    The potential financial stability risks associated with money 
market funds also have attracted the attention of the Financial 
Stability Oversight Council (``FSOC''), which has been tasked with 
monitoring and responding to threats to the U.S. financial system and 
which superseded the PWG.\113\ On November 13, 2012, FSOC proposed to 
recommend that we implement one or a combination of three reforms 
designed to address risks to financial companies and markets that money 
market funds may pose.\114\ The first option would require money market 
funds to use floating NAVs.\115\ The second option would require money 
market funds to have a NAV buffer with a tailored amount of assets of 
up to 1% (raised through various means) to absorb day-to-day 
fluctuations in the value of the funds' portfolio securities and allow 
the funds to maintain a stable NAV.\116\ The NAV buffer would be paired 
with a requirement that 3% of a shareholder's highest account value in 
excess of $100,000 during the previous 30 days--a ``minimum balance at 
risk'' (``MBR'')--be made available for redemption on a delayed basis. 
These requirements would not apply to certain money market funds that 
invest primarily in U.S. Treasury obligations and repurchase agreements 
collateralized with U.S. Treasury securities. The third option would 
require money market funds to have a risk-based NAV buffer of 3%. This 
3% NAV buffer potentially could be combined with other measures aimed 
at enhancing the effectiveness of the buffer and potentially increasing 
the resiliency of money market funds, and

[[Page 36848]]

thereby justifying a reduction in the level of the required NAV 
buffer.\117\ Finally, in addition to proposing to recommend these three 
reform options, FSOC requested comment on other potential reforms, 
including standby liquidity fees and temporary restrictions on 
redemptions (``gates''), which would be implemented during times of 
market stress to reduce money market funds' vulnerability to runs.\118\
---------------------------------------------------------------------------

    \113\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (the ``Dodd-Frank Act'') established the FSOC: (A) To 
identify risks to the financial stability of the United States that 
could arise from the material financial distress or failure, or 
ongoing activities, of large, interconnected bank holding companies 
or nonbank financial companies, or that could arise outside the 
financial services marketplace; (B) to promote market discipline, by 
eliminating expectations on the part of shareholders, creditors, and 
counterparties of such companies that the Government will shield 
them from losses in the event of failure; and (C) to respond to 
emerging threats to the stability of the United States financial 
system. The ten voting members of the FSOC include the Treasury 
Secretary (who serves as Chairman of the FSOC), the Chairmen of the 
Commission, the Board of Governors of the Federal Reserve System, 
the Commodity Futures Trading Commission, the Federal Deposit 
Insurance Corporation, and the National Credit Union Administration 
Board, the Directors of the Bureau of Consumer Financial Protection 
and the Federal Housing Finance Agency, the Comptroller of the 
Currency, and an independent insurance expert appointed by the 
President of the United States. See Dodd-Frank Act, Public Law 111-
203, 124 Stat. 1376 Sec. Sec.  111-112 (2010).
    \114\ See Proposed Recommendations Regarding Money Market Mutual 
Fund Reform, Financial Stability Oversight Council [77 FR 69455 
(Nov. 19, 2012)] (the ``FSOC Proposed Recommendations''). Under 
section 120 of the Dodd-Frank Act, if the FSOC determines that the 
conduct, scope, nature, size, scale, concentration, or 
interconnectedness of a financial activity or practice conducted by 
bank holding companies or nonbank financial companies could create 
or increase the risk of significant liquidity, credit, or other 
problems spreading among bank holding companies and nonbank 
financial companies, the financial markets of the United States, or 
low-income, minority or under-served communities, the FSOC may 
provide for more stringent regulation of such financial activity or 
practice by issuing recommendations to primary financial regulators, 
like the Commission, to apply new or heightened standards or 
safeguards. FSOC has proposed to issue a recommendation to the 
Commission under this authority concerning money market funds. If 
FSOC issues a final recommendation to the Commission, the 
Commission, under section 120, would be required to impose the 
recommended standards, or similar standards that FSOC deems 
acceptable, or explain in writing to FSOC why the Commission has 
determined not to follow FSOC's recommendation.
    \115\ See FSOC Proposed Recommendations, supra note 114, at 
section V.A.
    \116\ See id. at section V.B.
    \117\ See id. at section V.C.
    \118\ See id. at section V.D.
---------------------------------------------------------------------------

    In its proposed recommendation FSOC stated that the Commission, 
``by virtue of its institutional expertise and statutory authority, is 
best positioned to implement reforms to address the risk that [money 
market funds] present to the economy,'' and that if the Commission 
``moves forward with meaningful structural reforms of [money market 
funds] before [FSOC] completes its Section 120 process, [FSOC] expects 
that it would not issue a final Section 120 recommendation.'' \119\ We 
strongly agree that the Commission is best positioned to consider and 
implement any further reforms to money market funds, and we have 
considered FSOC's analysis of its proposed recommended reform options 
and the public comments that FSOC has received in formulating the money 
market reforms we are proposing today.
---------------------------------------------------------------------------

    \119\ See id. at section III.B.
---------------------------------------------------------------------------

    The RSFI Study, discussed throughout this Release, also has 
informed our consideration of the risks that may be posed by money 
market funds and our formulation of today's proposals. The RSFI Study 
contains, among other things, a detailed analysis of our 2010 
amendments to rule 2a-7 and some of the amendments' effects to date, 
including changes in some of the characteristics of money market funds, 
the likelihood that a fund with the maximum permitted weighted average 
maturity (``WAM'') would ``break the buck'' before and after the 2010 
reforms, money market funds' experience during the 2011 Eurozone 
sovereign debt crisis and the U.S. debt-ceiling impasse, and how money 
market funds would have performed during September 2008 had the 2010 
reforms been in place at that time.\120\
---------------------------------------------------------------------------

    \120\ See generally RSFI Study, supra note 21, at section 4.
---------------------------------------------------------------------------

    In particular, the RSFI Study found that under certain assumptions 
the expected probability of a money market fund breaking the buck was 
lower with the additional liquidity required by the 2010 reforms.\121\ 
In addition, funds in 2011 had sufficient liquidity to withstand 
investors' redemptions during the summer of 2011.\122\ The fact that no 
fund experienced a credit event during that time also contributed to 
the evidence that funds' were able to withstand relatively heavy 
redemptions while maintaining a stable $1.00 share price. Finally, 
using actual portfolio holdings from September 2008, the RSFI Study 
analyzed how funds would have performed during the financial crisis had 
the 2010 reforms been in place at that time. While funds holding 30% 
weekly liquid assets are more resilient to portfolio losses, funds will 
``break the buck'' with near certainty if capital losses of the fund's 
non-weekly liquid assets exceed 1%.\123\ The RSFI Study concludes that 
the 2010 reforms would have been unlikely to prevent a fund from 
breaking the buck when faced with large credit losses like the ones 
experienced in 2008.\124\ The inferences that can be drawn from the 
RSFI Study lead us to conclude that while the 2010 reforms were an 
important step in making money market funds better able to withstand 
heavy redemptions when there are no portfolio losses (as was the case 
in the summer of 2011), they are not sufficient to address the 
incentive to redeem when credit losses are expected to cause fund's 
portfolios to lose value or when the short-term financing markets more 
generally are expected to, or do, come under stress. Accordingly, we 
preliminarily believe that the alternative reforms proposed in this 
Release could lessen money market funds' susceptibility to heavy 
redemptions, improve their ability to manage and mitigate potential 
contagion from high levels of redemptions, and increase the 
transparency of their risks, while preserving, as much as possible, the 
benefits of money market funds.
---------------------------------------------------------------------------

    \121\ Id. at 30.
    \122\ Id. at 34.
    \123\ Id. at 38, Table 5. In fact, even at capital losses of 
only 0.75% of the fund's non-weekly liquid assets and no investor 
redemptions, funds are already more likely than not (64.6%) to 
``break the buck.'' Id.
    \124\ To further illustrate the point, the RSFI Study noted that 
the Reserve Primary Fund ``would have broken the buck even in the 
presence of the 2010 liquidity requirements.'' Id. at 37.
---------------------------------------------------------------------------

III. Discussion

    We are proposing alternative amendments to rule 2a-7, and related 
rules and forms, that would either (i) require money market funds 
(other than government and retail money market funds) \125\ to 
``float'' their NAV per share or (ii) require that a money market fund 
(other than a government fund) whose weekly liquid assets fall below 
15% of its total assets be required to impose a liquidity fee of 2% on 
all redemptions (unless the fund's board determines that the liquidity 
fee is not in the best interest of the fund). Under the second 
alternative, once the money market fund crosses this threshold, the 
fund's board also would have the ability to temporarily suspend 
redemptions (or ``gate'') the fund for a limited period of time if the 
board determines that doing so is in the fund's best interest.\126\ We 
discuss each of these alternative proposals in this section, along with 
potential tax, accounting, operational, and economic implications. We 
also discuss a potential combination of our floating NAV proposal and 
liquidity fees and gates proposal, as well as the potential benefits, 
drawbacks, and operational issues associated with such a potential 
combination. We also discuss various alternative approaches that we 
have considered for money market fund reform.
---------------------------------------------------------------------------

    \125\ Our proposed exemptions for government and retail money 
market funds (including our proposed definition for a retail money 
market fund) are discussed in sections III.A.3 and III.A.4, 
respectively. The exemptive amendments we are proposing are within 
the Commission's broad authority under section 6(c) of the Act. 
Section 6(c) authorizes the Commission to exempt by rule, 
conditionally or unconditionally, any person, security, or 
transaction (or classes of persons, securities, or transactions) 
from any provision of the Act ``if and to the extent that such 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions'' of the Act. 15 U.S.C. 80a-
6(c). For the reasons discussed throughout this Release, the 
Commission preliminarily believes that the proposed amendments to 
rules 2a-7, 12d3-1, 18f-3, and 22e-3 meet these standards.
    \126\ In the text of the proposed rules and forms below we refer 
to our floating NAV alternative as ``Alternative 1,'' and our 
liquidity fees and gates alternative as ``Alternative 2.''
---------------------------------------------------------------------------

    In addition, we are proposing a number of other amendments that 
would apply under either alternative proposal to enhance the disclosure 
of money market fund operations and risks. Certain of our proposed 
disclosure requirements would vary depending on the alternative 
proposal adopted (if any) as they specifically relate to the floating 
NAV proposal or the liquidity fees and gates proposal. In addition, we 
are proposing additional disclosure reforms to improve the transparency 
of risks present in money market funds, including daily Web site 
disclosure of funds' daily and weekly liquid assets and market-based 
NAV per share and historic instances of sponsor support. We also are 
proposing to establish a new current event disclosure form that would 
require funds to make prompt public disclosure of certain events, 
including portfolio security defaults, sponsor support, a fall in the 
funds' weekly liquid assets below 15% of total

[[Page 36849]]

assets, and a fall in the market-based price of the fund below $0.9975.
    We are proposing to amend Form N-MFP to provide additional 
information relevant to assessing the risk of funds and make this 
information public immediately upon filing. In addition, we are 
proposing to require that a large liquidity fund adviser that manages a 
private liquidity fund provide security-level reporting on Form PF that 
are substantially the same as those currently required to be reported 
by money market funds on Form N-MFP.\127\
---------------------------------------------------------------------------

    \127\ See infra section III.I.
---------------------------------------------------------------------------

    Our proposed amendments also would tighten the diversification 
requirements of rule 2a-7 by requiring consolidation of certain 
affiliates for purposes of the 5% issuer diversification requirement, 
requiring funds to presumptively treat the sponsors of asset-backed 
securities (``ABSs'') as guarantors subject to rule 2a-7's 
diversification requirements, and removing the so-called ``twenty-five 
percent basket.'' \128\ Finally, we are proposing to amend the stress 
testing provision of rule 2a-7 to enhance how funds stress test their 
portfolios and require that money market funds stress test against the 
fund's level of weekly liquid assets falling below 15% of total assets.
---------------------------------------------------------------------------

    \128\ The ``twenty-five percent basket'' currently allows money 
market funds to only comply with the 10% guarantee concentration 
limit with respect to 75% of the fund's total assets. See infra 
section III.J.
---------------------------------------------------------------------------

    We note finally that we are not rescinding our outstanding 2011 
proposal to remove references to credit ratings from two rules and four 
forms under the Investment Company Act, including rule 2a-7 and Form N-
MFP, under section 939A of the Dodd-Frank Act, and on which we welcome 
additional comments.\129\ The Commission intends to address this matter 
at another time and, therefore, this Release is based on rule 2a-7 and 
Form N-MFP as amended and adopted in 2010.\130\
---------------------------------------------------------------------------

    \129\ See References to Credit Ratings in Certain Investment 
Company Act Rules and Forms, Investment Company Act Release No. 
29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] (proposing to also 
eliminate references to credit ratings from rule 5b-3 and Forms N-
1A, N-2, and N-3, and establish new rule 6a-5 to replace a reference 
to credit ratings in section 6(a)(5) that the Dodd-Frank Act 
eliminated).
    \130\ See 2010 Adopting Release, supra note 92. We note that 
after enactment of the Dodd-Frank Act, our staff issued a no-action 
letter assuring money market funds and their managers that, in light 
of section 939A of the Dodd-Frank Act, the staff would not recommend 
enforcement action to the Commission under section 2(a)(41) of the 
Act and rules 2a-4 and 22c-1 thereunder if a money market fund board 
did not designate NRSROs and did not make related disclosures in its 
SAI before the Commission had completed its review of rule 2a-7 
required by the Dodd-Frank Act and made any modifications to the 
rule. See SEC Staff No-Action Letter to the Investment Company 
Institute (Aug. 19, 2010). This staff guidance remains in effect 
until such time as the Commission or its staff indicate otherwise.
---------------------------------------------------------------------------

A. Floating Net Asset Value

    Our first alternative proposal--a floating NAV--is designed 
primarily to address the incentive of money market fund shareholders to 
redeem shares in times of fund and market stress based on the fund's 
valuation and pricing methods, as discussed in section II.B.1 above. It 
should also improve the transparency of pricing associated with money 
market funds. Under this alternative, money market funds (other than 
government and retail money market funds \131\) would be required to 
``float'' their net asset value. This proposal would amend \132\ rule 
2a-7 to rescind certain exemptions that have permitted money market 
funds to maintain a stable price by use of amortized cost valuation and 
penny-rounding pricing of their portfolios.\133\ As a result, the money 
market funds subject to this reform would sell and redeem shares at 
prices that reflect the value using market-based factors of their 
portfolio securities and would not penny round their prices.\134\ In 
other words, the daily share prices of these money market funds would 
``float,'' which means that each fund's NAV would fluctuate along with 
changes, if any, in the value using market-based factors of the fund's 
underlying portfolio of securities.\135\ Money market funds would only 
be able to use amortized cost valuation to the extent other mutual 
funds are able to do so--where the fund's board of directors 
determines, in good faith, that the fair value of debt securities with 
remaining maturities of 60 days or less is their amortized cost, unless 
the particular circumstances warrant otherwise.\136\
---------------------------------------------------------------------------

    \131\ The definitions of government and retail money market 
funds, as considered exempt under our proposals from certain 
proposed reforms, are discussed in sections III.A.3 and III.A.4. 
These funds would also price their portfolio securities using 
market-based factors, but would continue to be able to maintain a 
stable price per share through the use of the penny rounding method 
of pricing.
    \132\ References to rule 2a-7 as amended under our floating NAV 
proposal will be ``proposed (FNAV) rule''; similarly, references to 
rule 2a-7 as amended under our liquidity fees and gates proposal 
discussed in section III.B will be ``proposed (Fees & Gates) rule.''
    \133\ We also propose to amend rule 18f-3(c)(2)(i) to replace 
the phrase ``that determines net asset value using the amortized 
cost method permitted by Sec.  270.2a-7'' with ``that operates in 
compliance with Sec.  270.2a-7'' because money market funds would 
not use the amortized cost method to a greater extent than mutual 
funds generally under either of our core reform proposals.
    \134\ We have not previously proposed, but have sought comment 
on requiring money market funds to use a floating NAV. See 2009 
Proposing Release, supra note 31, at section II.A. The floating NAV 
alternative on which we seek comment today is informed by the 
comments we received in response to the 2009 comment request, as 
well as relevant comments submitted in response to: (i) the PWG 
Report and (ii) the FSOC Proposed Recommendations.
    \135\ See infra note 27 for a discussion of how money market 
funds generally value their portfolio securities using market-based 
factors based on estimates from models rather than trading inputs.
    \136\ See 1977 Valuation Release, supra note 10. 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 creditworthiness of an issuer, or other factors. 
In such situations, it would appear to be incumbent on the directors 
of a fund to recognize such factors and take them into account in 
determining `fair value.' '' Id. Accordingly, this guidance 
effectively limits the use of amortized cost valuation to 
circumstances where it is the same as valuation based on market 
factors. Some commenters voiced concern about allowing an exemption 
for money market funds with remaining maturities of 60 days or less. 
See, e.g., Federal Reserve Bank Presidents FSOC Comment Letter, 
supra note 38. However, we believe that these commenters 
misunderstood Commission guidance in this area, which limits the use 
of amortized cost valuation for these securities to circumstances 
under which the amortized cost value accurately reflects the fair 
value, as determined using market factors. See 1977 Valuation 
Release, supra note 10.
---------------------------------------------------------------------------

    Under this approach, the ``risk limiting'' provisions of rule 2a-7 
would continue to apply to money market funds.\137\ Accordingly, mutual 
funds that hold themselves out as money market funds would continue to 
be limited to investing in short-term, high-quality, dollar-denominated 
instruments. We would, however, rescind rule 2a-7's provisions that 
relate to the maintenance of a stable value for these funds, including 
shadow pricing, and would adopt the other reforms discussed in this 
Release that are not related to the discretionary standby liquidity 
fees and gates alternative, as discussed in section III.B below.
---------------------------------------------------------------------------

    \137\ See proposed (FNAV) rule 2a-7(d) (risk-limiting 
conditions).
---------------------------------------------------------------------------

    We also propose to require that all money market funds, other than 
government and retail money market funds, price their shares using a 
more precise method of rounding.\138\ The proposal would require that 
each money market fund round prices and transact in its shares at the 
fourth decimal place in the case of a fund with a $1.00 target share 
price (i.e., $1.0000) or an equivalent level of precision if a fund 
prices its shares at a different target level (e.g., a fund with a $10 
target share price would price its shares at $10.000). Depending on the 
degree of fluctuation, this precision would increase the

[[Page 36850]]

observed sensitivity of a fund's share price to changes in the market 
values of the fund's portfolio securities, and should better inform 
shareholders of the floating nature of the fund's value. Finally, we 
propose a relatively long compliance date of 2 years to provide time 
for money market funds converting to a floating NAV on a permanent 
basis to make system modifications and time for funds to respond to 
redemption requests. The extended compliance date would also allow 
shareholders time to understand the implications of any reforms, 
determine if a floating NAV money market fund is an appropriate 
investment, and if not, redeem their shares in an orderly fashion.
---------------------------------------------------------------------------

    \138\ See proposed (FNAV) rule 2a-7(c) (share price). We discuss 
our proposed amendment to share pricing in infra section III.A.2.
---------------------------------------------------------------------------

    The financial crisis of 2007-2008 had significant impacts on 
investors, money market funds, and the short-term financing markets. 
The floating NAV alternative is designed to respond, at least in part, 
to the contagion effects from heavy redemptions from money market funds 
that were revealed during that crisis. As discussed in greater detail 
below, although it is not possible to state with certainty what would 
have happened if money market funds had operated with a floating NAV at 
that time, we expect that if a floating NAV had been in place, it could 
have mitigated some of the heavy redemptions that occurred due to the 
stable share price. Many factors, however, contributed to these heavy 
redemptions, and we recognize that a floating NAV requirement is a 
targeted reform that may not ameliorate all of those factors.
    Under a floating NAV, investors would not have had the incentive to 
redeem money market fund shares to benefit from receiving the stable 
share price of a fund that may have experienced losses, because they 
would have received the actual market-based value of their shares. The 
transparency provided by the floating NAV alternative might also have 
reduced redemptions during the crisis that were a result of investor 
uncertainty about the value of the securities owned by money market 
funds because investors would have seen fluctuations in money market 
fund share prices that reflect market-based factors.
    Of course, a floating NAV would not have prevented redemptions from 
money market funds that were driven by certain other investing 
decisions, such as a desire to own higher quality assets than those 
that were in the portfolios of prime money market funds, or not to be 
invested in securities at all, but rather to hold assets in another 
form such as in insured bank deposits. The floating NAV alternative is 
not intended to deter redemptions that constitute rational risk 
management by shareholders or that reflect a general incentive to avoid 
loss. Instead, it is designed to increase transparency, and thus 
investor awareness, of money market fund risks and dis-incentivize 
redemption activity that can result from informed investors attempting 
to exploit the possibility of redeeming shares at their stable share 
price even if the portfolio has suffered a loss.
1. Certain Considerations Relating to the Floating NAV Proposal
a. A Reduction in the Incentive To Redeem Shares
    As discussed above, when a fund's shadow price is less than the 
fund's $1.00 share price, money market fund shareholders have an 
incentive to redeem shares ahead of other investors in times of fund 
and market stress. Given the size of institutional investors' holdings 
and their resources for monitoring funds, institutions have both the 
motivation and ability to act on this incentive. Indeed, as discussed 
above and in the RSFI Study, institutional investors redeemed shares 
more heavily than retail investors from prime money market funds in 
both September 2008 and June 2011.
    Some market observers have suggested that the valuation and pricing 
techniques permitted by rule 2a-7 may exacerbate the incentive to 
redeem in money market funds if investors expect that the value of the 
fund's shares will fall below $1.00.\139\ Our floating NAV proposal is 
designed to lower this risk by reducing investors' incentive to redeem 
shares in times of fund and market stress. Under our floating NAV 
proposal, money market funds would transact at share prices that 
reflect current market-based factors (not amortized cost or penny 
rounding) and thus investor incentives to redeem early to take 
advantage of transacting at a stable value are ameliorated.\140\
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    \139\ See, e.g., Roundtable Transcript, supra note 43. (Bill 
Stouten, Thrivent Financial) (``I think the primary factor that 
makes money funds vulnerable to runs is the marketing of the stable 
value.''); (Gary Gensler, U.S. Commodity Futures Trading Commission 
(``CFTC'')) (``But one thing comes along with the money market 
funds, which is the stable value, or if I can say as an old market 
guy, it's a `free put.' You can put back an instrument and get 100 
cents on the dollar. And it's that free put that I think causes some 
structural challenges.''); Comment Letter of Federal Reserve Bank of 
Richmond (Jan. 10, 2011) (available in File No. 4-619) (``Richmond 
Fed PWG Comment Letter''). See also supra section II.B (discussing 
the structural features of money market funds that can make them 
vulnerable to runs); Statement 309 of the Shadow Financial 
Regulatory Committee, Systemic Risk and Money Market Mutual Funds 
(Feb. 14, 2011) (available in File No. 4-619), (``[I]f fund 
valuations were marked to market immediately using the full NAV 
approach--as required for other types of mutual funds--this type of 
run [the September 2008 run on money market funds] would not have 
occurred, and there would not have been a strong economic incentive 
for money market mutual funds to liquidate positions.''); Gorton 
Shadow Banking, supra note 71, at 269-270 (explaining that money 
market funds' ability to transact at a stable $1.00 per share 
distinguishes them from other mutual funds, allows them to compete 
with bank demand deposits, and ``may have instilled a false sense of 
security in investors who took the implicit promise as equivalent to 
the explicit insurance offered by deposit accounts'').
    \140\ As discussed supra in Section II, we recognize that 
incentives other than those created by money market fund's stable 
share price exist for money market fund shareholders to redeem in 
times of stress, including avoidance of loss and the tendency of 
investors to engage in flights to quality, liquidity, and 
transparency.
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b. Improved Transparency
    Our floating NAV proposal also is designed to increase the 
transparency of money market fund risk. Money market funds are 
investment products that have the potential for the portfolio to 
deviate from a stable value. Although many investors understand that 
money market funds are not guaranteed, survey data shows that some 
investors are unsure about the amount of risk in money market funds and 
the likelihood of government assistance if losses occur.\141\ 
Similarly, many institutional investors use money market funds for 
liquidity purposes and are extremely loss averse; that is, they are 
unwilling to suffer any losses on money market fund investments.\142\ 
Money market funds' stable share price, combined with the practice of 
fund management companies providing financial support to money market 
funds when necessary, may have

[[Page 36851]]

implicitly encouraged investors to view these funds as ``risk-free'' 
cash.\143\ However, the stability of money market fund share prices has 
been due, in part, to the willingness of fund sponsors to support the 
stable value of the fund. As discussed in section II.B.3 above, sponsor 
support has not always been transparent to investors, potentially 
causing investors to underestimate the investment risk posed by money 
market funds. As a result, money market fund investors, who were not 
accustomed to seeing their funds lose value, may have increased their 
redemptions of shares when values fell in recent times.\144\
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    \141\ See Fidelity April 2012 PWG Comment Letter, supra note 61. 
For example, 41% of the retail customers surveyed said they either 
would expect the government to protect money market funds' stable 
values in times of crisis (10%) or were unsure about whether the 
government would do so (31%). 47% of the retail customers thought 
money market funds present comparable risks to ``bank products,'' 
which in context appears to refer to insured deposits, 12% thought 
money market funds posed less risk than bank products, while 36% of 
the retail customers thought money market funds posed more risk than 
bank products.
    \142\ See, e.g., Roundtable Transcript, supra note 43 (Lance 
Pan, Capital Advisors Group) (``I would like to add that money fund 
investors do view money funds as liquidity vehicles, not as 
investment vehicles. What I mean by that is they will take zero 
loss, and they're loss averse as opposed to risk averse. So to the 
extent that they own that risk [i.e., investors, rather than fund 
sponsors, may be exposed to a loss], at a certain point they started 
to own that risk, then the run would start to develop.''); Comment 
Letter of Treasury Strategies, Inc. (Jan. 10, 2011) (available in 
File No. 4-619) (``The added risk [in The Reserve Primary Fund 
resulting from its taking on more risk] produced higher yields, and 
as a result attracted substantial `hot money' from highly 
sophisticated, institutional investors. These investors were fully 
knowledgeable of the risks they were taking, and assumed they would 
be the first to be able to sell their investments if the Reserve 
Fund's bet on a government bailout of Lehman Brothers failed.'').
    \143\ See also, e.g., Better Markets FSOC Comment Letter, supra 
note 67, at 11-12 (``a fluctuating NAV would correct the basic 
misconception among many investors that their investment is 
guaranteed'').
    \144\ See, e.g., PWG Report, supra note 111, at 10 (``Investors 
have come to view MMF shares as extremely safe, in part because of 
the funds' stable NAVs and sponsors' record of supporting funds that 
might otherwise lose value. MMFs' history of maintaining stable 
value has attracted highly risk-averse investors who are prone to 
withdraw assets rapidly when losses appear possible.''); Comment 
Letter of Capital Advisers (Apr. 2, 2012) (available in File No. 4-
619) (stating that institutional money market fund investors 
``derive their risk-free assumptions from the fact that very few (a 
total of two) funds have experienced losses and in all other `near 
miss' instances fund sponsors have provided voluntary capital or 
liquidity support to cover potential losses'' and that the 
``Treasury Department further reinforced these assumptions when it 
announced the Temporary Guarantee Program for Money Market Funds on 
September 29, 2008'') (emphasis in original).
---------------------------------------------------------------------------

    Our floating NAV proposal is designed to increase the transparency 
of risks present in money market funds. By making gains and losses a 
more regular and observable occurrence in money market funds, a 
floating NAV could alter investor expectations by making clear that 
money market funds are not risk free and that the funds' share price 
will fluctuate based on the value of the funds' assets.\145\ Investors 
in money market funds with floating NAVs should become more accustomed 
to, and tolerant of, fluctuations in money market funds' NAVs and thus 
may be less likely to redeem shares in times of stress. The proposal 
would also treat money market fund shareholders more equitably than the 
current system by requiring redeeming shareholders to receive the fair 
value of their shares.\146\
---------------------------------------------------------------------------

    \145\ For a more detailed discussion of a floating NAV and 
investors' expectations, see PWG Report, supra note 111, at 19-22; 
2009 Proposing Release, supra note 31, at section III.A.
    \146\ See, e.g., Comment Letter of Deutsche Investment 
Management Americas Inc. (Jan. 10, 2011) (available in File No. 4-
619) (``Deutsche PWG Comment Letter'') (noting that a ``variable NAV 
fund . . . will treat all investors fairly during times of stress''; 
that ``large and sudden redemptions runs [are] a phenomenon 
exacerbated by the fact that amortized cost accounting rules can 
embed realized losses in the fund that are not reflected in the 
NAV''; and that ``[t]o avoid having to absorb these embedded losses, 
investors have the incentive to redeem early''); Comment Letter of 
TDAM USA Inc. (Sept. 8, 2009) (available in File No. S7-11-09) 
(agreeing that ``requiring money market funds to issue and redeem 
their shares at market value, or to float their NAVs, would in 
certain respects advance shareholder fairness'').
---------------------------------------------------------------------------

    To further enhance transparency, we also are proposing to require a 
number of new disclosures related to fund sponsor support (see section 
III.F below). As discussed further in section III.E below, investors 
unwilling to bear the risk of a floating NAV would likely move to other 
products, such as government or retail money market funds (which we 
propose would be exempt from our floating NAV proposal and permitted to 
maintain a stable price).
    We seek comment on this aspect of our proposal.
     Do commenters agree that floating a money market fund's 
NAV would lessen the incentive to redeem shares in times of fund and 
market stress that can result from use of amortized cost valuation and 
penny rounding pricing by money market funds today?
     What would be the effect of the other incentives to redeem 
that would remain under a floating NAV with basis point pricing 
requirement?
     Would floating a money market fund's NAV provide 
sufficient transparency to cause investors to estimate more accurately 
the investment risks of money market funds? Do commenters believe that 
daily disclosure of shadow prices on fund Web sites would accomplish 
the same goal without eliminating the stable share price at which fund 
investors purchase and redeem shares? Why or why not? Is daily 
disclosure of a fund's shadow price without transacting at that price 
likely to lead to higher or lower risks of large redemptions in times 
of stress? If the enhanced disclosure requirements proposed elsewhere 
in this Release were in place, what would be the incremental benefit of 
the enhanced transparency of a floating NAV?
     Are there other places to disclose the shadow price that 
would make the disclosure more effective in enhancing transparency?
     If the fluctuations in money market funds' NAVs remained 
relatively small even with a $1.0000 share price, would investors 
become accustomed only to experiencing small gains and losses, and 
therefore be inclined to redeem heavily if a fund experienced a loss in 
excess of investors' expectations?
     Would investors in a floating NAV money market fund that 
appears likely to suffer a loss be less inclined to redeem because the 
loss would be shared pro rata by all shareholders? Would a floating NAV 
make investors in a fund more likely to redeem at the first sign of 
potential stress because any loss would be immediately reflected in the 
floating NAV?
     Would floating NAV money market funds treat non-redeeming 
shareholders, and particularly slower-to-redeem shareholders, more 
equitably in times of stress?
     To the extent that some investors choose not to invest in 
money market funds due to the prospect of even a modest loss through a 
floating NAV, would the funds' resiliency to heightened redemptions be 
improved?
     Would money market fund sponsors voluntarily make cash 
contributions or use other available means to support their money 
market funds and thereby prevent their NAVs from actually floating? 
\147\ Would larger fund sponsors or those sponsors with more access to 
capital have a competitive advantage over other fund sponsors?
---------------------------------------------------------------------------

    \147\ In section III.A.5.a we discuss the economic implications 
of sponsor support under our floating NAV proposal. We are not 
proposing any changes that would prohibit fund sponsors from 
supporting money market funds under our floating NAV proposal. Our 
proposal also includes new disclosure requirements related to 
sponsor support. See infra section III.F.
---------------------------------------------------------------------------

c. Redemptions During Periods of Illiquidity
    We recognize that a floating NAV may not eliminate investors' 
incentives to redeem fund shares, particularly when financial markets 
are under stress and investors are engaging in flights to quality, 
liquidity, or transparency.\148\ As discussed above, the RSFI Study 
noted that the incentive for investors to redeem ahead of other 
investors is heightened by liquidity concerns-when liquidity levels are 
insufficient to meet redemption requests, funds may be forced to sell 
portfolio securities into illiquid secondary markets at

[[Page 36852]]

discounted or even fire-sale prices.\149\ Because the potential cost of 
liquidity transformation is not reflected in market-based pricing until 
after the redemption has occurred, this liquidity pressure may create 
an additional incentive for investors to redeem shares in times of fund 
and market stress.\150\ In addition, market-based pricing does not 
capture the likely increasing illiquidity of a fund's portfolio as it 
sells its more liquid assets first during a period of market stress to 
defer liquidity pressures as long as possible. As discussed in section 
II.D.1 above, our 2010 amendments, including new daily and weekly 
liquid asset requirements, strengthened the resiliency of money market 
funds to both portfolio losses and investor redemptions as compared 
with 2008. We note, however, that other financial intermediaries that 
engage in maturity transformation, including banks, also have liquidity 
mismatches to some degree.
---------------------------------------------------------------------------

    \148\ See, e.g., PWG Report, supra note 111, at 20 (``To be 
sure, a floating NAV itself would not eliminate entirely MMFs' 
susceptibility to runs. Rational investors still would have an 
incentive to redeem as fast as possible the shares of any MMF that 
is at risk of depleting its liquidity buffer before that buffer is 
exhausted, because subsequent redemptions may force the fund to 
dispose of less-liquid assets and incur losses.''); 2009 Proposing 
Release, supra note 31, at 106 (``We recognize that a floating net 
asset value would not necessarily eliminate the incentive to redeem 
shares during a liquidity crisis--shareholders still would have an 
incentive to redeem before the portfolio quality deteriorated 
further from the fund selling securities into an illiquid market to 
meet redemption demands.''). See also supra notes 36-37 and 
accompanying text.
    \149\ See RSFI Study, supra note 21, at 4 (noting that most 
money market fund portfolio securities are held to maturity, and 
secondary markets in these securities are not deeply liquid).
    \150\ Although we recognize that managers of certain other 
mutual funds, and not just money market funds, generally sell the 
most liquid portfolio securities first to satisfy redemptions that 
exceed available cash, non-money market mutual funds generally are 
not as susceptible to heightened redemptions as are money market 
funds for a variety of reasons, including that non-money market 
mutual funds generally are not used for cash management.
---------------------------------------------------------------------------

    We request comment on the incentive to redeem that exists in a 
liquidity crisis.
     Do commenters believe that a floating NAV is sufficient to 
address the incentive to redeem caused by liquidity concerns in times 
of market stress? Would other tools, such as redemption gates or 
liquidity fees, also be necessary?
     Do commenters believe that money market funds as currently 
structured present unique risks as compared with other mutual funds, 
all of which may face some degree of liquidity pressure during times of 
market stress? Would the floating NAV proposal suffice to address those 
risks?
     Did the 2010 amendments, including new daily and weekly 
liquid asset requirements, address sufficiently the incentive to redeem 
in periods of illiquidity?
d. Empirical Evidence in Other Floating NAV Cash Management Vehicles
    Commenters have cited to the fact that some floating value money 
market funds in other jurisdictions and U.S. ultra-short bond mutual 
funds also suffered heavy redemptions during the 2007-2008 financial 
crisis.\151\ These commenters suggest, therefore, that money market 
fund floating NAVs would likely not stop investors from redeeming 
shares. One qualification in considering these experiences is that many 
of the European floating NAV products that experienced heavy 
shareholder redemptions were priced and managed differently than our 
proposal and that U.S. ultra-short bond mutual funds are not subject to 
rule 2a-7's risk-limiting conditions.\152\
---------------------------------------------------------------------------

    \151\ See, e.g., Statement of the Investment Company Institute, 
SEC Open Meeting of the Investor Advisory Committee, May 10, 2010, 
at 4, available at www.ici.org/pdf/24289.pdf (stating that 
``[u]ltra-short bond funds lost more than 60% of their assets from 
mid-2007 to the end of 2008, and French floating NAV dynamic money 
funds lost about 40% of their assets in a three-month time span from 
July 2007 to September 2007'' and that ``[s]hareholders in fixed-
income funds [including those with floating NAVs] also tend to be 
more risk adverse and more likely to redeem shares quickly when 
fixed-income markets show any signs of distress''); Comment Letter 
of the European Fund and Asset Management Association (Jan. 10, 
2011) (available in File No. 4-619) (``EFAMA PWG Comment Letter'') 
(noting that ``[i]n a matter of weeks, EUR 70 billion were redeemed 
from these [enhanced money market] funds, predominantly by 
institutional investors; around 15-20 suspended redemptions for a 
short period, and 4 of them were [definitively] closed.'').
    \152\ Many European floating NAV money market funds, not all of 
which suffered heavy redemptions, price their shares differently 
than floating NAV money market funds would under our proposal by 
accumulating rather than distributing dividends. The shares of 
accumulating dividend funds therefore generally will exceed one 
euro, and a loss in these funds would be a small reduction in the 
excess value above one euro as opposed to a drop in value below a 
single euro. This kind of floating NAV money market fund may not 
have affected shareholders' expectations of and tolerance for losses 
to the same extent as would our proposal. See, e.g., Deutsche PWG 
Comment Letter, supra note 146 (stating that ``drawing parallels to 
the return or redemption experiences within [European money market 
funds and ultra-short bond funds] and those in the proposed variable 
NAV rule 2a-7 money market funds is not entirely accurate due to the 
differences in the duration of time and the magnitude of the 
redemption experiences'' and noting that (i) ``the variable NAV 
structure prevalent in many European money market funds is based on 
a system of accumulating dividends, not the use of a mark to market 
accounting system'' and (ii) ``one of the weaknesses addressed 
through the European Fund and Asset Management Association 
(``EFAMA'') and the Committee of European Securities Regulators 
(``CESR'') in the European style of money market funds was the lack 
of standardization in the definition of money market funds and the 
broad investment policies across EU member states''). See also 
Witmer, supra note 36.
---------------------------------------------------------------------------

    Europe, for example, has several different types of money market 
funds, all of which can take on more risk than U.S. money market funds 
as they are not currently subject to regulatory restrictions on their 
credit quality, liquidity, maturity, and diversification as stringent 
as those imposed under rule 2a-7, among other differences in 
regulation.\153\ One commenter observed that the financial crisis was 
first felt in Europe when ``so-called `enhanced money market funds,' 
which used the `money market' fund label in their marketing strategies 
while taking on more risk than traditional money market funds, [ran] 
into problems.'' \154\ The difficulties experienced by these funds, the 
commenter asserted, ``created confusion for investors about the 
definition, classification and risk characteristics of money market 
funds.'' \155\ In contrast, French mon[eacute]taire funds, which are 
managed more conservatively than ``enhanced money market funds'' and 
thus resemble more closely the floating NAV money market funds 
contemplated by our proposal, generally did not experience heavy 
redemptions.\156\ The experience of French mon[eacute]taire funds would 
be consistent with another commenter's observation that ``one could 
reach the opposite conclusion that a variable NAV structure can, and in 
fact has, operated as intended during times of market stress in a 
manner consistent with minimizing systemic risk.'' \157\
---------------------------------------------------------------------------

    \153\ For a discussion of the regulation of European money 
market funds, see infra Table 2, notes E and H; Common Definition of 
European Money Market Funds (Ref. CESR/10-049).
    \154\ See EFAMA PWG Comment Letter, supra note 151 (emphasis in 
original).
    \155\ Id. (noting that ``[i]n a matter of weeks, EUR 70 billion 
were redeemed from these [enhanced money market] funds, 
predominantly by institutional investors; around 15-20 suspended 
redemptions for a short period, and 4 of them were [definitively] 
closed'').
    \156\ See Comment Letter of HSBC Global Asset Management on the 
European Commission's Green Paper on Shadow Banking (May 28, 2012) 
(``HSBC EC Letter''), available at http://ec.europa.eu/internal_market/consultations/2012/shadow/individual-others/hsbc_en.pdf 
(comparing inflows and outflows of European money market funds); 
EFAMA PWG Comment Letter, supra note 151 (describing the outflows 
from European enhanced money market funds).
    \157\ Deutsche PWG Comment Letter, supra note 146 (emphasis in 
original).
---------------------------------------------------------------------------

    U.S ultra-short bond funds also experienced redemptions in this 
period. U.S. ultra-short bond funds are not subject to rule 2a-7's 
risk-limiting conditions and although their NAVs float, pose more risk 
of loss to investors than most U.S. money market funds, including 
floating NAV money market funds under our proposal.\158\ One reason 
that investors redeemed shares in ultra-short bond funds during the 
2007-2008 financial crisis may have been because they did not fully 
understand the riskiness or liquidity of ultra-short

[[Page 36853]]

bond funds. That some ultra-short bond funds experienced heavy 
redemptions during the financial crisis, therefore, does not 
necessarily suggest that investors in the floating NAV money market 
funds contemplated by our proposal also would experience redemptions in 
a financial crisis. Empirical analysis in this area also yields 
different opinions.\159\
---------------------------------------------------------------------------

    \158\ See, e.g., Witmer, supra note 36, at 23 (noting that 
ultra-short bond funds in the U.S. and enhanced money market funds 
in Europe both maintain a floating NAV structure, but are not 
subject to the same liquidity, credit, and maturity restrictions as 
money market funds).
    \159\ See, e.g., Witmer, supra note 36 (empirically testing 
whether floating NAVs (as compared with constant NAVs) provide a 
benefit in reducing run-like behavior by examining flow and 
withdrawal behavior (from 2006 through 2011) of money market mutual 
funds in the United States and Europe and concluding that the 
variable NAV fund structure is less susceptible to run-like behavior 
relative to constant NAV money market funds). But see Comment Letter 
of Jeffrey Gordon (Feb. 28, 2013) (available in File No. FSOC-2012-
0003) (``Gordon FSOC Comment Letter'').
---------------------------------------------------------------------------

    Having pointed out these differences, we recognize that the data is 
consistent with certain commenters' view that other incentives may lead 
to heavy redemptions of floating NAV funds in times of stress.\160\ We 
seek comment on the performance of other floating NAV investment 
products during the 2007-2008 financial crisis.
---------------------------------------------------------------------------

    \160\ See, e.g., Comment Letter of Treasury Strategies, Inc. 
(Alternative One: Floating Net Asset Value) (Jan. 15, 2013) 
(available in File No. FSOC-2012-0003).
---------------------------------------------------------------------------

     Do commenters agree with the preceding discussion of what 
may have caused investors to heavily redeem shares in some floating 
value money market funds in other jurisdictions and in U.S. ultra-short 
bond funds during the 2007-2008 financial crisis? Are there other 
possible factors that we should consider?
     Do commenters agree with the distinctions we identified 
between money market funds under our proposed floating NAV and money 
market funds in other jurisdictions and U.S. ultra-short bond funds? 
Are there similarities or differences we have not identified?
     Do commenters believe that the risk limiting requirements 
of rule 2a-7 would deter heavy redemptions in money market funds with a 
floating NAV because of the restrictions on the underlying assets?
     Do commenters believe that money market funds attract very 
risk averse investors? If so, are these investors more or less likely 
to rapidly redeem in times of stress to avoid even small losses?
2. Money Market Fund Pricing
    We are proposing that money market funds, other than government and 
retail money market funds, price their shares using a more precise 
method of valuation that would require funds to price and transact in 
their shares at an NAV that is calculated to the fourth decimal place 
for shares with a target NAV of one dollar (e.g., $1.0000). Funds with 
a current share price other than $1.00 would be required to price their 
shares at an equivalent level of precision (e.g., a fund with a $10 
target share price would price its shares at $10.000).\161\ The 
proposed change to money market fund pricing under our floating NAV 
proposal would change the rounding convention for money market funds--
from penny rounding (i.e., to the nearest one percent) to ``basis 
point'' rounding (to the nearest 1/100th of one percent).\162\ ``Basis 
point'' rounding is a significantly more precise standard than the 1/
10th of one percent currently required for most mutual funds.\163\ For 
the reasons discussed below, we believe that our proposal provides the 
level of precision necessary to convey the risks of money market funds 
to investors.
---------------------------------------------------------------------------

    \161\ See proposed (FNAV) rule 2a-7(c). In its proposed 
recommendations the FSOC proposed that money market funds re-price 
their shares to $100.00, which is the mathematical equivalent of our 
$1.0000 proposed share price. See FSOC Proposed Recommendations, 
supra note 114, at 31. FSOC commenters generally opposed the $100.00 
per share re-pricing, stating that the Investment Company Act does 
not require that a registered investment company offer its shares at 
a particular price. See, e.g., Comment Letter of Federated 
Investors, Inc. (Re: Alternative One) (Jan. 25. 2013) (available in 
File No. FSOC-2012-0003) (``Federated Investors Alternative 1 FSOC 
Comment Letter''); ICI Jan. 24 FSOC Comment Letter, supra note 25. 
While our proposed pricing is mathematically the same as that 
proposed by the FSOC, pricing fund shares using $1.00 extended to 
four decimal places reduces other potential costs, including, for 
example, the possibility that funds would require corporate actions 
(e.g., reverse stock splits) to re-price their shares at $100.00. 
Our proposed pricing does not mandate that funds establish a 
particular share price, but rather amends the precision by which a 
fund prices its shares.
    \162\ Money market funds are permitted to use penny rounding 
under rule 2a-7(c) and therefore, a money market fund priced at 
$1.00 per share may round its NAV to the nearest penny.
    \163\ Currently, money market funds priced at $1.00 may round 
their NAV to the nearest penny ($1.00). See rule 2a-7(c). Mutual 
funds other than money market funds must calculate the fund's NAV to 
the nearest 1/10th of 1% (i.e., for funds with shares priced at 
$1.00, the funds should price their shares to the third decimal 
place, or $1.000). See 1977 Valuation Release, supra note 10. Many 
mutual funds typically price their shares at an initial NAV of $10 
and round their NAV to the nearest penny. See rule 2a-4. Because 
floating NAV money market funds, under our proposal, would continue 
to adhere to rule 2a-7s's risk-limiting conditions and generally 
seek principal stability, we are proposing that money market funds 
with a floating NAV value their shares to the nearest 1/100th of 1%, 
a more precise standard than that required of most mutual funds 
today.
---------------------------------------------------------------------------

    Market-based valuation with penny rather than ``basis point'' 
rounding effectively provides the same rounding convention as exists in 
money market funds today--the underlying valuation based on market-
based factors may deviate by as much as 50 basis points before the fund 
breaks the buck. Accordingly, it is unlikely to change investor 
behavior.
    A $1.0000 share price, however, would reflect small fluctuations in 
value more than a $1.00 price, which may more effectively inform 
investor expectations. For example, the value of a $1.00 per share 
fund's portfolio securities would have to change by 50 basis points for 
investors to currently see a one-penny change in the NAV; under our 
proposal, the share price at which investors purchase and redeem shares 
would reflect single basis point variations.\164\ We do not anticipate 
significant operational difficulties or overly burdensome costs arising 
from funds pricing shares using ``basis point'' rounding: A number of 
money market funds recently elected to voluntarily report daily shadow 
NAVs at this level of precision.\165\
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    \164\ We expect that floating $100.00 NAVs (which is the 
mathematical equivalent of our proposed $1.0000 NAV) would change by 
a penny or more during all but the shortest investment horizons. 
Commission staff compared reported shadow prices on Form N-MFP 
between November 2010 and March 2012 over consecutive one-, three-, 
and six-month periods. Staff estimated that there would have been no 
penny change over a one-month period in 98% of the months using a 
$10.00 NAV but only 69% of the months using a $100 NAV. Staff 
estimated that there would have been no penny change over a three-
month period in 98% of the time using a $10 NAV but only 59% of the 
time using a $100.00 NAV. Staff estimates that there would have been 
no penny change over a six-month period in 96% of the time using a 
$10 NAV but only 43% of the time using a $100.00 NAV. No money 
market fund had a support agreement in place during this time 
period.
    \165\ Many large fund complexes have begun (or plan) to disclose 
daily money market fund market valuations (i.e., shadow prices) of 
at least some of their money market funds, rounded to four decimal 
places (``basis point'' rounding), for example, BlackRock, Fidelity 
Investments, and J.P. Morgan. See, e.g., Money Funds' New Openness 
Unlikely to Stop Regulation, Wall St. J. (Jan. 30, 2013).
---------------------------------------------------------------------------

    ``Basis point'' rounding should enhance many of the potential 
advantages of having a floating NAV. It should allow funds to reflect 
gains and losses more precisely. In addition, it should help reduce 
incentives for investors to redeem shares ahead of other investors when 
the shadow price is less than $1.0000 as investors would sell shares at 
a more precise and equitable price than under the current rules. At the 
same time, it should help reduce penalties for investors buying shares 
when shadow prices are less than $1.0000. ``Basis point'' rounding 
should therefore help stabilize funds in times of market stress by 
deterring redemptions from investors that would otherwise seek to take 
advantage of less precise pricing to redeem at a higher value than a 
more precise valuation would provide

[[Page 36854]]

and thus dilute the value of the fund for remaining shareholders.
    Our proposed amendment to require that money market funds use 
``basis point'' rounding should provide shareholders with sufficient 
price transparency to better understand the tradeoffs between risk and 
return across competing funds, and become more accustomed to 
fluctuations in market value of a fund's portfolio securities.\166\ It 
should allow them to appreciate that some money market funds may 
experience greater price volatility than others, and thus that there 
are variations in the risk profiles of different money market funds.
---------------------------------------------------------------------------

    \166\ Similar to other mutual funds, our proposed pricing of 
money market fund shares would continue to allow shareholders to 
purchase and redeem fractional shares, and therefore would not 
affect the ability of shareholders to purchase and redeem shares 
with round or precise dollar amounts as they do today.
---------------------------------------------------------------------------

    We also considered whether to require that money market funds price 
to three decimal places (for a fund with a target share price of 
$1.000), as other mutual funds do. We are concerned, however, that such 
``10 basis point'' rounding may not be sufficient to ensure that 
investors do not underestimate the investment risks of money market 
funds, particularly if funds manage themselves in such a way that their 
NAVs remain constant or nearly constant. Fund investment managers may 
respond to a floating NAV with ``10 basis point'' rounding by managing 
their portfolios more conservatively to avoid volatility that would 
require them to price fund shares at something other than $1.000. It is 
possible that managers would be able to avoid this volatility for quite 
some time, even with a floating NAV.\167\ Although a floating NAV with 
``basis point'' rounding may discourage risk taking in funds, a 
floating NAV with ``10 basis point'' rounding may mask small deviations 
in the market-based value of the fund's portfolio securities.
---------------------------------------------------------------------------

    \167\ See, e.g., PWG Report, supra note 111, at 22 (``Investors' 
perceptions that MMFs are virtually riskless may change slowly and 
unpredictably if NAV fluctuations remain small and rare. MMFs with 
floating NAVs, at least temporarily, might even be more prone to 
runs if investors who continue to see shares as essentially risk-
free react to small or temporary changes in the value of their 
shares.''); Comment Letter of Federated Investors, Inc. (May 19, 
2011) (available in File No. 4-619) (stating that ``managers would 
employ all manners of techniques to minimize the fluctuations in 
their funds' NAVs'' and, therefore, ``[i]nvestors would then expect 
the funds to exhibit very low volatility, and would redeem their 
shares if the volatility exceeded their expectations'').
---------------------------------------------------------------------------

    We seek comment on this aspect of our proposal.
     What level of precision in calculating a fund's share 
price would best convey to investors that floating NAV funds are 
different from stable price funds? Is ``basis point'' rounding too 
precise? Would ``10 basis point rounding'' ($1.000 for a fund with a 
$1.00 target share price) provide sufficient price transparency? Or 
another measure?
     Would requiring funds to price their shares at $1.0000 per 
share effectively alter investor expectations regarding a fund's NAV 
gains and losses? Would this in turn make investors less likely to 
redeem heavily when faced with potential or actual losses?
     Would ``basis point'' rounding better reflect gains and 
losses? Would it help eliminate incentives for investors to redeem 
shares ahead of other investors when prices are less than $1.0000?
     Should we require that all money market funds price their 
shares at $1.0000, including those funds that currently price their 
shares at an initial value other than $1.00? Do commenters agree that, 
regardless of a fund's initial share price, under our proposal all 
money market funds would be required to price fund shares to an 
equivalent level of precision (e.g., ``basis point'' rounding)?
     What would be the cost of implementing ``basis point'' 
rounding? Would funds require corporate actions or shareholder approval 
to price fund shares at $1.0000? What operational changes and related 
costs would be involved?
3. Exemption to the Floating NAV Requirement for Government Money 
Market Funds
    We are proposing an exemption to the floating NAV requirement for 
government money market funds-money market funds that maintain at least 
80% of their total assets in cash, government securities, or repurchase 
agreements that are collateralized fully.\168\ We believe that a 
government money market fund that maintains 80% of its total assets in 
cash and government securities fits within the typical risk profile of 
government money market funds as understood by investors, and is the 
portfolio holdings test used today for determining the accuracy of a 
fund's name.\169\ Under the proposal, government money market funds 
would not be subject to the basis point rounding aspect of the floating 
NAV requirement and instead would be permitted to use the penny 
rounding method of pricing fund shares to maintain a stable price.\170\
---------------------------------------------------------------------------

    \168\ Proposed (FNAV) rule 2a-7(c)(2).
    \169\ For example, some government money market funds limit 
themselves to holding mostly Treasury securities and Treasury repos 
and are referred to as ``Treasury money market funds.'' To comply 
with the investment company names rule, funds that hold themselves 
out as Treasury money market funds must hold at least 80% of their 
portfolio assets in U.S. Treasury securities and for Treasury repos. 
See rule 35d-1 (a materially deceptive and misleading name of a fund 
(for purposes of section 35(d) of the Investment Company Act 
(Unlawful representations and names)) includes a name suggesting 
that the fund focuses its investments in a particular type of 
investment or in investments in a particular industry or group of 
industries, unless, among other requirements, the fund has adopted a 
policy to invest, under normal circumstances, at least 80% of the 
value of its assets in the particular type of investments or 
industry suggested by the fund's name).
    \170\ As discussed in greater detail below, money market funds 
that take advantage of an exemption to the floating NAV requirement 
would not be able to use the amortized cost method of valuation, but 
would instead be required to only use the penny rounding method of 
pricing to facilitate a stable price per share.
---------------------------------------------------------------------------

    As discussed above, government money market funds face different 
redemption pressures and have different risk characteristics than other 
money market funds because of their unique portfolio composition.\171\ 
The securities primarily held by government money market funds 
typically have even a lower credit default risk than commercial paper 
and are highly liquid in even the most stressful market scenario.\172\ 
The primary risk that these funds bear is interest rate risk; that is, 
the risk that changes in interest rates result in a change in the 
market value of portfolio securities. Even the interest rate risk of 
government money market funds, however, is generally mitigated because 
they typically hold assets that have short maturities and hold those 
assets to maturity.\173\
---------------------------------------------------------------------------

    \171\ See, e.g., Comment Letter of Charles Schwab (Jan. 17, 
2013) (available in File No. FSOC-2012-0003) (``Schwab FSOC Comment 
Letter''); FSOC Proposed Recommendations, supra note 114, at 9.
    \172\ See, e.g., RSFI Study, supra note 21, at 8-9; Comment 
Letter of Vanguard (Jan. 15, 2013) (available in File No. FSOC-2012-
0003) (``Vanguard FSOC Comment Letter'').
    \173\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 
(``Given the short duration of [government] money market fund 
portfolios, any interest rate movements have a modest and temporary 
effect on the value of the fund's securities'').
---------------------------------------------------------------------------

    Nonetheless, it is possible that a government money market fund 
could undergo such stress that it results in a significant decline in a 
fund's shadow price. Government money market funds may invest up to 20% 
of their portfolio in non-government securities, and a credit event in 
that 20% portion of the portfolio or a shift in interest rates could 
trigger a drop in the shadow price, thereby creating incentives for 
shareholders to redeem shares ahead of other investors.

[[Page 36855]]

    Despite these risks, we believe that requiring government money 
market funds to float their NAV may be unnecessary to achieve policy 
goals.\174\ As discussed below, shifting to a floating NAV could impose 
potentially significant costs on both a fund and its investors. In 
light of the evidence of investor behavior during previous crises, it 
does not appear that government money market funds are as susceptible 
to the risks of mass investor redemptions as other money market 
funds.\175\ Investors have frequently noted the benefits of having a 
stable money market fund option, and exempting government money market 
funds from a floating NAV would allow us to preserve this option at a 
minimal risk.\176\ On balance, we believe the benefits of retaining a 
stable share price money market fund option and the relative safety in 
a government money market fund's 80% bucket appropriately 
counterbalances the risks associated with the 20% portion of a 
government money market fund's portfolio that may be invested in 
securities other than cash, government securities, or repurchase 
agreements.
---------------------------------------------------------------------------

    \174\ Many commenters have agreed with this position, suggesting 
that a floating NAV proposal should exempt government money market 
funds. See, e.g., Comment Letter of The Dreyfus Corporation (Feb. 
11, 2013) (available in File No. FSOC-2012-0003) (``Dreyfus FSOC 
Comment Letter''); Comment Letter of Northern Trust (Feb. 14, 2013) 
(available in File No. FSOC-2012-0003) (``Northern Trust FSOC 
Comment Letter''); ICI Jan. 24 FSOC Comment Letter, supra note 25.
    \175\ See RSFI Study, supra note 21, at 12-13 (examining the 
change in daily assets of different types of money market funds and 
highlighting abnormally large inflows into institutional and retail 
government funds during September 2008).
    \176\ See, e.g., Comment Letter of Allegheny Conference on 
Community Development (Jan. 4, 2013) (available in File No. FSOC-
2012-0003) (``Many nonprofit institutions are required, by law or by 
investment policy, to invest cash only in products offering a stable 
value''); Comment Letter of New Jersey Association of Counties (Dec. 
21, 2012) (available in File No. FSOC-2012-0003) (``We thus strongly 
support maintaining the ability of money market funds to offer a 
stable $1.00 per-share value'').
---------------------------------------------------------------------------

    Under the proposal, funds taking advantage of the government fund 
exemption (as well as funds using the retail exemption discussed in the 
next section) would no longer be permitted to use the amortized cost 
method of valuation to facilitate a stable NAV, but would continue to 
be able to use the penny rounding method of pricing. While today 
virtually all money market funds use both amortized cost valuation and 
penny rounding pricing together to maintain a stable value, either 
method alone effectively provides the same 50 basis points of deviation 
from a fund's shadow price before the fund must ``break the buck'' and 
re-price its shares. Accordingly, today the principal benefit from 
money market funds being able to use amortized cost valuation in 
addition to basis point rounding is that it alleviates the burden of 
the money market fund having to value each portfolio security each day 
using market factors.\177\ However, as described in section III.F.3 
below, we are proposing that all money market funds be required to 
disclose on a daily basis their share price with portfolios valued 
using market factors and applying basis point rounding. As a result, 
money market funds--including those exempt from the floating NAV 
requirement--would have to value their portfolio assets using market 
factors instead of amortized cost each day. Accordingly, in line with 
this increased transparency on the valuation of money market funds' 
portfolios, and in light of the fact that this increased transparency 
renders penny rounding alone an equal method of achieving price 
stability in money market funds, we are proposing that the government 
exemption permit penny rounding pricing alone and not also amortized 
cost valuation for all portfolio securities.
---------------------------------------------------------------------------

    \177\ Rule 2a-7 currently requires a money market fund's board 
of directors to review the amount of deviation between the fund's 
market-based NAV per share and the fund's amortized cost per share 
``periodically.'' Rule 2a-7(c)(8)(ii)(A)(2).
---------------------------------------------------------------------------

    The government money market fund exemption to the floating NAV 
requirement would not be limited solely to Treasury money market funds, 
but also would extend to money market funds that invest at least 80% of 
their portfolio in cash, ``government securities'' as defined in 
section 2(a)(16) of the Act, and repurchase agreements collateralized 
with government securities. Allowable securities would include 
securities issued by government-sponsored entities such as the Federal 
Home Loan Banks, government repurchase agreements, and those issued by 
other ``instrumentalities'' of the U.S. government.\178\ It would 
exclude, however, securities issued by state and municipal governments, 
which do not generally share the same credit and liquidity traits as 
U.S. government securities.\179\
---------------------------------------------------------------------------

    \178\ Section 2(a)(16) of the Investment Company Act.
    \179\ See, e.g., RSFI Study, supra note 21; Schwab FSOC Comment 
Letter, supra note 171 (``There may be slightly higher risk in 
municipal money market funds, but these funds tend to be more liquid 
than most prime funds.'').
---------------------------------------------------------------------------

    Today, government money market funds hold approximately $910 
billion in assets, or around 40% of all money market fund assets.\180\ 
Fund groups that wish to focus on offering stable price products could 
offer government and retail money market funds. We also note that our 
proposed retail money market fund exemption discussed in the next 
section would likely cover most municipal (or tax-exempt) funds, 
because the tax advantages that these funds offer are only enjoyed by 
individuals and thus most of these funds could continue to offer a 
stable share price.\181\ Similarly, investors who prefer a stable price 
fund or are unable to invest in a floating NAV fund could choose to 
invest in government money market funds. These investors could continue 
to use these money market funds as a cash management tool without 
incurring any costs or other effects associated with floating NAV 
investment vehicles.
---------------------------------------------------------------------------

    \180\ Based on iMoneyNet data.
    \181\ We note that there are some tax-exempt money market funds 
that self-classify as institutional funds to private reporting 
services such as iMoneyNet. We understand that these funds' 
shareholder base typically is comprised of omnibus accounts, with 
underlying individual investors.
---------------------------------------------------------------------------

    We request comment on this aspect of our proposal.
     Do commenters agree with our assumption that money market 
funds with at least 80% of their total assets in cash, government 
securities, and government repos are unlikely to suffer losses due to 
credit quality problems correct? Is our assumption that they are 
unlikely to be subject to significant shareholder redemptions during a 
financial crisis correct?
     Should government money market funds be exempt from the 
floating NAV requirement? Why or why not? Are there other risks, such 
as interest rate or liquidity risks, about which we should be concerned 
if we adopt this proposed exemption to the floating NAV requirement? If 
so, what are they and how should they be addressed?
     Would the costs imposed on government money market funds 
if we required them to price at a floating NAV be different from the 
costs discussed below?
     Are the proposed criteria for qualifying for the 
government money market funds exemption to the floating NAV requirement 
appropriate? Should government money market funds be required to hold 
more or fewer than 80% of total assets in cash, government securities, 
and government repos? If so, what should it be and why?
     What kinds of risks are created by exempting government 
money market funds from a floating NAV requirement where the funds are 
permitted to maintain 20% of their portfolio in securities other than 
cash, government securities, and government repos? Should there be 
additional limits or

[[Page 36856]]

requirements on the 20%? Would investors have incentives to redeem 
shares ahead of other investors if they see a material downgrade in 
securities held in the 20% basket? Would such an incentive create a 
significant risk of runs?
     Is penny rounding sufficient to allow government money 
market funds to maintain a stable price? Should we also permit these 
funds to use amortized cost valuation? If so, why? Should we permit 
money market funds to continue using amortized cost valuation for 
certain types of securities, such as government securities? Why?
     If the Commission does not adopt this exemption, how many 
investors in government money market funds might reallocate assets to 
non-government money market fund alternatives? How many assets in 
government money market funds might be reallocated to alternatives? To 
what non-government money market fund alternatives are these investors 
likely to reallocate their investments?
     Should we provide other exemptions to the floating NAV 
requirement based on the characteristics of a fund's portfolio assets, 
such as funds that hold heightened daily or weekly liquid assets? If 
so, why and what threshold should we use?
     Should money market funds that invest primarily in 
municipal securities be exempted from the floating NAV requirement? Why 
or why not? To what extent would such funds expect to qualify for the 
retail exemption?
4. Exemption to the Floating NAV Requirement for Retail Money Market 
Funds
a. Overview
    We are also proposing to exempt money market funds that are limited 
to retail investors from our floating NAV proposal by allowing them to 
use the penny rounding method of pricing instead of basis point 
rounding.\182\ Under this proposal, retail funds would still generally 
be required to value portfolio securities using market-based factors 
rather than amortized cost. As discussed in detail below, retail 
investors historically have behaved differently from institutional 
investors in a crisis, being much less likely to make large redemptions 
quickly in response to the first sign of market stress. Thus, prime 
money market funds that are limited to retail investors in general have 
not been subject to the same pressures as institutional or mixed 
funds.\183\ Under the proposed exemption, we would define a retail fund 
as a money market fund that does not permit a shareholder to redeem 
more than $1 million in a single business day. We would permit retail 
funds to continue to maintain a stable price. As of February 28, 2013, 
funds that self-report as retail money market funds currently hold 
nearly $695 billion in assets, which is approximately 26% of all assets 
held in money market funds.\184\
---------------------------------------------------------------------------

    \182\ Much like under the government fund proposal, funds that 
take advantage of the retail exemption would not be able to use the 
amortized cost method of valuation to facilitate a stable NAV for 
the same reasons as discussed in section III.A.3 above.
    \183\ See, e.g., Comment Letter of United Services Automobile 
Association (Feb. 15. 2013) (available in File No. FSOC-2012-0003) 
(``USAA FSOC Comment Letter'') (``Retail MMFs do not need additional 
or more stringent regulation to prevent runs because retail 
investors are inherently (and historically) less likely to cause 
runs.'').
    \184\ Based on iMoneyNet data. Of these assets, approximately 
$497 billion are held by prime money market funds and another $198 
billion are in government funds. Because we are proposing to exempt 
government funds from the floating NAV requirement, the proposed 
retail exemption would only be relevant to the investors holding the 
$497 billion in retail prime funds.
---------------------------------------------------------------------------

    As noted above in section II, during the 2007-2008 financial 
crisis, institutional prime money market funds had substantially 
greater redemptions than retail prime money market funds.\185\ For 
example, approximately 4-5% of prime retail money market funds had 
outflows of greater than 5% on each of September 17, 18, and 19, 2008, 
compared to 22-30% of prime institutional money market funds.\186\ 
Similarly, in late June 2011, institutional prime money market funds 
experienced heightened redemptions in response to concerns about their 
potential exposure to the Eurozone debt crisis, whereas retail prime 
money market funds generally did not experience a similar 
increase.\187\ Studies of money market fund redemption patterns in 
times of market stress also have noted this difference.\188\ As 
discussed above, institutional shareholders tend to respond more 
quickly than retail shareholders to potential market stresses because 
generally they have greater capital at risk and may be better informed 
about the fund through sophisticated tools to monitor and analyze the 
portfolio holdings of the funds in which they invest.
---------------------------------------------------------------------------

    \185\ See RSFI Study, supra note 21, at 8. We note that the RSFI 
Study used a definition of retail fund based on fund self-
classification, which does not entirely correspond with the 
definition of retail fund that we are proposing today.
    \186\ Based on iMoneyNet data. iMoneyNet classifies retail and 
institutional money market funds according to who is eligible to 
purchase fund shares, minimum initial investment amount in the fund, 
and to whom the fund is marketed. However, as discussed infra, there 
is currently no regulatory distinction that reliably distinguishes 
these types of investors, and the iMoneyNet method uses a different 
method of classification than the method we are proposing.
    \187\ Based on iMoneyNet data. Retail money market funds 
suffered net redemptions of less than 1% between June 14, 2011 and 
July 5, 2011, and only 27 retail money market funds had redemptions 
in excess of 5% during that period (and of these funds only 7 had 
redemptions in excess of 10% during this period), far fewer 
redemptions than those incurred by institutional funds.
    \188\ See, e.g., RSFI Study, supra note 21, at 8; Cross Section, 
supra note 60, at 9 (noting that institutional prime money market 
funds suffered net redemptions of $410 billion (or 30% of assets 
under management) in the four weeks beginning September 10, 2008, 
based on iMoneyNet data, while retail prime money market funds 
suffered net redemptions of $40 billion (or 5% of assets under 
management) during this same time period); Kacperczyk & Schnabl, 
supra note 60, at 31; Wermers Study, supra note 64.
---------------------------------------------------------------------------

    Given the tendency of retail investors to continue to hold money 
market fund shares in times of market stress, it appears to be 
unnecessary to impose a floating NAV requirement on retail funds to 
address the risk that a fund would be unable to manage heavy 
redemptions in times of crisis.\189\ We understand that funds designed 
for retail investors generally do not have a concentrated shareholder 
base and are therefore less likely to experience large and unexpected 
redemptions that would put a strain on the fund's liquidity.\190\ Some 
commenters have therefore suggested providing an exemption for retail 
funds to preserve the current benefits of money market funds for these 
investors, and as a consequence, reduce the macroeconomic effects that 
may be associated with a floating NAV requirement.\191\ A retail 
exemption may also reduce the operational burdens of implementing a 
floating NAV, because retail funds and their intermediaries may not 
need to undertake the operational costs of transitioning

[[Page 36857]]

systems or managing potential tax and accounting issues associated with 
a floating NAV. However, other commenters have opposed a retail 
exemption, citing the difficulty of distinguishing retail and 
institutional investors, operational issues, and other concerns.\192\
---------------------------------------------------------------------------

    \189\ See Comment Letter of Reich & Tang (Feb. 14, 2013) 
(available in File No. FSOC-2012-0003) (``Reich & Tang FSOC Comment 
Letter'') (``As a general rule, retail investors' use of money 
market funds tends to be stable and countercyclical. . . . This is 
in direct contrast to the general behavior of institutional 
investors.'').
    \190\ See Comment Letter of John M. Winters (Dec. 18, 2012) 
(available in File No. FSOC-2012-0003) (``Winters FSOC Comment 
Letter'') (``Retail MMFs and institutional government MMFs do not 
have a liquidity problem due to the nature of the investor type or 
portfolio securities. . . .'').
    \191\ See, e.g., USAA FSOC Comment Letter, supra note 183 
(``Bifurcation would allow retail MMFs to continue to play the same 
vital role they do today, provide retail investors with professional 
investment management services, portfolio diversification and 
liquidity, while also acting as a key provider of financing in the 
broader capital markets''); Reich & Tang FSOC Comment Letter, supra 
note 189 (``A departure of this nature would diminish and endanger 
the benefits [of MMFs] to retail investors and cause these same 
individuals to seek potentially less appropriate or riskier 
alternatives.''). See also infra section III.E.
    \192\ See, e.g., Comment Letter of Invesco Ltd. (Feb. 15, 2013) 
(available in File No. FSOC-2012-0003) (``Invesco FSOC Comment 
Letter'') (``While we acknowledge that the disruptions experienced 
by MMFs during the 2008 financial crisis were largely attributable 
to prime MMF redemptions by large investors, we believe that efforts 
to characterize MMFs or their investors as either ``institutional'' 
or ``retail'' are misplaced and impractical due to the difficulty of 
establishing a litmus test that can be used consistently to identify 
those investors most likely to trigger a MMF run.''); Comment Letter 
of Federated Investors, Inc. (Feb. 15. 2013) (available in File No. 
FSOC-2012-0003) (``Federated Investors Feb. 15 FSOC Comment 
Letter'').
---------------------------------------------------------------------------

    In 2009, similar considerations led us to propose lower 
requirements for the amount of daily and weekly liquid assets that 
retail money market funds would need to hold compared with 
institutional funds.\193\ We noted that retail prime money market funds 
experienced significantly fewer outflows when compared with 
institutional prime money market funds in the fall of 2008.\194\ 
Although we have not adopted that proposal, in part because we 
recognize significant difficulties in distinguishing retail from 
institutional funds for purposes of that reform, we continue to 
consider whether retail and institutional money market funds should be 
subject to different requirements.
---------------------------------------------------------------------------

    \193\ In 2009, we proposed to define a retail money market fund 
as a money market fund that was not an institutional fund, and to 
define an institutional fund as a money market fund whose board of 
directors, considering a number of factors, determines that is 
``intended to be offered to institutional investors.'' See 2009 
Proposing Release, supra note 31, at section II.C.2.
    \194\ Id. at n.185 and accompanying text.
---------------------------------------------------------------------------

    It is important to note that some commenters on our 2009 money 
market fund reforms proposal suggested that not all retail and 
institutional shareholders behave the same way as their peers.\195\ 
Also, although retail shareholders during recent financial crises have 
not redeemed from money market funds in large numbers in response to 
market stress, this does not necessarily mean that in the future they 
will not eventually exhibit increased redemption activity if stress on 
one or more money market funds persists.\196\ Empirical analyses of 
retail money market fund redemptions during the 2007-2008 financial 
crisis show that at least some retail investors eventually began 
redeeming shares.\197\ The introduction of the Treasury Temporary 
Guarantee Program on September 19, 2008 (a few days after institutional 
prime money market funds experienced heavy redemptions) may have 
prevented shareholder redemptions from accelerating in retail money 
market funds. Commenters on the FSOC Proposed Recommendations also have 
questioned whether the behavior of retail investors during the 2008 
crisis should be regarded as definitive.\198\
---------------------------------------------------------------------------

    \195\ See, e.g., Comment Letter of Invesco Aim Advisors, Inc. 
(Sept. 4, 2009) (available in File No. S7-11-09) (``Invesco 2009 
Comment Letter''); Comment Letter of Federated Investors, Inc. 
(Sept. 8, 2009) (available in File No. S7-11-09).
    \196\ See, e.g., Comment Letter of HSBC Global Asset Management 
Ltd (Feb. 15, 2013) (available in File No. FSOC-2012-0003) (``HSBC 
FSOC Comment Letter'') (``Whilst the credit crisis of 2008 is an 
important data point to compare investor behavior, there are other 
data points in history that show that retail investors do ``run'' 
from investments (banks, other types of mutual fund) during times of 
market crisis.'').
    \197\ See, e.g., Cross Section, supra note 60, at 25-26 (finding 
that net redemptions from retail prime money market funds in 
September 2008 indicates that higher risk money market funds did 
have greater net outflows but only late in the run and that outflows 
from retail money market funds peaked later than those from 
institutional funds); Wermers Study, supra note 64, at 3 (analysis 
of money market fund redemption data from the 2007-2008 financial 
crisis showed that ``prime institutional funds exhibited much larger 
persistence in outflows than retail funds, although retail investors 
also exhibited some run-like behavior.'').
    \198\ See, e.g., Federated Investors Feb 15 FSOC Comment Letter, 
supra note 192 (``The oft-repeated point that some funds labeled 
``institutional'' experienced higher redemptions than some funds 
labeled ``retail'' during the financial crisis is not sufficient. 
Many so-called institutional funds experienced the same or even 
lower levels of redemptions as so-called [retail money market] funds 
during the period of high redemptions during the financial crisis, 
and many funds included both retail and institutional investors.'').
---------------------------------------------------------------------------

    The evidence, however, suggests that retail investors tend to 
redeem shares slowly in times of fund and market stress or do not 
redeem shares at all. As indicated in the RSFI study, such lower 
redemptions may be more readily managed without adverse effects on the 
fund, in part because of the Commission's enhanced liquidity 
requirements adopted in 2010.\199\ However, we recognize that by 
providing a retail exemption to the floating NAV, we would be leaving 
in place for those investors the existing incentive to redeem that can 
result from the use of a stable price, and some retail investors could 
potentially benefit from redeeming shares ahead of other retail 
investors in times of fund and market stress.\200\
---------------------------------------------------------------------------

    \199\ See supra section II.D.2 for a discussion of how these 
enhanced liquidity requirements were more effective in providing 
stability in the face of the slower pace of redemptions in 
institutional prime money market funds in June and July of 2011 in 
response to the Eurozone debt crisis compared with the very rapid 
heavy redemptions that occurred in September 2008. But see RSFI 
study, supra at note 21, at 37 (noting that The Reserve Primary Fund 
would have broken the buck even in the presence of the 2010 
liquidity requirements).
    \200\ See Dreyfus FSOC Comment Letter, supra note 174 (``Thus 
while it can be expected that different kinds of prime money market 
funds may experience different levels of redemption activity, it may 
not be the case that different kinds of prime money market funds 
have different credit risk profiles.'').
---------------------------------------------------------------------------

    The retail exemption would take the same form as the government 
exemption in allowing these money market funds to price using penny 
rounding instead of basis point rounding. For the reasons described in 
section III.A.3 above, we do not believe that allowing continued use of 
amortized cost valuation for all securities in these funds' portfolios 
is appropriate given that these funds will be required to value their 
securities using market factors on a daily basis due to new Web site 
disclosure requirements described in section III.F.3 and given that 
penny rounding otherwise achieves the same level of price stability.
    We request comment on whether we should provide a retail money 
market fund exemption to the floating NAV.
     Are we correct in our understanding that retail investors 
are less likely to redeem money market fund shares in times of market 
stress than institutional investors? Or are they just slower to 
participate in heavy redemptions?
     Does the evidence showing that retail investors behave 
differently than institutional investors justify a retail exemption? Is 
this difference in behavior likely to continue in the future?
     Would a retail exemption reduce the operational effects of 
implementing the floating NAV requirement, such as systems changes and 
tax and accounting issues? If so, to what extent and how?
     If the Commission does not adopt an exemption to the 
floating NAV requirement for retail funds, how many investors in retail 
prime money market funds might reallocate assets to non-prime money 
market fund alternatives? How many assets in retail prime money market 
funds might be reallocated to alternatives? To what non-prime money 
market alternatives are retail investors likely to reallocate their 
investments? \201\
---------------------------------------------------------------------------

    \201\ See infra section III.E.
---------------------------------------------------------------------------

     Are we correct that retail investors would prefer an 
exemption from the floating NAV requirement? Would they instead prefer 
to invest in floating NAV funds? If so, why?
     Is penny rounding sufficient to allow retail money market 
funds to maintain a stable price? Should we also permit these funds to 
use amortized cost valuation? If so, why?
     Should we consider requiring retail funds that rely on an 
exemption from

[[Page 36858]]

the floating NAV requirement to be subject to the liquidity fees and 
gates requirement described in section III.B?
b. Operation of the Retail Fund Exemption
    The operational challenges of implementing an exemption for retail 
investor funds are numerous and complex. Currently, many money market 
funds are owned by both retail and institutional investors, although 
many are separated into retail and institutional share classes.\202\ 
With the retail exemption to the floating NAV requirement, funds with 
separate share classes for different types of investors (as well as 
funds that mix different types of investors together) that wish to 
offer a stable price would need to reorganize, offering separate money 
market funds to retail and institutional investors.\203\ We recognize 
that any distinction could result in ``gaming behavior'' whereby 
investors having the general attributes of an institution might attempt 
to fit within the confines of whatever retail exemption we craft.\204\
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    \202\ Several of the largest prime money market funds have both 
institutional and retail share classes. For example, see Vanguard 
Money Market Reserves, Vanguard Prime Money Market Fund Investor 
Shares (VMMXX), Registration Statement (Form N-1A) (Dec. 28, 2012); 
Vanguard Money Market Reserves, Vanguard Prime Money Market Fund 
Institutional Shares (VMRXX), Registration Statement (Form N-1A) 
(Dec. 28, 2012); J.P. Morgan Money Market Funds, JPMorgan Prime 
Money Market Fund Institutional Class Shares (JINXX), Registration 
Statement (Form N-1A) (July 1, 2012); J.P. Morgan Money Market 
Funds, JPMorgan Prime Money Market Fund Morgan Class Shares (VMVXX), 
Registration Statement (Form N-1A) (July 1, 2012).
    \203\ Alternatively, funds might choose to be treated as 
institutional (and not eligible for the proposed retail exemption to 
the floating NAV requirement).
    \204\ See Comment Letter of BlackRock, Inc. (Dec. 13, 2012) 
(available in File No. FSOC-2012-0003) (``BlackRock FSOC Comment 
Letter'') (``A two-tiered approach to MMFs based on a distinction 
between ``retail'' and ``institutional'' funds would be difficult to 
implement and may lead to gaming behavior by investors.''); HSBC 
FSOC Comment Letter, supra note 196 (``There are also practical 
challenges such as defining and identifying different types of 
investors and preventing the ``gaming'' of any regulation.'').
---------------------------------------------------------------------------

    It can be difficult to distinguish objectively between retail and 
institutional money market funds, given that funds generally self-
report this designation, there are no clear or consistent criteria for 
classifying funds and there is no common regulatory or industry 
definition of a retail investor or a retail money market fund.\205\ 
Many of the issues that we discuss below regarding distinguishing 
between types of investors were raised by our 2009 proposed money 
market fund reforms in which we proposed to establish different 
liquidity requirements for institutional and retail money market 
funds.\206\ Many commenters then asserted that distinguishing between 
retail and institutional money market funds would be difficult given 
the extent to which shares of money market funds are held by investors 
through omnibus accounts and other financial intermediaries.\207\
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    \205\ Commenters have suggested a number of ways to distinguish 
retail funds from institutional funds. See, e.g., Comment Letter of 
Fidelity Investments, Comments on Response to Questions Posed by 
Commissioners Aguilar, Paredes, and Gallagher, (Jan. 24, 2013), 
available at http://www.sec.gov/comments/mms-response/mms-response.shtml (``Fidelity RSFI Comment Letter''); Schwab FSOC 
Comment Letter, supra note 171. All of these methods involve some 
degree of subjectivity and risk of over or under inclusion.
    \206\ We proposed but did not adopt a requirement that a money 
market fund's board determine at least once each calendar year 
whether the fund is an institutional fund based on the nature of the 
record owner of the fund's shares, minimum initial investment 
requirements, and cash flows from purchases and redemptions. See 
2009 Proposing Release, supra note 31, at nn.195-197 and 
accompanying text.
    \207\ See 2010 Adopting Release, supra note 92, at nn.220-228 
and accompanying text. Many commenters also expressed concern with 
requiring fund boards to make such a determination. See 2010 
Adopting Release, supra note 92, at n.222 and accompanying text. See 
also section III.A.4.b of this Release.
---------------------------------------------------------------------------

    Some commenters at the time, however, suggested possible approaches 
we might take.\208\ We have since received more comments suggesting 
other methods for distinguishing between investor types.\209\ The daily 
redemption limit method we are proposing today is an objective 
criterion intended to encourage self-identification of retail 
investors, because we understand that institutional investors generally 
would not be able to tolerate such redemption limits and they would 
accordingly self-select into institutional money market funds designed 
for them, while we anticipate that the limit would not constrain how 
most retail investors typically use money market funds. We also discuss 
several alternate methods we could use to make such a distinction 
below.
---------------------------------------------------------------------------

    \208\ For example, one commenter suggested that we treat as 
institutional a fund that has any class that offers same-day 
liquidity to shareholders. Comment Letter of Fidelity Investments 
(Aug. 24, 2009) (available in File No. S7-11-09) (``Fidelity 2009 
Comment Letter''). We expressed concern regarding this proposal and 
whether institutional investors would be willing to migrate to funds 
that offer next-day liquidity to avoid the more restrictive 
requirements. See 2010 Adopting Release, supra note 92. We expressed 
similar concerns about others' suggestion that retail funds be 
distinguished based on minimum initial account sizes or maximum 
expense ratios. See, e.g., Comment Letter of HighMark Capital 
Management, Inc. (Sept. 8, 2009) (available in File No. S7-11-09); 
Comment Letter of T. Rowe Price Associates, Inc. (Sept. 8, 2009) 
(available in File No. S7-11-09) (``T. Rowe Price 2009 Comment 
Letter'').
    \209\ See, e.g., Fidelity RSFI Comment Letter, supra note 205; 
Schwab FSOC Comment Letter, supra note 171.
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i. Daily Redemption Limit
    We are proposing to define a retail money market fund as a money 
market fund that restricts a shareholder of record from redeeming more 
than $1,000,000 in any one business day.\210\ We believe that this 
approach would be relatively simple to implement, since it would only 
require a retail money market fund to establish a one-time, across-the-
board redemption policy,\211\ and unlike other approaches discussed 
below, it would not depend on a fund's ability to monitor the dollar 
amounts invested in shareholders' accounts, shareholder concentrations, 
or other shareholder characteristics. A daily redemption limitation 
approach also should reduce the risk that a retail fund will experience 
heavier redemption requests than it can effectively manage in a crisis, 
because it will limit the total amount of redemptions a fund can 
experience in a single day, allowing the fund time to better predict 
and manage its liquidity.\212\
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    \210\ See proposed (FNAV) rule 2a-7(c)(3).
    \211\ The proposed retail exemption would provide exemptive 
relief from the Investment Company Act and its rules to permit a 
retail money market fund to restrict daily redemptions as provided 
for in the proposed rule. See proposed (FNAV) rule 2a-7(c)(3)(iii).
    \212\ See USAA FSOC Comment Letter, supra note 183 (``This 
approach would reduce large money movement from retail MMFs in any 
given day, and therefore retail MMFs would be less likely to 
experience large scale runs resulting from a lack of liquidity.'').
---------------------------------------------------------------------------

    A redemption limitation approach to defining retail funds should 
also lead institutions to self-select into institutional floating money 
market funds, since retail money market funds with redemption 
limitations would typically not meet their operational needs.\213\ This 
incentive to self-select may help mitigate (but cannot eliminate) 
``gaming'' by investors with institutional characteristics who 
otherwise might be tempted to try and invest in stable price retail 
funds, compared to the other methods of distinguishing investors 
discussed below. Even if an institutional investor purchased shares in 
a stable price fund, the institutional investor would be subject to the 
$1 million daily redemption limit. Retail investors rarely need the 
ability to redeem such a significant amount on a daily basis, and if 
they do anticipate needing to make

[[Page 36859]]

large redemptions quickly, they would be able to choose to invest in a 
government money market fund, a floating NAV fund, or plan to make 
several redemptions over time.
---------------------------------------------------------------------------

    \213\ See id. (noting that if the Commission were to define a 
fund as retail through a daily redemption limitation approach 
``[l]arge individual investors and institutions will self-select 
into institutional MMFs because retail MMFs will not meet their 
operational needs.'').
---------------------------------------------------------------------------

    Applying the daily redemption limitation method to omnibus accounts 
may pose difficulties. In order for the fund to impose its redemption 
limit policies on the underlying shareholders, intermediaries with 
omnibus accounts would need to provide some form of transparency 
regarding underlying shareholders, such as account sizes of underlying 
shareholders (showing that each was below the $1 million redemption 
limit). Alternatively, the fund could arrange with the intermediary to 
carry out the fund's policies and impose the redemption limitation, or 
else impose redemption limits on the omnibus account as a whole. We 
discuss omnibus account issues further below.
    We have selected $1,000,000 as the appropriate daily redemption 
threshold because we expect that such a daily limit is high enough that 
it should continue to make money market funds a viable and desirable 
cash management tool for retail investors,\214\ but is low enough that 
it should not suit the operational needs of institutions. We recognize 
that typical retail investors rarely make redemptions that approach 
$1,000,000 in a single day. Nonetheless, retail investors' net worth 
and investment choices can differ significantly, and they may on 
occasion engage in large transactions. For example, a retail investor 
may make large redemption requests when closing out their account, 
rebalancing their investment portfolio, paying their tax bills, or 
making a large purchase such as the down payment on a house. In 
selecting the appropriate redemption limit, we sought to find a 
threshold that is low enough that institutions would self-select out of 
retail funds, but high enough that it would not impose unnecessary 
burdens on retail investors, even when they engage in atypical 
redemptions. One commenter suggested a lower redemption threshold of 
$250,000,\215\ but we are concerned that such a threshold may be too 
low to meet the cash management needs of retail investors that engage 
in occasional large transactions. We also considered a higher 
threshold, such as a $5,000,000 daily redemption limit instead, but are 
concerned that such a higher limit might not provide sufficient 
limitation on heightened redemptions in times of stress.
---------------------------------------------------------------------------

    \214\ The staff understands that for at least one large fund 
group, significantly less than 1% of the number of redemption 
transactions in money market funds intended for retail investors 
exceed $1,000,000, and that more than 97% of retail transactions 
were under $25,000. Nonetheless, the fund group received redemption 
request exceeding $250,000 from some retail investors on a daily 
basis.
    \215\ See USAA FSOC Comment Letter, supra note 183 (suggesting 
that a $250,000 cap on daily redemptions is a natural dollar limit 
because it is consistent with rule 18f-1 (exemption for mutual funds 
that allows funds to commit to pay certain redemptions in cash, 
rather than in-kind) and the current FDIC account guarantee limit).
---------------------------------------------------------------------------

    As mentioned previously, setting an appropriate redemption 
threshold for retail money market funds is complicated by the fact that 
retail investors may, however, on occasion need to redeem relatively 
large amounts from a money market fund, for example, in connection with 
the purchase of a home, and that some institutions may have small 
enough cash balances that they may find that a $1,000,000 daily 
redemption threshold still suits their operational needs. A retail 
fund's prospectus and advertising materials would need to provide 
information to shareholders about daily redemption limitations to 
shareholders.\216\ This should provide sufficient information to 
potential investors, both retail and institutional, to allow them to 
make informed decisions about whether investing in the fund would be 
appropriate. Any money market fund that takes advantage of the retail 
exemption would also need to effectively describe that it is intended 
for retail investors. Retail investors who may need to make large 
(i.e., in excess of $1,000,000) immediate redemptions would thus know 
that they should not invest in a retail money market fund with daily 
redemption limitations, and that they should instead use an alternate 
cash management tool. Alternatively, since it is likely that retail 
investors would have advance notice of the need to redeem in excess of 
the fund's limits, they could manage the redemption request over a 
period of several days.
---------------------------------------------------------------------------

    \216\ Prospectus disclosure regarding any restrictions on 
redemptions is currently required by Form N-1A, and we do not 
believe that any amendments to the current disclosure requirements 
would be necessary to require additional fund disclosure regarding 
the daily redemption restrictions of the proposed retail exemption. 
See Item 6 and Item 11(c)(1) of Form N-1A.
---------------------------------------------------------------------------

    We request comment on our proposed method of distinguishing between 
retail and institutional money market funds based on a daily redemption 
limitation of $1,000,000.
     Would a daily redemption limit effectively distinguish 
retail from institutional money market funds? Are we correct in 
assuming that institutional investors would self-select out of retail 
funds with such redemption limits? Would a daily redemption limit help 
reduce the risk that a fund might not be able to manage heavy 
shareholder redemptions in times of stress? Would this method of 
distinguishing between retail and institutional money market funds 
appropriately reflect the relative risks faced by these two types of 
funds?
     If we classify funds as retail or institutional based on 
an investor's permitted daily redemptions, should we limit a retail 
fund investor's daily redemptions to $1,000,000, or some other dollar 
amount such as $250,000 or $5,000,000? Should we provide a means to 
increase the dollar amount limit to keep pace with inflation? If so, 
what method should we use?
     How large are institutional investors' typical account 
balances and daily redemptions? Would institutional investors be 
willing to break large investments into smaller pieces so they can 
spread them across multiple retail funds?
     Are current disclosure requirements sufficient to inform 
current and potential shareholders of the operations and risks of 
redemption limitations? Should we consider additional disclosure 
requirements? If so, what kinds of disclosures should be required?
     We ask commenters to provide empirical justification for 
any comments on a redemption limitation approach to distinguishing 
retail and institutional money market funds. We also request that 
commenters with access to shareholder redemption data provide us with 
detailed information about the size of individual redemptions in normal 
market periods but especially in September 2008 and summer 2011.
     In particular, we request that commenters submit data on 
the size and frequency of retail and institutional redemptions in money 
market funds today, including breakdowns of the typical number and 
dollar volume of transactions in funds intended for retail and 
institutional shareholders. We also request empirical data on the size 
and frequency of retail investors outlier redemption activity, such as 
when closing out their accounts or making other atypical transactions.
     Should the exemption have a weekly redemption limit as an 
alternative to, or in addition to, the daily redemption limit? If so, 
what should that limit be?
    We have discussed above why we believe a daily redemption limit may 
effectively distinguish between retail and institutional investors and 
may also serve to help a retail fund manage the redemption requests it 
receives. In some cases, retail investors may still want to

[[Page 36860]]

redeem more than $1 million in a single day. To help accommodate such 
requests, but at the same time allow a retail fund to effectively 
manage its redemptions, a retail exemption also could include a 
provision permitting an investor to redeem in excess of the fund's 
daily redemption limit, provided the investor gives advance notice of 
their intent to redeem in excess of the limit. Permitting higher 
redemptions with advance notice may serve the interests of retail 
investors, while also giving a fund manager sufficient time to prepare 
to meet the redemption request without adverse consequences to the 
fund. We request comment on whether we should include a provision 
allowing retail funds to permit redemption requests in excess of their 
daily limit if the investor provides advance notice.
     Should we include a provision permitting retail investors 
to redeem more than the daily redemption limit if they gave advance 
notice? How frequently are retail investors likely to need to redeem 
more than the daily redemption limit, and also know that they would 
need to make such a redemption in advance? Would such an advance notice 
provision encourage ``gaming behavior,'' for example if an institution 
invested in a retail fund and gave notice that every Friday it would 
redeem a large position to make payroll? Should we be concerned with 
such ``gaming behavior'' provided that the fund was given sufficient 
notice that it could effectively manage the redemptions?
     If we were to include an advance notice provision, what 
should the terms be? Should a retail investor be permitted to redeem 
any amount provided that they gave sufficient notice? A limited amount, 
such as $5 or $10 million? How much advance notice would be required, 2 
days, 5 days, more or less? Should the amount that an investor be 
permitted to redeem be tied to the amount of advance notice given? For 
example, should an investor be permitted to redeem $3 million in a 
single day if they give 3 days' notice, but $10 million in a single day 
if they gave 10 days' notice?
     Should an advance notice provision include requirements 
regarding the method of how the notice is submitted to the fund, or for 
fund recordkeeping of the notices it receives? Should such a provision 
include requirements on intermediary communications, (for example, if 
the notice is provided to the intermediary rather than the fund, should 
we require that the advance notice clock begin counting once the fund 
receives the notice, not when it is given to the intermediary) or 
should it leave such details to be worked out between the parties?
     What operational costs would be associated with providing 
such an advance notice provision? Would funds be able to effectively 
communicate to investors the terms of such an advance notice provision?
    We note that most money market funds that invest in municipal 
securities (tax-exempt funds) are intended for retail investors, 
because the tax advantages of those securities are only applicable to 
individual investors, and accordingly, a retail exemption would likely 
result in most such funds seeking to qualify for the proposed 
exemption. Our 2010 reforms exempted tax-exempt funds from the 
requirement to maintain 10% daily liquid assets because, at the time, 
we understood that the supply of tax-exempt securities with daily 
demand features was extremely limited.\217\ Because tax-exempt money 
market funds are not required to maintain 10% daily liquid assets, 
these funds may be less liquid than other retail money market funds, 
which could raise concerns that tax-exempt retail funds might not be 
able to manage even the lower level of redemptions expected in a retail 
fund. Based on information received through Form N-MFP, we now 
understand that many tax-exempt funds can and do maintain more than 10% 
of their portfolio in daily liquid assets, and thus complying with a 
10% daily liquid asset requirement may be feasible for these 
funds.\218\ We request comment on whether we should require tax-exempt 
funds that wish to take advantage of the proposed retail exemption to 
also meet the 10% daily liquid asset requirements.
---------------------------------------------------------------------------

    \217\ See 2010 Adopting Release, supra note 92, at nn.240-243 
and accompanying text; rule 2a-7(c)(5)(ii).
    \218\ Based on a review of Form N-MFP filings, we understand 
that as of the end of February 2013, 51% of tax-exempt funds 
maintain daily liquid assets in excess of 10%, and that another 29% 
maintain daily liquid assets of between 5% and 10% of their 
portfolios. The average daily liquid assets held across all tax-
exempt funds was approximately 9.9% of their total portfolios.
---------------------------------------------------------------------------

     Would tax-exempt funds that rely on the proposed retail 
exemption be able to manage redemptions in time of stress without such 
a daily liquid asset requirement? What level of daily liquid assets do 
tax-exempt money market funds typically maintain today? Should we 
require tax-exempt money market funds to meet the daily liquid asset 
requirement if they are to rely on the proposed retail exemption to the 
floating NAV?
    There are different ways a money market fund could comply with the 
exemption's daily redemption limitation if a shareholder seeks to 
redeem more than $1 million on any given day notwithstanding the fund's 
policy not to honor such requests. The fund could treat the entire 
order as not in ``good order'' and reject the order in its entirety. 
Alternatively, the fund could treat the order as a request to redeem $1 
million and reject the remainder of the order (or treat it as if it 
were received on the next business day). Any of those approaches would 
allow the money market fund to meet the daily redemption limitation and 
neither would provide an incentive for a shareholder to submit a 
redemption request in excess of $1 million on any one day. A fund would 
also need to disclose how it handles such excessive redemption requests 
in its prospectus.\219\ We request comment on these approaches.
---------------------------------------------------------------------------

    \219\ See Item 6 and Item 11(c)(1) of Form N-1A.
---------------------------------------------------------------------------

     Should we specify in rule 2a-7 the way that a money market 
fund must comply with the exemption's daily redemption limitation? Is 
either of the ways we discuss above easier or less costly to implement 
than the other?
     Are there any other approaches, other than the ones 
discussed above, that funds may use to meet the daily redemption 
limitation? If so, what are the benefits and costs of those 
alternatives?
ii. Omnibus Account Issues
    Today, most money market funds do not have the ability to look 
through omnibus accounts to determine the characteristics and 
redemption patterns of their underlying investors. An omnibus account 
may consist of holdings of thousands of small investors in retirement 
plans or brokerage accounts, just one or a few institutional accounts, 
or a mix of the two. Omnibus accounts typically aggregate all the 
customer orders they receive each day, net purchases and redemptions, 
and they often present a single buy and single sell order to the fund. 
Because the omnibus account holder is the shareholder of record, to 
qualify as a retail fund under a direct application of our daily 
redemptions limitation proposal, a fund would be required to restrict 
daily redemptions by omnibus accounts to no more than $1,000,000. 
Because omnibus accounts can represent hundreds or thousands of 
beneficial owners and their transactions, they would often have daily 
activity that exceeds this limit. This combined activity would result 
in omnibus accounts often having daily redemptions that exceed the 
limit even though no one beneficial owner's

[[Page 36861]]

transaction exceeds the limit.\220\ Accordingly, to implement a retail 
exemption, our proposal needs to also address retail investors that 
purchase money market shares through omnibus accounts.
---------------------------------------------------------------------------

    \220\ See, e.g., Invesco FSOC Comment Letter, supra note 192 
(``These [omnibus] accounts, due to their size, might well be 
regarded as `institutional' despite the fact that the aggregate of 
assets belong largely to investors who would be considered `retail' 
if they invested in the MMF directly.'').
---------------------------------------------------------------------------

    To address this issue, the proposed retail exemption would also 
permit a fund to allow a shareholder of record to redeem more than 
$1,000,000 in a single day, provided that the shareholder of record is 
an ``omnibus account holder'' \221\ that similarly restricts each 
beneficial owner in the omnibus account to no more than $1,000,000 in 
daily redemptions.\222\ Under the proposed exemption, a fund would not 
be required to impose its redemption limits on an omnibus account 
holder, provided that the fund has policies and procedures reasonably 
designed to allow the conclusion that the omnibus account holder does 
not permit any beneficial owner from ``directly or indirectly'' 
redeeming more than $1,000,000 in a single day.\223\
---------------------------------------------------------------------------

    \221\ Omnibus account holder would be defined in the proposed 
rule as ``a broker, dealer, bank, or other person that holds 
securities issued by the fund in nominee name.'' See proposed (FNAV) 
rule 2a-7(c)(3) (ii).
    \222\ See proposed (FNAV) rule 2a-7(c)(3) (ii).
    \223\ See id.
---------------------------------------------------------------------------

    The restriction on ``direct or indirect'' redemptions is designed 
to manage issues related to ``chains of intermediaries,'' such as when 
an investor purchases fund shares through one intermediary, for 
example, an introducing broker or retirement plan, which then purchases 
the fund shares through a second intermediary, such as a clearing 
broker.\224\ The proposed exemption would require that a retail fund's 
policies and procedures be reasonably designed to allow the conclusion 
that the fund's redemption limit is applied to beneficial owners all 
the way down any chain of intermediaries. If a fund cannot reasonably 
conclude that such policies are enforced by intermediaries at each step 
of the chain, then the fund must apply its redemption limit at the 
aggregate omnibus account holder level (or rely on a cooperating 
intermediary to apply the fund's redemption limits to any uncooperative 
intermediaries further down the chain). Accordingly, to redeem more 
than $1,000,000 daily, a fund's policies and procedures must be 
designed to conclude that an omnibus account holder that is the 
shareholder of record with the fund reasonably concludes that all 
beneficial owners in the omnibus account, even if invested through 
another intermediary, comply with the redemption limit. If the fund 
cannot reasonably conclude that intermediaries that have omnibus 
accounts with it also do not permit beneficial owners to redeem more 
than $1,000,000 in a single day, the fund's policies must be reasonably 
designed to allow the conclusion that the omnibus account holder 
applies the fund's redemption limit to the other intermediaries' 
transactions on an aggregate level.\225\
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    \224\ For purposes of imposing redemption limitations on 
beneficial owners, we would expect that funds seek to ensure as part 
of their policies and procedures that an intermediary would make 
reasonable efforts consistent with applicable regulatory 
requirements to aggregate multiple accounts held with it that are 
owned by a single beneficial owner. We would not expect that a fund 
would seek to ensure that an intermediary reasonably be able to 
identify that a single beneficial owner owns fund shares through 
multiple accounts if the shareholder has an account with the 
intermediary, and also owns shares through another intermediary that 
does not already share account information with the first 
intermediary.
    \225\ See proposed (FNAV) rule 2a-7(c)(3)(ii).
---------------------------------------------------------------------------

    We note that the challenges of managing implementation of fund 
policies through omnibus accounts are not unique to a retail exemption. 
For example, funds frequently rely on intermediaries to assess, 
collect, and remit redemption fees charged pursuant to rule 22c-2 on 
beneficial owners that invest through omnibus accounts. Funds and 
intermediaries face similar issues when managing compliance with other 
fund policies, such as account size limits, breakpoints, rights of 
accumulation, and contingent deferred sales charges.\226\ Service 
providers also offer services designed to facilitate compliance and 
evaluation of intermediary activities.
---------------------------------------------------------------------------

    \226\ Under rule 38a-1, funds are required to have policies and 
procedures reasonably designed to prevent violation of the federal 
securities laws by the fund and certain service providers.
---------------------------------------------------------------------------

    The proposed rule would not require retail money market funds to 
enter into explicit agreements or contracts with omnibus account 
holders at any stage in the chain, but would instead allow funds to 
manage these relations in whatever way that best suits their 
circumstances. We would expect that in some cases, funds may enter into 
agreements with omnibus account holders to reasonably conclude that 
their policies are complied with. In other cases, funds may have 
sufficient transparency into the activity of omnibus account holders, 
or use other verification methods (such as certifications), that funds 
could reasonably conclude that their policies are being followed 
without an explicit agreement. If a fund could not verify or reasonably 
conclude that an omnibus account holder is applying the redemption 
limit to underlying beneficial owner transactions, we would expect that 
a fund would treat that omnibus account holder like any other 
shareholder of record, and impose the $1,000,000 daily redemption limit 
on that omnibus account. Retail money market funds will need to monitor 
compliance and implement policies and procedures to address the 
implications of potential exceptions, for example, if an intermediary 
improperly permitted a redemption in excess of the fund's limits. 
Finally, the rule would also prohibit a fund from allowing an omnibus 
account holder to redeem more than $1,000,000 for its own account in a 
single day.\227\ This restriction is intended to prevent an omnibus 
account holder from exceeding the fund's redemption limits under the 
exemption when trading for its own account.
---------------------------------------------------------------------------

    \227\ See proposed (FNAV) rule 2a-7(c)(3)(ii).
---------------------------------------------------------------------------

    As proposed, the omnibus account holder provision does not provide 
for any different treatment of intermediaries based on their 
characteristics and instead applies the redemption limits equally to 
all beneficial owners. However, in some circumstances such treatment 
may not be consistent with the intent of the exemption. For example, an 
intermediary with investment discretion, such as a defined-contribution 
pension plan that allows the plan sponsor to remove a money market fund 
from its offerings, could unilaterally liquidate in one day a quantity 
of fund shares that greatly exceeds the fund's redemption limit, even 
if no one beneficial owner had an account balance that exceeds the 
limit. Intermediaries might also pose different risks, for example, the 
risks associated with a sweep account might be different than the risks 
posed by a retirement plan. Also, certain intermediaries may not be 
able to offer funds with redemption restrictions to investors, even if 
the underlying beneficial owners are retail investors. We understand 
that identical treatment of intermediaries under the proposal may not 
precisely reflect the risks of intermediaries with different 
characteristics, but recognize that this is a cost of our attempt to 
keep the retail exemption simple to implement.
    A shareholder may own fund shares through multiple accounts, either 
directly with a fund, or through an intermediary. In some cases, such 
as when one account is held directly with

[[Page 36862]]

a fund and another account is held through an intermediary, the fund 
would not be able to identify that the same shareholder has multiple 
accounts with the fund, and may not be able to effectively restrict 
that shareholder from redeeming fund shares from those accounts, that 
in aggregate, may exceed the proposed daily redemption limit. The 
proposed retail exemption would not restrict such redemptions, because 
the shareholder with multiple accounts would not be a ``shareholder of 
record'' for all of the accounts.\228\ In other cases, a fund may be 
able to identify that a shareholder holds multiple accounts with the 
fund, such as if a shareholder owns fund shares in an account held 
directly with the fund, and also owns shares through an individual 
retirement account (``IRA'') held with the fund. In those cases, the 
shareholder with multiple accounts would be the shareholder of record 
for both accounts, and the fund should be able to identify the 
shareholder as such.\229\ If a fund receives redemption orders 
exceeding the $1,000,000 limit from a shareholder of record through 
multiple accounts in a single day, the fund would need to aggregate the 
redemption requests from all accounts held by that shareholder of 
record, and impose the daily redemption limit on the shareholder of 
record's total redemptions, not just on an account-by-account 
basis.\230\
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    \228\ See id.. An intermediary would be the shareholder of 
record for the omnibus accounts they hold.
    \229\ We note that we do not expect funds to collapse such 
accounts, but rather match such accounts where there is reasonably 
available identifying information on hand at the fund or its 
transfer agent that the accounts have the same record owner.
    \230\ Similar issues may arise if a shareholder holds an account 
jointly with another person, such as a spouse. A fund's policies and 
procedures should establish methods of managing redemptions from 
joint accounts.
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    We request comment on the proposed treatment of omnibus account 
holders under the retail exemption to the floating NAV alternative.
     Does our proposed treatment of omnibus accounts under the 
retail exemption appropriately address the operation of such accounts? 
What types of policies and procedures would funds develop to confirm 
that omnibus account holders are able to reasonably prevent beneficial 
owners that invest through the account from violating a retail money 
market fund's redemption limit policies and procedures?
     The proposed rule does not require funds to enter into 
agreements with omnibus account holders, nor does it prescribe any 
other mechanism for requiring a fund to verify that its redemption 
limits are effectively enforced. Should we require such agreements? 
What difficulties would arise in implementing such agreements? Instead 
of agreements, should we consider prescribing some other type of 
verification or compliance procedure to prevent a fund's limit from 
being breached, such as certifications from omnibus account holders?
     Should the rule require a fund to obtain periodic 
certifications regarding the redemptions of beneficial owners in an 
omnibus account? If so, should we require a specific periodicity of 
certifications, such as every month, or every quarter?
     Should we differentiate between intermediaries that invest 
through omnibus accounts? For example, should we require that an 
intermediary that has investment discretion over a number of beneficial 
owners' accounts be treated as a single beneficial owner for purposes 
of the daily redemption limit? Should we treat certain intermediaries 
differently than others, perhaps allowing higher or unlimited 
redemptions for investors who invest through certain types of 
intermediaries such as retirement plans? What operational difficulties 
would arise if we were to provide for such differential treatment of 
intermediaries?
     Can funds accurately identify multiple accounts in a fund 
that are owned by a single shareholder of record? If not, what costs 
would be incurred in building such systems? How should the redemption 
limit apply to accounts that are owned by multiple investors? Should we 
be concerned about investors opening accounts through multiple 
intermediaries and multiple accounts in an attempt to circumvent the 
daily redemption limits?
    As discussed above, we understand that today many money market 
funds are unable to determine the characteristics or redemption 
patterns of their shareholders that invest through omnibus accounts. 
This lack of transparency can not only hinder a fund from effectively 
applying a retail exemption but can also lead to difficulties in 
managing the liquidity levels of a fund's portfolio, if a fund cannot 
effectively anticipate when it is likely to receive significant 
shareholder redemptions through examination of its shareholder base. We 
request comment on whether we should consider requiring additional 
transparency into money market fund omnibus accounts to enable funds to 
understand better their respective shareholder base and relevant 
redemption patterns.
     Should we consider any other methods of generally 
providing more transparency into omnibus accounts for money market 
funds so that funds could better manage their portfolios in light of 
their respective shareholder base? If so, what methods should we 
consider?
c. Consideration of Other Distinguishing Methods
    As discussed above, as part of the retail exemption that we are 
proposing today, we are proposing a method of distinguishing between 
retail and institutional money market funds based on daily redemption 
limits. This is not the only method by which we could attempt to 
distinguish types of funds. Below we discuss several alternate methods 
of making such a distinction, and request comment on whether we should 
adopt one of these methods instead.
i. Maximum Account Balance
    A different method of distinguishing retail funds would be to 
define a retail fund as a fund that does not permit account balances of 
more than a certain size. For example, we could define a fund as retail 
if the fund does not permit investors to maintain accounts with a 
balance that exceeds $250,000, $1,000,000, $5,000,000, or some other 
amount.\231\ If an investor's account balance were to exceed the 
threshold dollar amount, the fund could automatically direct additional 
investments to shares of a government money market fund or a fund 
subject to the floating NAV requirement.\232\ Such an approach would 
require a retail fund to update the disclosure in its prospectus and 
advertising materials to inform investors how their investments would 
be handled in such circumstances. Much like the redemption limitation 
method, omnibus accounts may pose difficulties that would need to be 
addressed through certifications, transparency, or some other 
manner.\233\ A maximum account balance approach may also create 
operational issues in other ways, such

[[Page 36863]]

as managing what happens if a buy and hold investor's account exceeded 
the limits due to appreciation in value. Determining the proper maximum 
account balance that would effectively distinguish between retail and 
institutional investors may also prove difficult.
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    \231\ A variation on this approach might prohibit further 
investment in a retail fund at the end of a calendar quarter if the 
average account size exceeds a threshold dollar amount during the 
quarter.
    \232\ If a fund were part of a fund group that does not include 
an affiliated institutional fund, the fund would not allow further 
investments from an investor whose account balance reaches (or, if 
the account receives dividends or otherwise increases in value, 
exceeds) the threshold amount.
    \233\ We also expect that there may be significant differences 
in costs depending on how such an exemption was structured, and that 
it could be significantly less costly to test whether an investor 
investing through an omnibus account has exceeded a maximum account 
balance periodically rather than on a trade-by-trade basis. See also 
infra section III.A.4.d for a discussion of operational costs of the 
retail exemption.
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    Defining a retail fund based on the maximum permitted account 
balance would be relatively simple to explain to investors through 
disclosure in the fund's prospectus and advertising materials. This 
approach could, however, disadvantage funds that do not have an 
affiliated government or institutional money market fund into which 
investors' ``spillover'' investments in excess of the maximum amount 
could be directed and could encourage ``gaming behavior,'' if 
institutional investors were to open multiple accounts through 
different intermediaries with balances under the maximum amount in 
order to evade any maximum investment limit we might set.\234\
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    \234\ See BlackRock FSOC Comment Letter, supra note 204; 
Federated Investors Feb. 15 FSOC Comment Letter, supra note 192.
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    We request comment on the approach of distinguishing between retail 
and institutional money market funds based on investors' account 
balances:
     If we were to classify funds as retail or institutional 
based on an investor's account balance, what maximum account size would 
appropriately distinguish a retail account from an institutional 
account: $250,000, $1,000,000, $5,000,000, or some other dollar amount? 
Would this method of distinguishing between retail and institutional 
money market funds appropriately reflect the relative risks faced by 
these two types of funds? How would funds or other parties, such as 
intermediaries and omnibus accountholders, be able to enforce account 
balance limitations?
     Would shareholders with institutional characteristics be 
likely to open multiple retail money market fund accounts under the 
maximum amount, for example by going through intermediaries, to 
circumvent the account size requirement, and if so, would retail funds 
be subject to greater risk during periods of stress? What disclosure 
would be necessary to inform current and potential shareholders of the 
operations and risks of account balance limitations?
     We ask commenters to provide empirical justification for 
any comments on an account balance approach to distinguishing retail 
and institutional money market funds. We also request information on 
composition and distribution of individual account sizes to assist the 
Commission in considering this approach.
ii. Shareholder Concentration
    Another approach to distinguishing retail and institutional money 
market funds might be to base the distinction on the fund's shareholder 
concentration characteristics. Under this approach, a fund would be 
able to qualify for a retail exemption if the fund's largest 
shareholders owned less than a certain percentage of the fund. This 
type of ``concentration'' method of distinguishing funds would be a 
test for identifying funds whose shareholders are more concentrated, 
and thus have a limited number of shareholders whose redemption choices 
could affect the fund more significantly during periods of stress. A 
heavily concentrated fund may indicate that the fund has a smaller 
number of large shareholders, who are likely institutions. In addition, 
funds whose shareholders are less concentrated, and thereby that are 
less subject to heavy redemption pressure from a limited number of 
investors, may be able to withstand stress more effectively and thus 
could maintain a stable price.
    Commenters have suggested several methods for defining the 
appropriate concentration level for a fund. One test for determining if 
a fund is institutional might be whether the top 20 shareholders own 
more than 15% of the fund's assets,\235\ or the top 100 shareholders 
own more than 25% of fund assets, or some other similar measure. 
Another method to test concentration might be to define a fund as 
institutional if any shareholder owns more than 0.1% of the fund,\236\ 
or 1% of the fund, or some other percentage.
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    \235\ See Fidelity RSFI Comment Letter, supra note 205. This 
commenter suggested that the test would apply regardless of whether 
underlying shareholders are individuals or institutions.
    \236\ See Schwab FSOC Comment Letter, supra note 171.
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    Distinguishing between retail and institutional money market funds 
based on shareholder concentration could more accurately reflect the 
relative risks that funds face than distinguishing retail and 
institutional money market funds based on the maximum balance of 
shareholders' accounts, since an individual shareholder's account value 
does not necessarily reflect the risks of concentrated heavy 
redemptions. However it may be less accurate at distinguishing types of 
investors (and at reducing the risks of heavy redemptions associated 
with certain types of investors) than the redemption limitation 
discussed above, because the redemption limitation would likely cause 
investors to self-select into the appropriate fund.
    One benefit of the concentration method of distinguishing retail 
funds is that it may lessen operational issues related to omnibus 
accounts. If funds were required to count an intermediary with omnibus 
accounts as one shareholder for concentration purposes (e.g., like any 
other shareholder), there may be no need for transparency into omnibus 
accounts.\237\ However, if we did not require such treatment of omnibus 
accounts, this concentration method would raise the same issues 
associated with managing omnibus accounts as the other methods 
discussed above.
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    \237\ See supra note 235.
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    This concentration method of distinguishing retail funds would also 
pose a number of difficulties in implementation and operation. For 
example, it may be over-inclusive and a fund may be wrongly classified 
as an institutional money market fund if many of its large shareholders 
of record are intermediaries or sweep accounts,\238\ even though the 
underlying beneficial owners may be retail investors. The method may 
also create difficulties for funds that have limited assets or 
investors (for example, new funds with only a few investors), because 
those small and start-up funds may have a concentrated investor base 
even though their investors may be primarily retail.\239\ Similarly, 
this method may not effectively distinguish retail and institutional 
money market funds if the fund is so large that even institutional 
accounts do not trigger the concentration limits. An institutional fund 
that is not heavily concentrated may be subject to the same risks as a 
more concentrated fund, because institutional investors tend to be more 
sensitive to changing market conditions.
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    \238\ See, e.g., Dreyfus FSOC Comment Letter, supra note 174 
(noting that sweep accounts behaved more like retail accounts rather 
than institutional ones during the 2008 financial crisis).
    \239\ See Invesco FSOC Comment Letter, supra note 192 
(``Proposals to designate as ``institutional'' any account holding 
more than a given percentage of a MMF would provide an unfair 
competitive advantage to larger funds, which could continue to 
classify larger investors as ``retail.'').
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    Finally, this method could create significant operational issues 
for funds if shareholder concentration levels were to change 
temporarily, or to fluctuate periodically.\240\ For example, if we were 
to provide a retail exemption that

[[Page 36864]]

depended on a fund's top 20 investors not owning more than 15% of the 
fund, this would require a fund to constantly monitor the size of its 
investor base and reject investments that would push the fund over the 
concentration limit in real time. Constant monitoring and order 
rejection may be costly and difficult to implement, not only for the 
fund but also for the affected shareholders who may have their purchase 
orders rejected unexpectedly by the fund. Shareholders may also have 
issues understanding whether a fund is institutional or retail, and 
because concentration may frequently change, it may be difficult to 
provide clear guidelines regarding whether a shareholder could or could 
not invest in a fund.
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    \240\ See Schwab FSOC Comment Letter, supra note 171 (discussing 
issues related to temporary changes in ownership percentages that 
may cause violations of such a concentration test).
---------------------------------------------------------------------------

    We request comment on the approach of distinguishing between retail 
and institutional money market funds based on shareholder 
concentration:
     If we classify funds as retail or institutional based on 
shareholder concentration, what thresholds should we use? Would 
criteria such as whether the top 20 investors make up more than 15% of 
the fund, or some other threshold, effectively distinguish between 
types of funds? Would such a concentration test pose operational 
difficulties? How would funds enforce such limits? How should funds 
treat omnibus accounts if they were to use such a test?
     Would investors who are likely to redeem shares when 
market-based valuations fall below the stable price per share be 
willing and able to spread their investment across enough funds to 
avoid being too large in any one of them?
     Would shareholder concentration limits result in further 
consolidation in the industry, as funds seek to grow in order to 
accommodate large investors?
     We ask commenters to provide empirical justification for 
any comments on a shareholder concentration approach to distinguishing 
retail and institutional money market funds.
iii. Shareholder Characteristics
    Money market funds could also look at certain characteristics of 
the investors, such as whether they use a social security number or a 
taxpayer identification number to register their accounts or whether 
they demand same-day settlement, to distinguish between retail and 
institutional money market funds. Such a characteristics test could be 
used either alone, or in combination with one of the other methods 
discussed above to distinguish retail funds. However, this approach 
also has significant drawbacks. While institutional money market funds 
primarily offer same-day settlement and retail money market funds 
primarily do not, this is not always the case.\241\ Likewise, social 
security numbers do not necessarily correlate to an individual, and 
taxpayer identification numbers do not necessarily correlate to a 
business. For instance, many businesses are operated as pass-through 
entities for tax purposes. In addition, funds may not be aware of 
whether their investors have a SSN or a TIN if the investments are held 
through an omnibus account.
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    \241\ Some institutional money market funds do not offer same-
day settlement. See, e.g., Money Market Obligations Trust, Federated 
New York Municipal Cash Trust (FNTXX), Registration Statement (Form 
N-1A) (Feb. 28, 2013) (stating that redemption proceeds normally are 
wired or mailed within one business day after receiving a request in 
proper form). Some retail money market funds do offer same-day 
settlement. See, e.g., Dreyfus 100% U.S. Treasury Money Market Fund 
(DUSXX), Registration Statement (Form N-1A) (May 1, 2012) (stating 
that if a redemption request is received in proper form by 3:00 
p.m., Eastern time, the proceeds of the redemption, if transfer by 
wire is requested, ordinarily will be transmitted on the same day).
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    The Commission requests comment on shareholder characteristics that 
could effectively distinguish between types of investors, as well as 
other methods of distinguishing between retail and institutional money 
market funds.
     What types of shareholder characteristics would 
effectively distinguish between types of investors? Social security 
numbers and/or taxpayer identification numbers? Whether the fund 
provides same-day settlement? Some other characteristic(s)?
     Besides the approaches discussed above, are there other 
ways we could effectively distinguish retail from institutional money 
market funds? Should we combine any of these approaches? Should we 
adopt more than one of these methods of distinguishing retail funds, so 
that a fund could use the method that is lowest cost and best fits 
their investor base?
     We ask commenters to provide empirical justification for 
any comments on a shareholder characteristics approach to 
distinguishing retail and institutional money market funds.
d. Economic Effects of the Proposed Retail Exemption
    In addition to the costs and benefits of a retail exemption 
discussed above, implementing any retail exemption to the floating NAV 
requirement may have effects on efficiency, competition, and capital 
formation. A retail exemption to the floating NAV requirement could 
make retail money market funds more attractive to investors than 
floating NAV funds without a retail exemption, assuming that retail 
investors prefer such funds. If so, we anticipate a retail exemption 
could reduce the impact we expect on the number of funds and assets 
under management, discussed in section III.E below. However, these 
positive effects on capital formation could be reversed to the extent 
that the costs funds incur in implementing a retail exemption are 
passed on to shareholders, or shareholders give up potentially higher 
yields. As discussed above, 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. 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).
    A retail exemption to the floating NAV requirement could have 
negative effects on competition by benefitting fund groups with large 
percentages of retail investors, especially where those retail 
investors invest directly in the funds rather than through 
intermediaries, relative to other funds.\242\ A retail exemption could 
have a negative effect on competition to the extent that it favors fund 
groups that already offer separate retail and institutional money 
market funds and thus might not need to reorganize an existing money 
market fund into two separate funds to implement the exemption. On the 
other hand, as discussed above, we believe that the majority of money 
market funds currently are owned by both retail and institutional 
investors (although many funds are separated into retail and 
institutional classes), and therefore relatively few funds would 
benefit from this competitive advantage. Fund groups that can offer 
multiple retail funds will have a competitive advantage over those that 
cannot if investors with large liquidity needs are willing to spread 
their investments across multiple retail funds to avoid the redemption 
threshold.
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    \242\ Fund groups with large percentages of retail investors, 
and in particular, direct investors, may be better positioned to 
satisfy growing demand if we were to adopt the proposed retail 
exemption to our floating NAV proposal. See Invesco FSOC Comment 
Letter, supra note 192 (``Imposing a distinction between `retail' 
versus `institutional' funds would therefore unduly favor those MMF 
complexes with a preponderance of direct individual investors or 
affiliated omnibus account platforms over those with a more diverse 
investor basis and those with using unaffiliated intermediaries.'').

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[[Page 36865]]

    A retail exemption may promote efficiency by tying the floating NAV 
requirement to the shareholders that are most likely to redeem from a 
fund in response to deviations between its stable share price and 
market-based NAV per share. However, to the extent that a retail 
exemption fails to distinguish effectively institutional from retail 
shareholders, it may have negative effects on efficiency by permitting 
``gaming behavior'' by shareholders with institutional characteristics 
who nonetheless invest in retail funds. It may also negatively affect 
fund efficiency to the extent that, to take advantage of a retail 
exemption, a fund that currently separates institutional and retail 
investors through different classes instead would need to create 
separate and distinct funds, which may be less efficient. The costs of 
such a re-organization are discussed in this Release below.
    We request comment on the effects of a retail exemption to the 
floating NAV proposed on efficiency, competition, and capital 
formation.
     Would implementing a retail exemption have an effect on 
efficiency, competition, or capital formation? Which methods of 
distinguishing retail and institutional investors discussed above, if 
any, would result in the most positive effects on efficiency, 
competition, and capital formation?
     Would the floating NAV proposal have less of a negative 
impact on capital formation with a retail exemption than without? Would 
it provide competitive advantages to fund groups that have large 
percentages of retail investors, especially where those retail 
investors invest directly in the funds rather than through 
intermediaries, relative to other funds that have lower percentages of 
retail investors?
     Would a retail exemption better promote efficiency by 
tying the floating NAV requirement to institutional shareholders 
instead of retail shareholders? Why or why not?
    The qualitative costs and benefits of any retail exemption to the 
floating NAV proposal are discussed above. Because we do not know how 
attractive such funds would be to retail investors, we cannot quantify 
these qualitative benefits or costs. However, we can quantify the 
operational costs that money market funds, intermediaries, and money 
market fund service providers might incur in implementing and 
administering the retail exemption to the floating NAV requirement that 
we are proposing today.\243\
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    \243\ The costs estimated in this section would be spread 
amongst money market funds, intermediaries, and money market fund 
service providers (e.g., transfer agents). For ease of reference, we 
refer only to money market funds and intermediaries in our 
discussion of these costs. As with other costs we estimate in this 
Release, our staff has estimated the costs that a single affected 
entity would incur. We anticipate, however, that many money market 
funds and intermediaries may not bear the estimated costs on an 
individual basis. The costs of systems modifications, for example, 
likely would be allocated among the multiple users of the systems, 
such as money market fund members of a fund group, money market 
funds that use the same transfer agent, and intermediaries that use 
systems purchased from the same third party. Accordingly, we expect 
that the cost for many individual entities may be less than the 
estimated costs.
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    Although we do not have the information necessary to provide a 
point estimate \244\ of the potential costs associated with a retail 
exemption, our staff has estimated the ranges of hours and costs that 
may be required to perform activities typically involved in making 
systems modifications, implementing fund policies and procedures, and 
performing related activities. These estimates include one-time and 
ongoing costs to establish separate funds if necessary, modify systems 
and related procedures and controls, update disclosure in a fund's 
prospectus and advertising materials to reflect any investment or 
redemption restrictions associated with the retail exemption, as well 
as ongoing operational costs. All estimates are based on the staff's 
experience and discussions with industry representatives. We first 
discuss the different categories of operational costs that might be 
incurred in implementing a retail exemption, and then we provide a 
total cost estimate that captures all of the categories of costs 
discussed below. We expect that only funds that determine that the 
benefits of taking advantage of the proposed retail exemption would be 
justified by the costs would take advantage of it and bear these costs. 
Otherwise, they would incur the costs of implementing a floating NAV 
generally.
---------------------------------------------------------------------------

    \244\ We are using the term ``point estimate'' to indicate a 
specific single estimate as opposed to a range of estimates.
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    Many money market funds are currently owned by both retail and 
institutional investors, although they are often separated into retail 
and institutional share classes. A fund relying on the proposed retail 
exemption would need to be structured to accept only retail investors 
as determined by the daily redemption limit, and thus any money market 
fund that currently has both retail and institutional shareholders 
would need to be reorganized into separate retail and institutional 
money market funds. One-time costs associated with this reorganization 
would include costs incurred by the fund's counsel to draft appropriate 
organizational documents and costs incurred by the fund's board of 
directors to approve such documents. One-time costs also would include 
the costs to update the fund's registration statement and any relevant 
contracts or agreements to reflect the reorganization, as well as costs 
to update prospectuses and to inform shareholders of the 
reorganization. Funds and intermediaries may also incur one-time costs 
in training staff to understand the operation of the fund and 
effectively implement the redemption restrictions.
    The daily redemption limitation method of distinguishing retail and 
institutional investors that we are proposing today would also require 
funds to have policies and procedures reasonably designed to allow the 
conclusion that omnibus account holders apply the fund's redemption 
limits to beneficial owners invested through the omnibus accounts. 
Adopting such policies and procedures and building systems to implement 
them would also involve one-time costs for funds and intermediaries. 
Funds could either conclude that their policies are enforced by 
obtaining information regarding underlying investors in omnibus 
accounts (transparency), or use some other sort of method to reasonably 
verify that omnibus account holders are implementing the fund's 
redemption policies, such as entering into an agreement or getting 
certifications from the omnibus account holder. In preparing the 
following cost estimates, the staff assumed that funds would generally 
rely on financial intermediaries to implement redemption policies 
without undergoing the costs of entering into an agreement, because 
funds and intermediaries would typically take the approach that is the 
least expensive. However, some funds may undertake the costs of 
obtaining an explicit agreement despite the expense. Our staff 
estimates that the one-time costs necessary to implement the retail 
exemption to the floating NAV proposal, including the various 
organizational, operational, training, and other costs discussed above, 
would range from $1,000,000 to $1,500,000 for each fund that chooses to 
take advantage of the retail exemption.\245\
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    \245\ Staff estimates that these costs would be attributable to 
the following activities: (i) Planning, coding, testing, and 
installing system modifications; (ii) drafting, integrating, and 
implementing related procedures and controls; and (iii) preparing 
training materials and administering training sessions for staff in 
affected areas. Our staff's estimates of these operational and 
related costs, and those discussed throughout this Release, are 
based on, among other things, staff experience implementing, or 
overseeing the implementation of, systems modifications and related 
work at mutual fund complexes, and included analyses of wage 
information from SIFMA's Management & Professional Earnings in the 
Securities Industry 2012, see infra note 996, for the various types 
of professionals staff estimates would be involved in performing the 
activities associated with our proposals. The actual costs 
associated with each of these activities would depend on a number of 
factors, including variations in the functionality, sophistication, 
and level of automation of existing systems and related procedures 
and controls, and the complexity of the operating environment in 
which these systems operate. Our staff's estimates generally are 
based on the use of internal resources because we believe that a 
money market fund (or other affected entity) would engage third-
party service providers only if the external costs were comparable, 
or less than, the estimated internal costs. The total operational 
costs discussed here include the costs that are ``collections of 
information'' that are discussed in section IV of this Release.

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[[Page 36866]]

    Funds that choose to take advantage of the retail exemption would 
also incur ongoing costs. These ongoing costs would include the costs 
of operating two separate funds (retail and institutional) instead of 
separate classes of a single fund, such as additional transfer agent, 
accounting, and other similar costs. Funds and intermediaries would 
also incur ongoing costs related to enforcing the daily redemption 
limitation on an ongoing basis and monitoring to conclude that the 
limits are being effectively enforced. Other ongoing costs may include 
systems maintenance, periodic review and updates of policies and 
procedures, and additional staff training. Accordingly, our staff 
estimates that money market funds and intermediaries administering a 
retail exemption likely would incur ongoing costs of 20%-30% of the 
one-time costs, or between $200,000 and $450,000 per year.\246\
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    \246\ We recognize that adding new capabilities or capacity to a 
system (including modifications to related procedures and controls 
and related training) will entail ongoing annual maintenance costs 
and understand that those costs generally are estimated as a 
percentage of the initial costs of building or modifying a system.
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     Are the staff's cost estimates too high or too low, and, 
if so, by what amount and why? Are there operational or other costs 
associated with segregating retail investors other than those discussed 
above?
     Do commenters believe that the proposed retail exemption 
would involve expenses beyond those estimated? To what extent would the 
costs vary depending on how a retail exemption is structured? Which of 
the staff's assumptions would most significantly affect the costs? Has 
our staff identified the assumptions that most significantly influence 
the cost of a retail exemption?
     What kinds of ongoing activities would be required to 
administer the proposed retail exemption to the floating NAV 
requirement, and to what extent? Would it be less costly for some funds 
(e.g., those that are directly sold to investors) to make use of a 
retail investor exemption? If so, how much would those funds save?
5. Effect on Other Money Market Fund Exemptions
a. Affiliate Purchases
    Rule 17a-9 provides an exemption from section 17(a) of the Act to 
permit affiliated persons of a money market fund to purchase portfolio 
securities from the fund under certain circumstances, and it is 
designed to provide a means for an affiliated person to provide 
liquidity to the fund and prevent it from breaking the buck.\247\ Under 
our floating NAV proposal, however, money market funds' share prices 
would ``float,'' and funds thus could not ``break the buck.'' 
Notwithstanding the inability of funds to ``break the buck'' under our 
floating NAV proposal, for the reasons discussed below, we propose to 
retain rule 17a-9 with the amendments, discussed below, for all money 
market funds (including government and retail money market funds that 
would be exempt from our floating NAV proposal).
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    \247\ Absent a Commission exemption, section 17(a)(2) of the Act 
prohibits any affiliated person or promoter of or principal 
underwriter for a fund (or any affiliated person of such a person), 
acting as principal, from knowingly purchasing securities from the 
fund. For convenience, in this Release, we refer to all of the 
persons who would otherwise be prohibited by section 17(a)(2) from 
purchasing securities of a money market fund as ``affiliated 
persons.'' ``Affiliated person'' is defined in section 2(a)(3) of 
the Act.
    Rule 17a-9, as adopted in 1996, provides an exemption from 
section 17(a) of the Act to permit affiliated persons of a money 
market fund to purchase a security from a money market fund that is 
no longer an eligible security (as defined in rule 2a-7), provided 
that the purchase price is (i) paid in cash; and (ii) equals the 
greater of amortized cost of the security or its market price (in 
each case including accrued interest). See Revisions to Rules 
Regulating Money Market Funds, Investment Company Act Release No. 
21837 (Mar. 21, 1996) [61 FR 13956 (Mar.28, 1996)] (the ``1996 
Adopting Release''). As part of the 2010 money market fund reforms 
(discussed in supra section II.D.1), we expanded the exemptive 
relief in rule 17a-9 to permit affiliates to purchase from a money 
market fund (i) a portfolio security that has defaulted, but that 
continues to be an eligible security (subject to the purchase 
conditions described); and (ii) any other portfolio security 
(subject to the purchase conditions described above), for any 
reason, provided the affiliated person remits to the fund any profit 
it realizes from the later sale of the security (``clawback 
provision''). See rule 17a-9(a), (b).
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    Funds with a floating NAV would still be required to adhere to rule 
2a-7's risk-limiting conditions to reduce the likelihood that portfolio 
securities experience losses from credit events and interest rate 
changes. Even with a floating NAV and limited risk, as specified by the 
provisions of rule 2a-7, money market funds face potential liquidity, 
credit and reputational issues in times of fund and market stress and 
the resultant incentives for shareholders to redeem shares.
    In normal market conditions, that shareholders may request 
immediate redemptions from a fund with a portfolio that does not hold 
securities that mature in the same time frame generally is no cause for 
concern because funds typically can sell portfolio securities to 
satisfy shareholder redemptions without negatively affecting prices. In 
times of crisis when the secondary markets for portfolio assets become 
illiquid, funds might be unable to sell sufficient assets without 
causing large price movements that affect not only the non-redeeming 
shareholders but also investors in other funds that hold similar 
assets. Therefore, to provide fund sponsors with flexibility to protect 
shareholder interests, we are proposing to allow fund sponsors to 
continue to support money market fund operations through, for example, 
affiliate purchases (in reliance on rule 17a-9), provided such support 
is thoroughly and consistently disclosed.\248\
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    \248\ Commenters have noted the importance of sponsor support 
under rule 17a-9 as a tool that funds can use as a support 
mechanism. See, e.g., Comment Letter of U.S. Chamber of Commerce 
(Jan. 23, 2013) (available in File No. FSOC-2012-0003) (``U.S. 
Chamber Jan. 23, 2013 FSOC Comment Letter''), Federated Investors 
Alternative 1 FSOC Comment Letter, supra note 161. We are proposing 
amendments to require that money market funds disclose the 
circumstances under which a fund sponsor may offer any form of 
support to the fund (e.g., capital contributions, capital support 
agreements, letters of indemnity), any limits on such support, past 
instances of support provided to the fund, and public notification 
to the Commission regarding current instances of support provided. 
See infra section III.F for a more detailed discussion.
---------------------------------------------------------------------------

    As exists today, money market fund sponsors that have a greater 
capacity to support their funds may have a competitive advantage over 
other fund sponsors that do not. The value of this competitive 
advantage depends on the extent to which fund sponsors choose to 
support their funds and may be reduced by the proposed enhanced 
disclosure requirements discussed in this Release which may 
disincentivize fund sponsors from supporting their funds. The value of 
potential sponsor support also will depend on whether investors view 
support as good news (because, for example, the sponsor stands behind 
the fund) or bad news (because, for

[[Page 36867]]

example, the sponsor does not adequately monitor the portfolio 
manager). The decision to leave rule 17a-9 in place should not, in our 
opinion, impose any additional costs on money market funds, their 
shareholders, or others, or change the effects on efficiency or capital 
formation. We recognize, however, that permitting sponsor support 
(through rule 17a-9 transactions) may allow money market fund sponsors 
to prevent their fund from deviating from its stable share price, 
potentially undercutting our goal to increase the transparency of money 
market fund risks.
    We request comment on retaining the rule 17a-9 exemption.
     Do commenters believe affiliated person support is 
important to funds, investors, or the securities markets even under our 
floating NAV proposal? Do commenters agree with our assumptions that 
liquidity concerns are likely to remain significant even with a 
floating NAV and that fund sponsors should continue to have this 
flexibility to protect shareholder interests? We note that rule 17a-9 
was established and then expanded in 2010, in the context of stable 
values. If money market funds are required to float their NAVs, should 
we limit further the circumstances under which fund sponsors or 
advisers can use rule 17a-9? If so, how?
     Does permitting affiliated purchases for floating NAV 
money market funds reduce the transparency of fund risks that our 
floating NAV proposal is designed, in part, to achieve? If so, does the 
additional disclosure we are proposing mitigate such an effect? Are 
there additional ways we can mitigate such an effect?
     Should we allow only certain types of support or should we 
prohibit certain types of support? For example, should we allow 
sponsors to purchase under rule 17a-9 only liquidity-impaired assets, 
or should we prohibit sponsors from purchasing defaulted securities? 
Why or why not? If yes, what types of support should be permitted and 
what types should be prohibited? Why?
     Would the ability of fund sponsors to support the NAV of 
floating funds affect the way in which money market funds are 
structured and marketed? If so, how? Would it affect the competitive 
position of fund sponsors that are more or less likely to have 
available capital to support their funds?
     Do commenters agree that our proposed amendment would not 
impose additional costs on funds or shareholders or impact efficiency 
or capital formation?
     Instead of retaining 17a-9, should we instead repeal the 
rule and thereby prohibit certain types of sponsor support of money 
market funds? If so, why?
b. Suspension of Redemptions
    Rule 22e-3 exempts money market funds from section 22(e) of the Act 
to permit them to suspend redemptions and postpone payment of 
redemption proceeds to facilitate an orderly liquidation of the 
fund.\249\ Rule 22e-3 replaced temporary rule 22e-3T.\250\ Rule 22e-3 
is designed to allow funds to suspend redemptions before actually 
breaking the buck, reduce the vulnerability of investors to the harmful 
effects of heavy redemptions on funds, and minimize the potential for 
disruption to the securities markets.\251\ Rule 22e-3 currently 
requires that a fund's board of directors, including a majority of 
disinterested directors, determine that the deviation between the 
fund's amortized cost price per share and the market-based net asset 
value per share may result in material dilution or other unfair results 
before it suspends redemptions.\252\ We recognize that, under our 
floating NAV proposal, money market funds (including those exempt from 
the floating NAV requirement) generally would no longer be able to use 
amortized cost valuation for their portfolio holdings.\253\ Instead, 
government and retail money market funds would use the penny rounding 
method of pricing to maintain a stable share price and other money 
market funds would have a floating NAV per share. Accordingly, for all 
money market funds, the current threshold under rule 22e-3 for 
suspending redemptions would need modification to conform to the new 
regulatory regime.
---------------------------------------------------------------------------

    \249\ Rule 22e-3(a)(1).
    \250\ Rule 22e-3 was first adopted as an interim final temporary 
final shortly after the Temporary Guarantee Program was established. 
See Temporary Exemption for Liquidation of Certain Money Market 
Funds, Investment Company Act Release No. 28487 (Nov. 20, 2008) [73 
FR 71919 (Nov. 26, 2008)] (establishing rule 22e-3T to facilitate 
compliance for those money market funds that elected to participate 
in the Temporary Guarantee Program and were therefore required to 
promptly suspend redemptions if the fund broke the buck). The 
temporary rule expired on expired October 18, 2009. Id. See also 
infra section II.C (discussing the Temporary Guarantee Program).
    \251\ See 2010 Adopting Release, supra note 92, at section II.H 
(noting that the rule is designed only to facilitate the permanent 
termination of the fund in an orderly manner). See also rule 22e-
3(a)(2) (requiring the fund's board to irrevocably approve the 
fund's liquidation).
    \252\ Rule 22e-3(a)(1).
    \253\ As discussed above, money market funds would continue to 
be permitted to use amortized cost to value portfolio securities 
with a remaining maturity of 60 days or less.
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    As discussed above, we recognize that our floating NAV proposal, in 
conjunction with our other proposals, may not be sufficient to 
eliminate the incentive for shareholders to redeem shares in times of 
fund and market stress. As such, floating NAV money market funds may 
still face liquidity issues that could force them to want to suspend 
redemptions and liquidate. Commenters have noted the benefits of rule 
22e-3, including that the rule prevents a lengthy and disorderly 
liquidation process, like that experienced by the Reserve Primary 
Fund.\254\ Therefore, despite a floating NAV fund's inability to break 
a buck, we believe the benefits of rule 22e-3 should be preserved. 
Accordingly, under our proposed amendment, all floating NAV money 
market funds would be permitted to suspend redemptions, when, among 
other requirements, the fund, at the end of a business day, has less 
than 15% of its total assets in weekly liquid assets.\255\ As discussed 
below in our discussion of the liquidity fees and gates alternative 
proposal, we believe that when a fund's weekly liquid assets are at 
least 50% below the minimum required weekly liquidity (i.e., weekly 
liquid assets have fallen from 30% to 15%), the fund is under 
sufficient stress to warrant that the fund's board be permitted to 
suspend redemptions in light of a decision to liquidate the fund (and 
therefore facilitate an orderly liquidation).
---------------------------------------------------------------------------

    \254\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; 
Comment Letter of Federated Investors, Inc. (Re: Alternative 2) 
(Jan. 25. 2013) (available in File No. FSOC-2012-0003) (``Federated 
Alternative 2 FSOC Comment Letter'').
    \255\ See proposed (FNAV) rule 22e-3(a) (requiring that the 
fund's board, including a majority of directors who are not 
interested persons of the fund, irrevocably has approved the 
liquidation of the fund).
---------------------------------------------------------------------------

    Government money market funds and retail money market funds, which 
would be exempt from the floating NAV requirement, would be able to 
suspend redemptions and liquidate if either (1) the fund, at the end of 
a business day, has less than 15% of its total assets in weekly liquid 
assets or (2) the fund's price per share as computed for purposes of 
distribution, redemption, and repurchase is no longer equal to its 
stable share price or the fund's board (including a majority of 
disinterested directors) determines that such a change is likely to 
occur.\256\ This would allow those funds to suspend redemptions and 
liquidate if the fund came under liquidity stress or if the fund was 
about to ``break the buck.''
---------------------------------------------------------------------------

    \256\ See id.
---------------------------------------------------------------------------

    Because money market funds already comply with rule 22e-3, we do 
not believe that retaining the rule in the

[[Page 36868]]

context of our floating NAV proposal would impose any additional costs 
on money market funds, their shareholders, or others, nor have any 
effects on competition, efficiency, or capital formation.\257\
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    \257\ The Commission considered rule 22e-3's costs, benefits, 
and effects on competition, efficiency, and capital formation, which 
this amendment would preserve, when it adopted the rule. See 2010 
Adopting Release, supra note 92, at sections II.H, V, and VI.
---------------------------------------------------------------------------

    We request comment on this proposed amendment.
     Do commenters believe that the ability to suspend 
redemptions (under the circumstances we propose) would be important to 
floating NAV funds, their investors, and the securities markets?
     Would this ability be important to a retail or government 
money market fund even though we are proposing to exempt these funds 
from the floating NAV requirement, in part, because they are less 
likely to face heavy redemptions in times of stress?
     Is it appropriate to allow a money market fund to suspend 
redemptions and liquidate if its level of weekly liquid assets falls 
below 15% of its total assets? Is there a different threshold based on 
daily or weekly assets that would better protect money market fund 
shareholders? What is that threshold, and why is it better? Is there a 
threshold based on different factors that would better protect money 
market fund shareholders? What are those factors, and why are they 
better? If so, is such suspension then appropriate only in connection 
with liquidation, or should it be broader?
     Is our conclusion correct that it will impose no costs nor 
have any effects on competition, efficiency, or capital formation?
6. Tax and Accounting Implications of Floating NAV Money Market Funds
a. Tax Implications
    Money market funds' ability to maintain a stable value per share 
simplifies tax compliance for their shareholders. Today, purchases and 
sales of money market fund shares at a stable $1.00 share price 
generate no gains or losses, and money market fund shareholders 
therefore generally need not track the timing and price of purchase and 
sale transactions for capital gains or losses.
i. Realized Gains and Losses
    If we were to require some money market funds to use floating NAVs, 
taxable investors in those money market funds, like taxable investors 
in other types of mutual funds, would experience gains and losses. 
Shareholders in floating NAV money market funds, therefore, could owe 
tax on any gains on sales of their money market fund shares, could have 
tax benefits from any losses, and would have to determine those 
amounts.\258\ Because it is not possible to predict the timing of 
shareholders' future transactions and the amount of NAV fluctuations, 
we are not able to estimate the amount of any increase or decrease in 
shareholders' tax burdens. But, given the relatively small fluctuations 
in value that we anticipate would occur in floating NAV money market 
funds and our proposed exemption of certain funds from the floating NAV 
requirement, any changes in tax burdens likely would be minimal.
---------------------------------------------------------------------------

    \258\ In its proposed recommendation, the FSOC recognized the 
potential increased tax-compliance burdens associated with a 
floating NAV for both money market funds and shareholders. FSOC 
Proposed Recommendations, supra note 114, at 33-34.
---------------------------------------------------------------------------

    Commenters also have asserted that taxable investors in floating 
NAV money market funds, like taxable investors in other types of mutual 
funds, would be required to track the timing and price of purchase and 
sale transactions to determine the amounts of gains and losses 
realized.\259\ For mutual funds other than stable-value money market 
funds, tax rules now generally require the funds or intermediaries to 
report to the IRS and the shareholders certain information about sales 
of shares, including sale dates and gross proceeds.\260\ If the shares 
sold were acquired after January 1, 2012, the fund or intermediary must 
also report cost basis and whether any gain or loss is long or short 
term.\261\ These new basis reporting requirements and the pre-2012 
reporting requirements are collectively referred to as ``information 
reporting.'' Mutual funds and intermediaries, however, are not 
currently required to make reports to certain shareholders (including 
most institutional investors). The regulations call these shareholders 
``exempt recipients.'' \262\
---------------------------------------------------------------------------

    \259\ See, e.g., Comment Letter of Investment Company Institute 
(Feb. 16, 2012) (available in File No. 4-619) (``ICI Feb. 2012 PWG 
Comment Letter'') (enclosing a submission by the Investment Company 
Institute Working Group on Money Market Fund Reform Standing 
Committee on Investment Management International Organization of 
Securities Commissions) (``To be sure, investors already face these 
burdens [tracking purchases and sales for tax purposes] in 
connection with investments in long-term mutual funds. But most 
investors make fewer purchases and sales from long-term mutual funds 
because they are used for long-term saving, not cash management.'').
    \260\ Regulations exclude sales of stable-value money market 
funds from this reporting obligation. See 26 CFR 1.6045-1(c)(3)(vi).
    \261\ The new reporting requirements (often referred to as 
``basis reporting'') were instituted by section 403 of the Energy 
Improvement and Extension Act of 2008 (Division B of Pub. L. 110-
343) (codified at 26 U.S.C. 6045(g), 6045A, and 6045B); see also 26 
CFR 1.6045-1; Internal Revenue Service Form 1099-B.
    \262\ See 26 CFR 1.6045-1(c)(3).
---------------------------------------------------------------------------

    We understand, based on discussions by our staff with staff at the 
Treasury Department and the IRS, that, by operation of the current tax 
regulations, if our floating NAV proposal is adopted, money market 
funds that float their NAV per share would no longer be excluded from 
the information reporting requirements currently applicable to mutual 
funds and intermediaries.\263\ Because retail money market funds would 
not be required to use floating NAVs, the vast majority of floating NAV 
money market fund shareholders are expected to be exempt recipients 
(with respect to which information reporting is not required). Such 
exempt recipients would thus be required to track gains and losses, 
similar to the current treatment of exempt recipient holders of other 
mutual fund shares. If there are any money market fund shareholders for 
which information reporting is made, those shareholders would be able 
to make use of such reports in determining and reporting their tax 
liability. We also understand that the Treasury Department and the IRS 
are considering alternatives for modifying forms and guidance (1) to 
include net information reporting by the funds of realized gains and 
losses for sales of all mutual fund shares; and (2) to allow summary 
income tax reporting by shareholders.\264\
---------------------------------------------------------------------------

    \263\ See supra note 260.
    \264\ For 2012, the IRS allowed certain taxpayers to include 
summary totals in their Federal income tax returns, adding 
``Available upon request'' where transaction details might otherwise 
have been required. See 2012 Instructions for Form 8949--Sales and 
Other Dispositions of Capital Assets, p. 3, col. 1, ``Exception 2,'' 
available at http://www.irs.gov/pub/irs-pdf/i8949.pdf.
---------------------------------------------------------------------------

    We anticipate that these modifications, if effected, could reduce 
burdens and costs to shareholders when reporting annual realized gains 
or losses from transactions in a floating NAV money market fund. We 
recognize that if these modifications are not made, the tax reporting 
effects of a floating NAV could be quite burdensome for money market 
fund investors that typically engage in frequent transactions. 
Regardless of the applicability of net information reporting or of 
summary income tax reporting, however, all shareholders of floating NAV 
money market funds would be required to recognize and report taxable 
gains and losses with respect to redemptions of fund shares, which does 
not occur today

[[Page 36869]]

with respect to shares of stable-value money market funds.\265\
---------------------------------------------------------------------------

    \265\ Money market funds also would incur costs in gathering and 
transmitting this information to money market fund shareholders that 
they would not incur absent our proposal, but these costs are 
discussed in the operational costs discussed below.
---------------------------------------------------------------------------

    We request comment on the burdens of tax compliance for money 
market fund shareholders (the impact on funds is discussed in the 
operational costs section below).
     If any shareholders of a floating NAV money market fund 
are not exempt recipients (and thus receive the information reporting 
that other non-exempt-recipient shareholders of other mutual funds 
currently receive), how difficult would it be for those shareholders to 
use that information to determine and report taxable gains and losses? 
Would it be any more difficult for floating NAV money market fund 
shareholders than other mutual fund shareholders? What kinds of costs, 
by type and amount, would be involved?
     In the case of floating NAV fund shareholders that are 
exempt recipients (which are not required recipients of information 
reporting), what types and amounts of costs would those shareholders 
incur to track their share purchases and sales and report any taxable 
gains or losses?
     As discussed above, mutual funds and intermediaries are 
not required to provide information reporting for exempt recipients, 
including virtually all institutional investors. Do mutual funds and 
intermediaries provide this information to shareholders even if tax law 
does not require them to do so? If not, would money market funds and 
intermediaries be able to use their existing systems and processes to 
access this information if investors request it as a result of our 
floating NAV proposal? Would doing so involve systems modifications or 
other costs in addition to those we estimate in section III.A.7, below? 
Would institutions or other exempt recipients find it useful or more 
efficient to receive this information from funds rather than to develop 
it themselves?
     Would exempt-recipient investors continue to invest in 
floating NAV funds if there continues to be no information reporting 
with respect to them?
     Would exempt-recipient investors invest in floating NAV 
money market funds if there is no administrative relief related to 
summary reporting of capital gains and losses, as discussed above? What 
would be the effect on the utility of floating NAV money market funds 
if the anticipated administrative relief is not provided? Would 
investors be able to use floating NAV money market funds in the same 
way or for the same purposes absent the anticipated administrative 
relief?
ii. Wash Sales
    In addition to the tax obligations that may arise through daily 
fluctuations in purchase and redemption prices of floating NAV money 
market funds (discussed above), special ``wash sale'' rules apply when 
shareholders sell securities at a loss and, within 30 days before or 
after the sale, buy substantially identical securities.\266\ Generally, 
if a shareholder incurs a loss from a wash sale, the loss cannot be 
deducted, and instead must be added to the basis of the new, 
substantially identical securities, which effectively postpones the 
loss deduction until the shareholder recognizes gain or loss on the new 
securities.\267\ Because many money market fund investors automatically 
reinvest their dividends (which are often paid monthly), virtually all 
redemptions by these investors would be within 30 days of a dividend 
reinvestment (i.e., purchase). Under the wash sale rules, the losses 
realized in those redemptions would be disallowed in whole or in part 
until an investor disposed of the replacement shares (or longer, if 
that disposition is also a wash sale). We understand that the Treasury 
Department and IRS are actively considering administrative relief under 
which redemptions of floating NAV money market fund shares that 
generate losses below a de minimis threshold would not be subject to 
the wash sale rules. We recognize, however, that money market funds 
would still incur operational costs to establish systems with the 
capability of identifying wash sale transactions, assessing whether 
they meet the de minimis criterion, and adjusting shareholder basis as 
needed when they do not.\268\
---------------------------------------------------------------------------

    \266\ See 26 U.S.C. 1091.
    \267\ Id.
    \268\ These operational costs are discussed in infra section 
III.A.7.
---------------------------------------------------------------------------

    We request comment on the tax implications related to our floating 
NAV proposal.
     Would investors continue to invest in floating NAV money 
market funds absent administrative relief from the Treasury Department 
and IRS relating to wash sales? What would be the effect on the utility 
of floating NAV money market funds if the anticipated administrative 
relief is not provided? Would investors be able to use floating NAV 
money market funds in the same way or for the same purposes absent the 
anticipated administrative relief?
b. Accounting Implications
    If we were to adopt our floating NAV proposal, some money market 
fund shareholders may question whether they would be able to treat 
their fund shares as ``cash equivalents'' on their balance sheets. We 
understand that classifying money market fund investments as cash 
equivalents is important because, among other things, investors may 
have debt covenants that mandate certain levels of cash and cash 
equivalents.\269\
---------------------------------------------------------------------------

    \269\ In addition, some corporate investors may perceive cash 
and cash equivalents on a company's balance sheet as a measure of 
financial strength.
---------------------------------------------------------------------------

    Current U.S. GAAP defines cash equivalents as ``short-term, highly 
liquid investments that are readily convertible to known amounts of 
cash and that are so near their maturity that they present 
insignificant risk of changes in value because of changes in interest 
rates.'' \270\ In addition, U.S. GAAP includes an investment in a money 
market fund as an example of a cash equivalent.\271\ Notwithstanding, 
some shareholders may be concerned given this guidance came before 
money market funds using floating NAVs.\272\
---------------------------------------------------------------------------

    \270\ See Financial Accounting Standards Board Accounting 
Standards Codification (``FASB ASC'') paragraph 305-10-20.
    \271\ Id.
    \272\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25.
---------------------------------------------------------------------------

    Except as noted below, the Commission believes that an investment 
in a money market fund with a floating NAV would meet the definition of 
a ``cash equivalent.'' We believe the adoption of floating NAV alone 
would not preclude shareholders from classifying their investments in 
money market funds as cash equivalents because fluctuations in the 
amount of cash received upon redemption would likely be insignificant 
and would be consistent with the concept of a `known' amount of cash. 
The RSFI Study supports our belief by noting that floating NAV money 
market funds are not likely to experience significant fluctuations in 
value.\273\ The floating NAV requirement is also not expected to change 
the risk profile of money market fund portfolio investments. Rule 2a-
7's risk-limiting conditions should result in fluctuations in value 
from changes in interest rates and credit risk being insignificant.
---------------------------------------------------------------------------

    \273\ See RSFI Study, supra note 21.
---------------------------------------------------------------------------

    As is the case today with stable share price money market funds, 
events may occur that give rise to credit and liquidity issues for 
money market funds and shareholders would need to reassess if their 
investments continue to meet the definition of a cash equivalent. For 
example, during the financial crisis,

[[Page 36870]]

certain money market funds experienced unexpected declines in the fair 
value of their investments due to deterioration in the creditworthiness 
of their assets and as a result, portfolios of money market funds 
became less liquid. Investors in these money market funds would have 
needed to determine whether their investments continued to meet the 
definition of a cash equivalent. If events occur that cause 
shareholders in floating NAV money market funds to determine their 
shares are not cash equivalents, the shares would need to be classified 
as investments, and shareholders would have to treat them either as 
trading securities or available-for-sale securities.\274\
---------------------------------------------------------------------------

    \274\ See FASB ASC paragraph 320-10-25-1.
---------------------------------------------------------------------------

    Do commenters believe using a floating NAV would preclude money 
market funds from being classified as cash equivalents under GAAP?
     Would shareholders be less likely to invest in floating 
NAV money market funds if the shares held were classified for financial 
statement purposes as an ``investment'' rather than ``cash and cash 
equivalent?''
     Are there any other accounting-related costs or burdens 
that money market fund shareholders would incur if we require money 
market funds to use floating NAVs?
c. Implications for Local Government Investment Pools
    We also recognize that many states have established local 
government investment pools (``LGIPs''), money market fund-like 
investment pools that invest in short-term securities,\275\ that are 
required by law or investment policies to maintain a stable NAV per 
share.\276\ The Government Accounting Standards Board (``GASB'') states 
that LGIPs that are operated in a manner consistent with rule 2a-7 
(i.e., a ``2a7-like pool'') may use amortized cost to value securities 
(and presumably, facilitate maintaining a stable NAV per share).\277\ 
Our floating NAV proposal, if adopted, may have implications for LGIPs. 
In order to continue to manage LGIPs, state statutes and policies may 
need to be amended to permit the operation of investment pools that 
adhere to rule 2a-7 as we propose to amend it.\278\ Because we are 
unable to predict how various state legislatures and other market 
participants will react to our floating NAV proposal, we do not have 
the information necessary to provide a reasonable estimate of the 
impact on LGIPs or the potential effects on efficiency, competition, 
and capital formation. We note, however, that it is possible that 
states could amend their statutes or policies to permit the operation 
of LGIPs that comply with rule 2a-7 as we propose to amend it. We 
request comment on this aspect of our proposal.
---------------------------------------------------------------------------

    \275\ LGIPs tend to emulate typical money market funds by 
maintaining a stable NAV per share through investments in short-term 
securities. See infra III.E.1, Table 2, note N.
    \276\ See, e.g., U.S. Chamber of Commerce Letter to the Hon. 
Elisse Walter (Feb. 13, 2013), available at http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/2013-2.13-Floating-NAV-Qs-Letter.pdf. See also, e.g., Virginia's Local 
Government Investment Pool Act, which sets certain prudential 
investment standards but leaves it to the state treasury board to 
formulate specific investment policies for Virginia's LGIP. See Va. 
Code Ann. Sec.  2.2-4605(A)(3). Accordingly, the treasury board 
instituted a policy of managing Virginia's LGIP in accordance with 
``certain risk limiting provisions to maintain a stable net asset 
value at $1.00 per share'' and ``GASB `2a-7 like' requirements.'' 
Virginia LGIP's Investment Circular, June 30, 2012, available at 
http://www.trs.virginia.gov/cash/lgip.aspx. Not all LGIPs are 
currently managed to maintain a stable NAV, however, see infra 
section III.E.1, Table 2, note N.
    \277\ See GASB, Statement No. 31, Accounting and Financial 
Reporting for Certain Investments and for External Investment Pools 
(Mar. 1997).
    \278\ See, e.g., Comment Letter of American Public Power Assoc., 
et al., File No. FSOC-2012-0003 (Feb. 13, 2013) (``If the SEC rules 
are changed to adopt a daily floating NAV, states would have to 
alter their own statutes in order to comply, as many state statues 
cite rule 2a-7 as the model for their management of the LGIPs'').
---------------------------------------------------------------------------

     Would our floating NAV proposal affect LGIPs as described 
above? Are there other ways in which LGIPs would be affected? If so, 
please describe.
     Are there other costs that we have not considered?
     How do commenters think states and other market 
participants would react to our floating NAV proposal? Do commenters 
believe that states would amend their statutes or policies to permit 
LGIPs to have a floating NAV per share provided the fund complies with 
rule 2a-7, as we propose to amend it? If so, what types and amounts of 
costs would states incur? If not, would there be any effect on 
efficiency, competition, or capital formation?
7. Operational Implications of Floating NAV Money Market Funds
    Money market funds (or their transfer agents) are required under 
rule 2a-7 to have the capacity to redeem and sell fund shares at prices 
based on the funds' current net asset value per share pursuant to rule 
22c-1 rather than $1.00, i.e., to transact at the fund's floating 
NAV.\279\ Intermediaries, although not subject to rule 2a-7, typically 
have separate obligations to investors with regard to the distribution 
of proceeds received in connection with investments made or assets held 
on behalf of investors.\280\ Prior to adopting these amendments to rule 
2a-7, the ICI submitted a comment letter detailing the modifications 
that would be required to permit funds to transact at the fund's 
floating NAV.\281\ Accordingly, we expect that money market funds and 
transfer agents already have laid the foundation required to use 
floating NAVs.
---------------------------------------------------------------------------

    \279\ See rule 2a-7(c)(13). See also 2010 Adopting Release, 
supra note 92, at nn.362-363.
    \280\ See, e.g., 2010 Adopting Release, supra note 92, at 
nn.362-363. Examples of intermediaries that offer money market funds 
to their customers include broker-dealers, portals, bank trust 
departments, insurance companies, and retirement plan 
administrators. See Investment Company Institute, Operational 
Impacts of Proposed Redemption Restrictions on Money Market Funds, 
at 13 (2012), available at http://www.ici.org/pdf/ppr_12_operational_mmf.pdf (``ICI Operational Impacts Study'').
    \281\ See, e.g., Comment Letter of the Investment Company 
Institute (Sept. 8, 2009) (available in File No. S7-11-09) (``ICI 
2009 Comment Letter'') (describing the modifications that would be 
necessary if the Commission adopted the requirement, currently 
reflected in rule 2a-7(c)(13), that money market funds (or their 
transfer agents) have the capacity to transact at a floating NAV, 
to: (i) Fund transfer agent recordkeeping systems (e.g., special 
same-day settlement processes and systems, customized transmissions, 
and reporting mechanisms associated with same-day settlement systems 
and proprietary systems used for next-day settlement); (ii) a number 
of essential ancillary systems and related processes (e.g., systems 
changes for reconciliation and control functions, transactions 
accepted via the Internet and by phone, modifying related 
shareholder disclosures and phone scripts, education and training 
for transfer agent employees and changes to the systems used by fund 
accountants that transmit net asset value data to fund transfer 
agents); and (iii) sub-transfer agent/recordkeeping arrangements 
(explaining that similar modifications likely would be needed at 
various intermediaries).
---------------------------------------------------------------------------

    We recognize, however, that funds, transfer agents, intermediaries, 
and others in the distribution chain may not currently have the 
capacity to process transactions at floating NAVs constantly, as would 
be required under our proposal.\282\ Accordingly, we expect that sub-
transfer agents, fund accounting departments, custodians, 
intermediaries, and others in the distribution chain would need to 
develop and overlay additional controls and procedures on top of 
existing systems in order to implement a floating NAV on a continual 
basis. In each case, the controls and procedures for the accounting 
systems at these entities would have to be modified to permit those 
systems to calculate a money

[[Page 36871]]

market fund's floating NAV each business day and to communicate that 
value to others in the distribution chain on a permanent basis. In 
addition, we understand that, under our floating NAV proposal, money 
market funds and other recordkeepers would incur additional costs to 
track portfolio security gains and losses, provide ``basis reporting,'' 
and monitor for potential wash-sale transactions, as discussed above in 
section III.A.6. We believe, however, that funds, in many cases, should 
be able to leverage existing systems that track this information for 
other mutual funds.
---------------------------------------------------------------------------

    \282\ Even though a fund complex's transfer agent system is the 
primary recordkeeping system, there are a number of additional 
subsystems and ancillary systems that overlay, integrate with, or 
feed to or from a fund's primary transfer agent system, incorporate 
custom development, and may be proprietary or vendor dependent 
(e.g., print vendors to produce trade confirmations). See ICI 
Operational Impacts Study at 20, supra note 280. The systems of sub-
transfer agents and other parties may also require modifications 
related to our floating NAV proposal.
---------------------------------------------------------------------------

    We understand that the costs to modify a particular entity's 
existing controls and procedures would vary depending on the capacity, 
function and level of automation of the accounting systems to which the 
controls and procedures relate and the complexity of those systems' 
operating environments.\283\ Procedures and controls that support 
systems that operate in highly automated operating environments would 
likely be less costly to modify while those that support complex 
operations with multiple fund types or limited automation or both would 
be more costly to change.\284\ Because each system's capabilities and 
functions are different, an entity would likely have to perform an in-
depth analysis of our proposed rules to calculate the costs of 
modifications required for its own system. While we do not have the 
information necessary to provide a point estimate of the potential 
costs of modifying procedures and controls, we expect that each entity 
would bear one-time costs to modify existing procedures and controls in 
the functional areas that are likely to be impacted by our proposal. 
Our staff has estimated that the one-time costs of implementation for 
an affected entity would range from $1.2 million (for entities 
requiring less extensive modifications) to $2.3 million (for entities 
requiring more extensive modifications).\285\ Staff also estimates that 
the annual costs to keep procedures and controls current and to provide 
continuing training would range from 5% to 15% of the one-time 
costs.\286\
---------------------------------------------------------------------------

    \283\ See, e.g., ICI Operational Impacts Study at 37, supra note 
280 (noting that the modifications necessary to transact at a 
floating NAV would ``require in some cases minor and other instances 
major modifications--depending on the complexity of the systems and 
the types of intermediaries and investors'' involved).
    \284\ See, e.g., id. at 41 (reporting that half of the 
respondents in its survey reported that their transfer agent systems 
``already had the capability to process money market trades'' at a 
floating value, while the other respondents would need to modify 
their transfer agent systems to comply with the requirement to have 
the capacity to transact at a floating NAV).
    \285\ Staff estimates that these costs would be attributable to 
the following activities: (i) Drafting, integrating, and 
implementing procedures and controls; (ii) preparation of training 
materials; and (iii) training. See also supra note 245 (discussing 
the bases of our staff's estimates of operational and related 
costs).
    \286\ As noted throughout this Release, we recognize that adding 
new capabilities or capacity to a system (including modifications to 
related procedures and controls) will entail ongoing annual 
maintenance costs and understand that those costs generally are 
estimated as a percentage of initial costs of building or expanding 
a system.
---------------------------------------------------------------------------

    We anticipate, however, that many money market funds, transfer 
agents, custodians, and intermediaries in the distribution chain may 
not bear the estimated costs on an individual basis and therefore 
experience economies of scale. For example, the costs would likely be 
allocated among the multiple users of affected systems, such as money 
market funds that are members of a fund group, money market funds that 
use the same transfer agent or custodian, and intermediaries that use 
systems purchased from the same third party. Accordingly, we expect 
that the cost for many individual entities that would have to process 
transactions at floating NAVs may be less than the estimated costs.
    We request comment on this analysis and our range of estimated 
costs to money market funds, transfer agents, custodians, and 
intermediaries.
     To what extent would transfer agents, fund accounting 
departments, custodians, and intermediaries need to develop and 
implement additional controls and procedures or modify existing ones 
under our floating NAV proposal?
     To what extent do intermediaries, as a result of their 
separate obligations to investors regarding distribution of proceeds, 
have the capacity to process (on a continual basis) transactions at a 
fund's floating NAV?
     Do money market funds and others expect they would incur 
costs in addition to those we estimate above or that they would incur 
different costs? If so, what are these costs?
     Would the costs incurred by money market funds and others 
in the distribution chain discussed above be passed on to retail (and 
other) investors in the form of higher fees?
     If a number of money market funds already report daily 
shadow prices using ``basis point'' rounding, are there additional 
operational costs that funds would incur to price their shares to four 
decimal places? If so, please describe. Are there means by which these 
operational costs can be reduced while still providing sufficient price 
transparency?
     Do all funds have the ready capability to price their 
shares to four decimal places? For those funds that do so already, we 
seek comment on the costs involved in developing this capability. For 
funds that do not have the capability, what types and amounts of costs 
would be incurred?
     What type of ongoing maintenance and training would be 
necessary, and to what extent? Do commenters agree that such costs 
would likely range between 5% and 15% of one-time costs? If not, is 
there a more accurate way to estimate these costs?
     To what extent would money market funds or others 
experience economies of scale?
     We request that intermediaries and others provide data to 
support the costs they expect they would incur and an explanation of 
the work they have already undertaken as a result of rule 2a-7's 
current requirement that money market funds (or their transfer agents) 
have the capacity to transact at a floating NAV.
    In addition, funds would incur costs to communicate with 
shareholders the change to a floating NAV per share. Although funds 
(and their intermediaries that provide information to beneficial 
owners) already have the means to provide shareholders the values of 
their money market fund holdings, our staff anticipates that they would 
incur additional costs associated with programs and systems 
modifications necessary to provide shareholders with access to that 
information online, through automated phone systems, and on shareholder 
statements under our floating NAV proposal and to explain to 
shareholders that the value of their money market funds shares will 
fluctuate.\287\
---------------------------------------------------------------------------

    \287\ Staff expects these costs would include software 
programming modifications, as well as personnel costs that would 
include training and scripts for telephone representatives to enable 
them to respond to investor inquiries.
---------------------------------------------------------------------------

    Our staff anticipates that these communication costs would vary 
among funds (or their transfer agents) and fund intermediaries 
depending on the current capabilities of the entity's Web site, 
automated or manned phone systems, systems for processing shareholder 
statements, and the number of investors. We believe that money market 
funds themselves would need to perform an in-depth analysis of our 
proposed rules in order to estimate the necessary systems 
modifications. While we do not have the information necessary to 
provide a point estimate of the potential costs of systems 
modifications, our staff

[[Page 36872]]

has estimated that the costs for a fund (or its transfer agent) or 
intermediary that may be required to perform these activities would 
range from $230,000 to $490,000.\288\ Staff also estimates that funds 
(or their transfer agents) and their intermediaries would have ongoing 
costs to maintain automated phone systems and systems for processing 
shareholder statements, and to explain to shareholders that the value 
of their money market fund shares will fluctuate, and that these costs 
would range from 5% to 15% of the one-time costs.\289\ We request 
comment on this aspect of our proposal.
---------------------------------------------------------------------------

    \288\ Staff estimates that these costs would be attributable to 
the following activities: (i) Project assessment and development; 
(ii) project implementation and testing; and (iii) written and 
telephone communication. See also supra note 245 (discussing the 
bases of our staff's estimates of operational and related costs).
    \289\ As noted throughout this Release, we recognize that adding 
new capabilities or capacity to a system will entail ongoing annual 
maintenance costs and understand that those costs generally are 
estimated as a percentage of initial costs of building or expanding 
a system.
---------------------------------------------------------------------------

     Do commenters agree with our estimated range of costs to 
funds (or their transfer agents) and fund intermediaries to communicate 
with shareholders the change to a floating NAV per share? If not, we 
request detailed estimates of the types and amounts of costs.
    Money market funds' ability to maintain a stable value also 
facilitates the funds' role as a cash management vehicle and provides 
other operational efficiencies for their shareholders.\290\ Money 
market fund shareholders generally are able to transact in fund shares 
at a stable value known in advance. This permits money market fund 
transactions to settle on the same day that an investor places a 
purchase or sell order, and allows a shareholder to determine the exact 
value of his or her money market fund shares (absent a liquidation 
event) at any time.\291\ These features have made money market funds an 
important component of systems for processing and settling various 
types of transactions.\292\
---------------------------------------------------------------------------

    \290\ See, e.g., Federated Investors Alternative 1 FSOC Comment 
Letter, supra note 161; Comment Letter of Steve Fancher, et al. 
(Jan. 22, 2013) (available in File No. FSOC-2012-0003); Comment 
Letter of Steve Morgan, et al. (Jan. 22, 2013) (available in File 
No. FSOC-2012-0003) (``Steve Morgan FSOC Comment Letter''); Comment 
Letter of Edward Jones (Feb. 15, 2013) (available in File No. FSOC-
2012-0003) (``Edward Jones FSOC Comment Letter'') (citing cash 
management benefits for individual investors in particular); Comment 
Letter of T. Rowe Price (Jan. 30, 2013) (available in File No. FSOC-
2012-0003) (``T. Rowe Price FSOC Comment Letter'').
    \291\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 
(noting how same-day settlement is vitally important to many 
investors and describing how such same-day settlement is facilitated 
by a stable NAV). We note, however, that not all money market fund 
transactions settle on the same day. See, e.g., ICI 2009 Comment 
Letter, supra note 281 (describing the systems and processes 
involved to permit same-day settlement and those involved for next-
day settlement).
    \292\ See, e.g., Comment Letter of John D. Hawke (Dec. 15, 2011) 
(available in File No. 4-619) (``Hawke Dec 2011 PWG Comment 
Letter'') (identifying various types of systems, including among 
others trust accounting systems at bank trust departments; corporate 
payroll processing systems and processing systems used to manage 
corporations' cash balances; processing systems used by federal, 
state, and local governments to manage their cash balances; and 
municipal bond trustee cash management systems).
---------------------------------------------------------------------------

    Commenters have asserted that money market funds with floating NAVs 
would be incompatible with these systems because, among other things, 
transactions in shares of these money market funds, like other types of 
mutual fund transactions, would generally not settle on the same day 
that an order is placed, and the value of the shares of these money 
market funds could not be determined precisely before that day's NAV 
had been calculated.\293\ Requiring money market funds to use floating 
NAVs, the commenters assert, would require money market fund 
shareholders and service providers to reprogram their systems or 
manually reconcile transactions, increasing staffing costs.\294\ Others 
have asserted that similar considerations could affect features that 
are particularly appealing to retail investors, such as ATM access, 
check writing, electronic check payment processing services and 
products, and U.S. Fedwire transfers.\295\ We note that we are 
proposing an exemption for retail funds which we expect would 
significantly alleviate any such concerns about the costs of altering 
those features, because funds that take advantage of the retail 
exemption would be able to maintain a stable price, and accordingly, 
such features would be unaffected. Nonetheless, not all funds with 
these features may choose to take advantage of the proposed retail 
exemption, and therefore, some funds may need to make additional 
modifications to continue offering these features. We have included 
estimates of the costs to make such modifications below. We seek 
comment on the extent to which these features may be affected by our 
proposal and the proposed retail exemption.
---------------------------------------------------------------------------

    \293\ Hawke Dec 2011 PWG Comment Letter, supra note 292 (``The 
net result of a floating NAV would be to make Money Funds not useful 
to hold the large, short-term cash balances used in these automated 
transaction processing systems across a wide variety of businesses 
and applications.''); Comment Letter of Cachematrix Holdings LLC 
(Dec. 12, 2011) (available in File No. 4-619) (``Cachematrix PWG 
Comment Letter'') (``A stable share price is critical to same-day 
and next-day processing, shortened settlement times, float 
management, and mitigation of counterparty risk among firms.''); 
Comment Letter of State Street Global Advisors (Sept. 8, 2009) 
(available in File No. S7-11-09) (``[T]he stable NAV simplifies 
transaction settlement, which permits money market funds to offer 
shareholders same day settlement options, as well as ATM access, 
check writing, and ACH/FedWire transfers.'').
    \294\ See, e.g., Hawke Dec 2011 PWG Comment Letter, supra note 
292 (stating that ``[m]anual processing [required to reconcile the 
day-to-day fluctuations in the value of money market funds with a 
floating NAV] would mean more staffing requirement, more costs 
associated with staffing the function, and errors and delays in 
completing the process'' and that reprogramming systems would ``take 
many years and hundreds of millions of dollars to complete across a 
wide range of businesses and applications for which stable value 
money funds currently are used to hold short-term liquidity''); 
Cachematrix PWG Comment Letter, supra note 293 (``[A]n entire 
industry has programmed accounting, trading and settlement systems 
based on a stable share price. The cost for each bank to retool 
their sub-accounting systems to accommodate a fluctuating NAV could 
be in the millions of dollars. This does not take into account the 
costs that each bank would then pass on to the thousands of 
corporations that use money market trading systems.'').
    \295\ See, e.g., Comment Letter of Fidelity Investments (Feb. 
14, 2013) (available in File No. FSOC-2012-0003) (``Fidelity FSOC 
Comment Letter''). ([B]roker-dealers offer clients a variety of 
features that are available generally only to accounts with a stable 
NAV, including ATM access, check writing, and ACH and Fedwire 
transfers. A floating NAV would force MMFs that offer same day 
settlement on shares redeemed through wire transfers to shift to 
next day settlement or require fund advisers to modify their systems 
to accommodate floating NAV MMFs.''); Edward Jones FSOC Comment 
Letter, supra note 290; ICI Feb 2012 PWG Comment Letter, supra note 
259 (``[E]limination of the stable NAV for money market funds would 
likely force brokers and fund sponsors to consider how or whether 
they could continue to provide such services to money market fund 
investors.'').
---------------------------------------------------------------------------

     Would money market funds and financial intermediaries 
continue to provide the retail-focused services discussed above if we 
were to require money market funds to use floating NAVs? If not, why 
not?
     Would investors reduce or eliminate their money market 
fund investments if these services were no longer available or if the 
cost of these services increases?
    Commenters also assert that requiring money market funds to use 
floating NAVs would extend the settlement cycle from same-day 
settlement to next-day settlement, which would expose parties to 
transactions to increased risk (e.g., during a day in which a 
transaction to be paid by proceeds from a sale of money market fund 
shares is still open, one party to the transaction could default).\296\ 
But a money market

[[Page 36873]]

fund with a floating NAV could still offer same-day settlement. The 
fund could price its shares each day and provide redemption proceeds 
that evening. Indeed, we are aware of two floating NAV money market 
funds that normally operate this way.\297\ Alternatively, funds could 
price their shares periodically (e.g., at noon and 4 p.m. each day) to 
provide same-day settlement.\298\ We recognize that pricing services 
may incur operational costs to modify their systems (and pass these 
costs along to funds) to provide pricing multiple times each day and 
seek comment on the nature and amounts of these costs.
---------------------------------------------------------------------------

    \296\ See, e.g., Hawke Dec 2011 PWG Comment Letter, supra note 
292 (``Both parties would carry the unsettled transaction as an open 
position for one extra day and each party would be exposed for that 
time to the risk that its counterparty would default during the 
extra day, or that the bank holding the cash overnight (or over the 
weekend) would fail. For a bank involved in making a payment in 
anticipation of an incoming funds transfer as part of these 
processing systems, this change from same-day to next-day processing 
of money fund redemptions would turn intra-day overdrafts into 
overnight overdrafts, resulting in much greater default and funding 
risks to the bank. This extra day's float would mean more risk in 
the system and a larger average float balance that each party must 
carry and finance.''); Cachematrix PWG Comment Letter, supra note 
293 (``A stable share price is critical to same-day and next-day 
processing, shortened settlement times, float management, and 
mitigation of counterparty risk among firms.'').
    \297\ See, e.g., the prospectus for the DWS Variable NAV Money 
Fund, dated December 1, 2011, available at http://www.sec.gov/Archives/edgar/data/863209/000008805311001627/nb120111ict-vnm.txt 
(``If the fund receives a sell request prior to the 4:00 p.m. 
Eastern time cut-off, the proceeds will normally be wired on the 
same day. However, the shares sold will not earn that day's 
dividend.''); prospectus for the Northern Funds, dated December 7, 
2012, available at http://www.sec.gov/Archives/edgar/data/916620/000119312512495705/d449473d485apos.htm (``Redemption proceeds 
normally will be sent or credited on the next Business Day or, if 
you are redeeming your shares through an authorized intermediary, up 
to three Business Days, following the Business Day on which such 
redemption request is received in good order by the deadline noted 
above, unless payment in immediately available funds on the same 
Business Day is requested.'').
    \298\ We understand that pricing vendors may not provide 
continual pricing throughout the day. Instead, money market funds 
could establish periodic times at which the fund would price its 
shares.
---------------------------------------------------------------------------

     Do commenters expect to incur the types of costs described 
above (e.g., increased staffing costs to manually reconcile 
transactions)? Are there additional costs we have not identified?
     What kinds of costs, specifically, do commenters expect to 
incur? What kinds of employee costs would be involved?
     Would an extended settlement cycle impose costs on money 
market fund investors? If so, what kinds of costs and how much?
     Would money market funds extend the settlement cycle or 
would they exercise either of those other options?
     Would exercising either of the two options discussed above 
impose costs on money market funds? If so, how much? Are there options 
that we have not identified that money market funds could use to 
provide same-day settlement?
     Would extending the settlement cycle cause investors to 
leave or not invest in money market funds?
     Do commenters agree that a delay in settlement for some 
money market fund transactions could expose parties to the transactions 
to increased counterparty risk? To what extent would this occur, and 
how does the nature of this risk differ from counterparty risk that 
arises in other aspects of a money market fund shareholder's business?
     Do commenters agree that money market funds generally 
could still offer same-day settlement if required to use a floating 
NAV?
     Do fund pricing services have the capacity to provide 
pricing multiple times each day? If not, what types and amounts of 
costs would pricing services incur to develop this capacity? Would 
pricing services pass these costs down to funds?
     Are the money market funds that currently same-day settle 
with a floating NAV representative of what a broader industry of 
floating NAV money market funds could achieve? Are there additional 
costs or complications in conducting such same-day settlement for 
larger funds than smaller funds?
    In addition to money market funds and other entities in the 
distribution chain, each money market fund shareholder would also 
likely be required to perform an in-depth analysis of our floating NAV 
proposal and its own existing systems, procedures, and controls to 
estimate the systems modifications it would be required to undertake. 
Because of this, and the variation in systems currently used by 
institutional money market fund shareholders, we do not have the 
information necessary to provide a point estimate of the potential 
costs of systems modifications. Nevertheless, our staff has attempted 
to describe the types of activities typically involved in making 
systems modifications and estimated a range of hours and costs that may 
be required to perform these activities. In addition, the Commission 
requests from commenters information regarding the potential costs of 
system modifications for money market fund shareholders.
    Our staff has prepared ranges of estimated costs, taking into 
account variations in the functionality, sophistication, and level of 
automation of money market fund shareholders' existing systems and 
related procedures and controls, and the complexity of the operating 
environment in which these systems operate.\299\ In deriving its 
estimates, our staff considered the need to modify systems and related 
procedures and controls related to recordkeeping, accounting, trading, 
cash management, and bank reconciliations, and to provide training 
concerning these modifications.
---------------------------------------------------------------------------

    \299\ Some money market fund shareholders do not use systems and 
would not use them under this proposal (e.g., many retail 
investors), and these shareholders of course would not incur any 
systems modifications costs.
---------------------------------------------------------------------------

    Staff estimates that a shareholder whose systems (including related 
procedures and controls) would require less extensive or labor-
intensive modifications would incur one-time costs ranging from 
$123,000 to $253,000.\300\ Staff estimates that a shareholder whose 
systems (including related procedures and controls) would require more 
extensive or labor-intensive modifications would incur one-time costs 
ranging from $1.4 million to $2.9 million.\301\ In addition, staff 
estimates the annual maintenance costs to these systems and procedures 
and controls, and the costs to provide continuing training, would range 
from 5% to 15% of the one-time implementation costs.\302\ We request 
comment on our analysis and the nature and extent of the costs money 
market fund shareholders anticipate they would incur as a result of our 
floating NAV proposal.
---------------------------------------------------------------------------

    \300\ Staff estimates that these costs would be attributable to 
the following activities: (i) Planning, coding, testing, and 
installing system modifications; (ii) drafting, integrating, 
implementing procedures and controls; (iii) preparation of training 
materials; and (iv) training. See also supra note 245 (discussing 
the bases of our staff's estimates of operational and related 
costs).
    \301\ Id.
    \302\ See supra note 286.
---------------------------------------------------------------------------

     Are shareholder systems in fact unable to accommodate a 
floating NAV, even if the NAV typically fluctuates very little (a 
fraction of a penny) on a day-to-day basis?
     If shareholder systems are unable to accommodate a 
floating NAV, what kinds of programming costs would shareholders incur 
in reprogramming the systems and how do they compare to our staff's 
estimates above?
     Do shareholders have other systems they use to manage 
their investments that fluctuate in value? If so, could these systems 
be used for money market funds? If not, why not?
     How much would it cost to adapt existing shareholder 
systems (currently used to accommodate investments that fluctuate in 
value) to accommodate money market funds with floating NAVs and how do 
these costs compare to our staff's estimates above?

[[Page 36874]]

8. Disclosure Regarding Floating NAV
    We are proposing disclosure-related amendments to rule 482 under 
the Securities Act \303\ and Form N-1A in connection with the floating 
NAV alternative. We anticipate that the proposed rule and form 
amendments would provide current and prospective shareholders with 
information regarding the operations and risks of this reform 
alternative. In keeping with the enhanced disclosure framework we 
adopted in 2009,\304\ the proposed amendments are intended to provide a 
layered approach to disclosure in which key information about the 
proposed new features of money market funds would be provided in the 
summary section of the statutory prospectus (and, accordingly, in any 
summary prospectus, if used) with more detailed information provided 
elsewhere in the statutory prospectus and in the statement of 
additional information (``SAI'').
---------------------------------------------------------------------------

    \303\ Rule 482 applies to advertisements or other sales 
materials with respect to securities of an investment company 
registered under the Investment Company Act that is selling or 
proposing to sell its securities pursuant to a registration 
statement that has been filed under the Investment Company Act. See 
rule 482(a). This rule describes the information that is required to 
be included in an advertisement, including a disclosure statement 
that must be used on money market fund advertisements. See rule 
482(b).
     Our proposal would also affect fund supplemental sales 
literature (i.e., sales literature that is preceded or accompanied 
by a statutory prospectus). Rule 34b-1 under the Investment Company 
Act prescribes the requirements for supplemental sales literature. 
Because rule 34b-1(a) cross-references the requirements of rule 
482(b)(4), any changes made to that provision will affect the 
requirements for fund supplemental sales literature.
    \304\ See Enhanced Disclosure and New Prospectus Delivery Option 
for Registered Open-End Management Investment Companies, Investment 
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 
2009)] (``Summary Prospectus Adopting Release'') at paragraph 
preceding section III (adopting rules permitting the use of a 
summary prospectus, which is designed to provide key information 
that is important to an informed investment decision).
---------------------------------------------------------------------------

a. Disclosure Statement
    The move to a floating NAV would be designed to change the 
investment expectations and behavior of money market fund investors. As 
a measure to achieve this change, we propose to require that each money 
market fund, other than a government or retail fund, include a bulleted 
statement disclosing the particular risks associated with investing in 
a floating NAV money market fund on any advertisement or sales material 
that it disseminates (including on the fund Web site). We also propose 
to include wording designed to inform investors about the primary risks 
of investing in money market funds generally in this bulleted 
disclosure statement. While money market funds are currently required 
to include a similar disclosure statement on their advertisements and 
sales materials,\305\ we propose amending this disclosure statement to 
emphasize that money market fund sponsors are not obligated to provide 
financial support, and that money market funds may not be an 
appropriate investment option for investors who cannot tolerate 
losses.\306\
---------------------------------------------------------------------------

    \305\ See supra note 303. Rule 482(b)(4) (which currently 
requires a money market fund to include the following disclosure 
statement on its advertisements and sales materials: An investment 
in the Fund is not insured or guaranteed by the Federal Deposit 
Insurance Corporation or any other government agency. Although the 
Fund seeks to preserve the value of your investment at $1.00 per 
share, it is possible to lose money by investing in the Fund).
    \306\ See infra note 607 and accompanying text (discussing the 
extent to which discretionary sponsor support has the potential to 
confuse money market fund investors); supra note 141 and 
accompanying text (noting that survey data shows that some investors 
are unsure about the amount of risk in money market funds and the 
likelihood of government assistance if losses occur).
---------------------------------------------------------------------------

    Specifically, we would require floating NAV money market funds to 
include the following bulleted disclosure statement on their 
advertisements and sales materials:
     You could lose money by investing in the Fund.
     You should not invest in the Fund if you require your 
investment to maintain a stable value.
     The value of shares of the Fund will increase and decrease 
as a result of changes in the value of the securities in which the Fund 
invests. The value of the securities in which the Fund invests may in 
turn be affected by many factors, including interest rate changes and 
defaults or changes in the credit quality of a security's issuer.
     An investment in the Fund is not insured or guaranteed by 
the Federal Deposit Insurance Corporation or any other government 
agency.
     The Fund's sponsor has no legal obligation to provide 
financial support to the Fund, and you should not expect that the 
sponsor will provide financial support to the Fund at any time.\307\
---------------------------------------------------------------------------

    \307\ See proposed (FNAV) rule 482(b)(4)(i). If an affiliated 
person, promoter, or principal underwriter of the fund, or an 
affiliated person of such person, has entered into an agreement to 
provide financial support to the fund, the fund would be permitted 
to omit the last bulleted sentence from the disclosure statement for 
the term of the agreement. See Note to paragraph (b)(4), proposed 
(FNAV) rule 482(b)(4).
---------------------------------------------------------------------------

    We also propose to require a substantially similar bulleted 
disclosure statement in the summary section of the statutory prospectus 
(and, accordingly, in any summary prospectus, if used).\308\
---------------------------------------------------------------------------

    \308\ See proposed (FNAV) Item 4(b)(1)(ii)(A) of Form N-1A. Item 
4(b)(1)(ii) currently requires a money market fund to include the 
following statement in its prospectus: An investment in the Fund is 
not insured or guaranteed by the Federal Deposit Insurance 
Corporation or any other government agency. Although the Fund seeks 
to preserve the value of your investment at $1.00 per share, it is 
possible to lose money by investing in the Fund.
---------------------------------------------------------------------------

    With respect to money market funds that are not government or 
retail funds, we propose to remove current requirements that money 
market funds state that they seek to preserve the value of shareholder 
investments at $1.00 per share.\309\ This disclosure, which was adopted 
to inform investors in money market funds that a stable net asset value 
does not indicate that the fund will be able to maintain a stable 
NAV,\310\ will not be relevant once funds are required to ``float'' 
their net asset value.
---------------------------------------------------------------------------

    \309\ See Item 4(b)(1)(ii) of Form N-1A; proposed (FNAV) Item 
4(b)(1)(ii)(A) of Form N-1A.
    \310\ See Registration Form Used by Open-End Management 
Investment Companies, Investment Company Act Release No. 23064 (Mar. 
13, 1998) [63 FR 13916 (Mar. 23, 1998)] (release amending 
disclosure) (``Registration Statement Adopting Release''); Revisions 
to Rules Regulating Money Market Funds, Investment Company Act 
Release No. 18005 (Feb. 20, 1990) [56 FR 8113 (Feb. 27, 1991)] 
(adopting release); Revisions to Rules Regulating Money Market 
Funds, Investment Company Act Release No. 17589 (July 17, 1990) [55 
FR 30239 (July 25, 1990)] (``1990 Proposing Release'').
---------------------------------------------------------------------------

    As discussed above, the floating NAV proposal would provide 
exemptions to the floating NAV requirement for government and retail 
money market funds.\311\ Accordingly, the proposed amendments to rule 
482 and Form N-1A would require government and retail money market 
funds to include a bulleted disclosure statement on the fund's 
advertisements and sales materials and in the summary section of the 
fund's statutory prospectus (and, accordingly, in any summary 
prospectus, if used) that does not discuss the risks of a floating NAV, 
but that would be designed to inform investors about the risks of 
investing in money market funds generally.\312\ We propose to require 
each government and retail fund to include the following bulleted 
disclosure statement in the summary section of its statutory prospectus 
(and, accordingly, in any summary prospectus, if used), and on any 
advertisement or sales material that it disseminates (including on the 
fund Web site):
---------------------------------------------------------------------------

    \311\ See supra sections III.A.3 and III.A.4 and proposed (FNAV) 
rules 2a-7(c)(2) and (c)(3).
    \312\ See supra notes 305-306 and accompanying text.
---------------------------------------------------------------------------

     You could lose money by investing in the Fund.
     The Fund seeks to preserve the value of your investment at 
$1.00 per

[[Page 36875]]

share, but cannot guarantee such stability.
     An investment in the Fund is not insured or guaranteed by 
the Federal Deposit Insurance Corporation or any other government 
agency.
     The Fund's sponsor has no legal obligation to provide 
financial support to the Fund, and you should not expect that the 
sponsor will provide financial support to the Fund at any time.\313\
---------------------------------------------------------------------------

    \313\ See proposed (FNAV) rule 482(b)(4)(ii) and proposed (FNAV) 
item 4(b)(1)(ii)(B) of Form N-1A; see also supra notes 305 and 308 
(discussing the current corresponding disclosure requirements for 
money market funds). If an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
entered into an agreement to provide financial support to the fund, 
the fund would be permitted to omit the last bulleted sentence from 
the disclosure statement that appears on a fund advertisement or 
fund sales material, for the term of the agreement. See Note to 
paragraph (b)(4), proposed (FNAV) rule 482(b)(4).
     Likewise, if an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
entered into an agreement to provide financial support to the fund, 
and the term of the agreement will extend for at least one year 
following the effective date of the fund's registration statement, 
the fund would be permitted to omit the last bulleted sentence from 
the disclosure statement that appears on the fund's registration 
statement. See Instruction to proposed (FNAV) item 4(b)(1)(ii) of 
Form N-1A.
---------------------------------------------------------------------------

    The proposed disclosure statements are intended to be one measure 
to change the investment expectations and, therefore, the behavior of 
money market fund investors. The risk-limiting conditions of rule 2a-7 
and past experiences of money market fund investors have created 
expectations of a stable, cash-equivalent investment. As discussed 
above, one reason for such expectation may have been the role of 
sponsor support in maintaining a stable net asset value for money 
market funds.\314\ In addition, we are concerned that investors, under 
the floating NAV proposal, will not be fully aware that the value of 
their money market fund shares will increase and decrease as a result 
of the changes in the value of the underlying portfolio 
securities.\315\ In proposing the disclosure statement, we have taken 
into consideration investor preferences for clear, concise, and 
understandable language.\316\ We also considered whether language that 
was stronger in conveying potential risks associated with money market 
funds would be effective for investors.\317\ In addition, we considered 
whether the proposed disclosure statement should be limited to only 
money market fund advertisements and sales materials, as discussed 
above. Although we acknowledge that the summary section of the 
prospectus must contain a discussion of key risk factors associated 
with a floating NAV money market fund, we believe that the importance 
of the disclosure statement merits its placement in both locations, 
similar to how the current money market fund legend is required in both 
money market fund advertisements and sales materials and the summary 
section of the prospectus.\318\
---------------------------------------------------------------------------

    \314\ See supra section II.B.3.
    \315\ See Fidelity FSOC Comment Letter, supra note 295 (finding, 
from its study, that 81% of its retail money market fund investors 
understood that securities held by these funds have some small day-
to-day fluctuations). However, the study did not address the extent 
to which these investors understood that these fluctuations could 
impact the value of their shares of money market funds, rather than 
the value of the underlying portfolio securities.
    \316\ See Study Regarding Financial Literacy Among Investors, a 
study by staff of the U.S. Securities and Exchange Commission (Aug. 
2012), available at http://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf, at vi.
    \317\ See Molly Mercer et al., Worthless Warnings? Testing the 
Effectiveness of Disclaimers in Mutual Fund Advertisements, 7 J. 
Empirical Legal Stud. 429 (2010) (evaluating the usefulness of 
legends in mutual fund advertisements regarding performance 
advertising).
    \318\ See supra notes 305 and 308.
---------------------------------------------------------------------------

    We request comment on the disclosure statements \319\ proposed to 
be required on any money market fund advertisements or sales materials, 
as well as in the summary section of a fund's statutory prospectus 
(and, accordingly, in any summary prospectus, if used).
---------------------------------------------------------------------------

    \319\ In the questions that follow, we use the term ``disclosure 
statement'' to mean the new disclosure statement that we propose to 
require floating NAV funds to incorporate into their prospectuses 
and advertisements and sales materials or, alternatively and as 
appropriate, the new disclosure statement that we propose to require 
government or retail funds to incorporate into their prospectuses 
and advertisements and sales materials.
---------------------------------------------------------------------------

     Would the disclosure statement proposed to be used by 
floating NAV funds adequately alert investors to the risks of investing 
in a floating NAV fund, and would investors understand the meaning of 
each part of the proposed disclosure statement? Will investors be fully 
aware that the value of their money market fund shares will increase 
and decrease as a result of the changes in the value of the underlying 
portfolio securities? If not, how should the proposed disclosure 
statement be amended?
     Would the disclosure statement proposed to be used by 
government and retail money market funds, which are not subject to the 
floating NAV requirement, adequately alert investors to the risks of 
investing in those types of funds, and would investors understand the 
meaning of each part of the proposed disclosure statement? If not, how 
should the proposed disclosure statement be amended?
     Would different shareholder groups or different types of 
funds benefit from different disclosure statements? For example, should 
retail and institutional investors receive different disclosure 
statements, or should funds that offer cash management features such as 
check writing provide different disclosure statements from funds that 
do not? Why or why not? If yes, how should the disclosure statement be 
tailored to different shareholder groups and fund types?
     Will the proposed disclosure statement respond effectively 
to investor preferences for clear, concise, and understandable 
language?
     Would the following variations on the proposed disclosure 
statement be any more or less useful in alerting shareholders to the 
risks of investing in a floating NAV fund (as applicable) and/or the 
risks of investing in money market funds generally?
    [cir] Removing or amending the following bullet point in the 
proposed disclosure statement: ``The Fund's sponsor has no legal 
obligation to provide financial support to the Fund, and you should not 
expect that the sponsor will provide financial support to the Fund at 
any time.''
    [cir] Removing or amending the following bullet point in the 
proposed disclosure statement: ``The value of the securities in which 
the Fund invests may in turn be affected by many factors, including 
interest rate changes and defaults or changes in the credit quality of 
a security's issuer.''
    [cir] Amending the final bullet point in the proposed disclosure 
statement to read: ``Your investment in the Fund therefore may 
experience losses.''
    [cir] Amending the final bullet point in the proposed disclosure 
statement to read: ``Your investment in the Fund therefore may 
experience gains or losses.''
     Would investors benefit from requiring the proposed 
disclosure statement also to be included on the front cover page of a 
money market fund's prospectus (and on the cover page or beginning of 
any summary prospectus, if used)?
     Would investors benefit from any additional types of 
disclosure in the summary section of the statutory prospectus or on the 
prospectus' cover page? If so, what else should be included?
     Should we provide any instruction or guidance in order to 
highlight the proposed disclosure statement on fund advertisements and 
sales materials (including the fund's Web site) and/or lead investors 
efficiently to the

[[Page 36876]]

disclosure statement? \320\ For example, with respect to the fund's Web 
site, should we instruct that the proposed disclosure statement be 
posted on the fund's home page or be accessible in no more than two 
clicks from the fund's home page?
---------------------------------------------------------------------------

    \320\ Such instruction or guidance would supplement current 
requirements for the presentation of the disclosure statement 
required by rule 482(b)(4). See supra note 305; rule 482(b)(5).
---------------------------------------------------------------------------

b. Disclosure of Tax Consequences and Effects on Fund Operations
    The proposed requirement that money market funds transition to a 
floating NAV would entail certain additional tax- and operations-
related disclosure, which disclosure requirements would not necessitate 
rule and form amendments.\321\ As discussed above, if we were to 
require certain money market funds to use a floating NAV, taxable 
investors in money market funds, like taxable investors in other types 
of mutual funds, may experience taxable gains and losses.\322\ 
Currently, funds are required to describe in their prospectuses the tax 
consequences to shareholders of buying, holding, exchanging, and 
selling the fund's shares.\323\ Accordingly, we expect that, pursuant 
to current disclosure requirements, floating NAV money market funds 
would include disclosure in their prospectuses about the tax 
consequences to shareholders of buying, holding, exchanging, and 
selling the shares of the floating NAV fund. In addition, we expect 
that a floating NAV money market fund would update its prospectus and 
SAI disclosure regarding the purchase, redemption, and pricing of fund 
shares, to reflect any procedural changes resulting from the fund's use 
of a floating NAV.\324\ As discussed below, if we were to adopt the 
floating NAV alternative, the compliance date would be 2 years after 
the effective date of the adoption with respect to any amendments 
specifically related to the floating NAV proposal, including related 
amendments to disclosure requirements.\325\
---------------------------------------------------------------------------

    \321\ Prospectus disclosure regarding the tax consequences of 
these activities is currently required by Form N-1A. See Item 11(f) 
of Form N-1A.
    \322\ See supra section III.A.6 (discussing the tax and economic 
implications of floating NAV money market funds).
    \323\ See Item 11(f) of Form N-1A.
    \324\ We expect that a money market fund would include this 
disclosure (as appropriate) in response to, for example, Item 
11(``Shareholder Information'') and Item 23 (``Purchase, Redemption, 
and Pricing of Shares'') of Form N-1A.
    \325\ See infra section III.N.1.
---------------------------------------------------------------------------

    We request comment on the disclosure that we expect floating NAV 
money market funds would include in their prospectuses about the tax 
consequences to shareholders of buying, holding, exchanging, and 
selling the shares of the fund, as well as the effects (if any) on fund 
operations resulting from the transition to a floating NAV.
     Should Form N-1A or its instructions be amended to more 
explicitly require any of the disclosure we discuss above, or any 
additional disclosure, to be included in a fund's prospectus and/or 
SAI?
     Is there any additional information about a floating NAV 
fund's operations that shareholders should be aware of that is not 
discussed above? If so, would such additional information already be 
covered under existing Form N-1A requirements, or would we need to make 
any amendments to the form or its instructions?
c. Disclosure of Transition to Floating NAV
    A fund must update its registration statement to reflect any 
material changes by means of a post-effective amendment or a prospectus 
supplement (or ``sticker'') pursuant to rule 497 under the Securities 
Act.\326\ We would expect that, to meet this requirement, at the time 
that a stable NAV money market fund transitions to a floating NAV (or 
adopts a floating NAV in the course of a merger or other 
reorganization),\327\ it would update its registration statement to 
include relevant related disclosure, as discussed in this section of 
the Release, by means of a post-effective amendment or a prospectus 
supplement. We request comment on this requirement.
---------------------------------------------------------------------------

    \326\ See 17 CFR 230.497.
    \327\ See infra section III.N.
---------------------------------------------------------------------------

     Besides requiring a fund that transitions to a floating 
NAV to update its registration statement by filing a post-effective 
amendment or prospectus supplement, should we also require that, when a 
fund transitions to a floating NAV, it must notify shareholders 
individually about the risks and operational effects of a floating NAV 
on the fund, such as a separate mailing or email notice? Would 
shareholders be more likely to understand and appreciate these risks 
and operational effects (disclosure of which would be included in the 
fund's registration statement, as discussed above) if they were to 
receive such individual notification? If so, what information should 
this individual notification include? What would be an appropriate time 
frame for this notification? How would such notification be 
accomplished, and what costs would be incurred in providing such 
notification?
d. Request for Comment on Money Market Fund Names
    As discussed above, our floating NAV proposal would provide 
exemptions to the floating NAV requirements for government money market 
funds and retail money market funds. We request comment on whether we 
should require new terminology in money market fund names \328\ to 
reduce the risk of investor confusion that might result from permitting 
some types of funds to maintain a stable price, while requiring others 
types of funds to use a floating NAV.
---------------------------------------------------------------------------

    \328\ See rule 2a-7(b)(3) (setting forth the conditions for a 
fund to use a name that suggests that it is a money market fund or 
the equivalent, including using terms such as ``cash,'' ``liquid,'' 
``money,'' ``ready assets,'' or similar terms in a fund's name).
---------------------------------------------------------------------------

     Given that, under our floating NAV proposal, some funds' 
share prices would increase and decrease as a result of changes in the 
value of the securities in which the fund invests, should we require 
new terminology in money market fund names to reduce any risk of 
investor confusion that might result from both stable price money 
market funds and floating NAV money market funds using the same term 
``money market fund'' in their names? For example, should we require 
money market funds to use either the term ``stable money market fund'' 
or ``floating money market fund,'' as appropriate, in their names? Why 
or why not?
e. Economic Analysis
    The floating NAV proposal makes significant changes to the nature 
of money market funds as an investment vehicle. The proposed disclosure 
requirements in this section are intended to communicate to 
shareholders the nature of the risks that follow from the floating NAV 
proposal. In section III.E, we discussed how the floating NAV proposal 
might affect shareholders' use of money market funds and the resulting 
effects on the short-term financing markets. The factors and uncertain 
effects of those factors discussed in that section would influence any 
estimate of the incremental effects that the proposed disclosure 
requirements might have on either shareholders or the short-term 
financing markets. However, we believe that the proposed disclosure 
will better inform shareholders about the changes, which should result 
in shareholders making investment decisions that better match their 
investment preferences. We expect that this will have similar effects 
on efficiency, competition, and capital formation as those that are 
outlined in

[[Page 36877]]

section III.E rather than introduce new effects. We further believe 
that the effects of the proposed disclosure requirements will be small 
relative to the effects of the floating NAV proposal. The Commission 
staff cannot estimate the quantitative benefits of these proposed 
requirements at this time because of uncertainty about how increased 
transparency may affect different investors' understanding of the risks 
associated with money market funds.\329\ We request additional data 
from commenters below to enable us to effectively calculate these 
effects.
---------------------------------------------------------------------------

    \329\ Likewise, uncertainty regarding how the proposed 
disclosure may affect different investors' behavior would make it 
difficult for the SEC staff to measure the quantitative benefits of 
the proposed requirements. With respect to the proposed disclosure 
statement, there are many possible permutations on specific wording 
that would convey the specific concerns identified in this Release, 
and the breadth of these permutations makes it difficult for SEC 
staff to test how investors would respond to each wording variation.
---------------------------------------------------------------------------

    We anticipate that all money market funds would incur costs to 
update their registration statements, as well as their advertising and 
sales materials (including the fund Web site), to include the proposed 
disclosure statement, and that floating NAV funds additionally would 
incur costs to update their registration statements to incorporate tax- 
and operations-related disclosure relating to the use of a floating 
NAV. We expect these costs generally would be incurred on a one-time 
basis. Our staff estimates that the average costs for a floating NAV 
money market fund to comply with these proposed disclosure amendments 
would be approximately $1,480 and that the compliance costs for a 
government or retail money market fund would be approximately 
$592.\330\ Each money market fund in a fund group might not incur these 
costs individually.
---------------------------------------------------------------------------

    \330\ Staff estimates that these costs would be attributable to 
amending the fund's disclosure statement and updating the fund's 
advertising and sales materials. See supra note 245 (discussing the 
bases of our staff's estimates of operational and related costs). 
The costs associated with these activities are all paperwork-related 
costs and are discussed in more detail in infra section IV.A.7.
     We expect the new required disclosure would add minimal length 
to the current required prospectus disclosure, and thus would not 
increase the number of pages in, or change the printing costs of, a 
fund's prospectus. Based on conversations with fund representatives, 
the Commission understands that, in general, unless the page count 
of a prospectus is changed by at least four pages, printing costs 
would remain the same.
---------------------------------------------------------------------------

    We request comment on this economic analysis:
     Are any of the proposed disclosure requirements unduly 
burdensome, or would they impose any unnecessary costs?
     We request comment on the staff's estimates of the 
operational costs associated with the proposed disclosure requirements.
     We request comment on our analysis of potential effects of 
these proposed disclosure requirements on efficiency, competition, and 
capital formation.
9. Transition
    The PWG Report suggests that a transition to a floating NAV could 
itself result in significant redemptions.\331\ Money market fund 
investors could seek to redeem shares ahead of other investors to avoid 
realizing losses when their money market funds switch to a floating 
NAV. Investors may anticipate their funds' NAVs per share being less 
than $1.00 when the switch occurs or they may fear their funds might 
incur liquidity costs from heavy redemptions resulting from the 
behavior of other investors.
---------------------------------------------------------------------------

    \331\ PWG Report, supra note 111, at 22. Other commenters have 
voiced additional concern that redemptions as a result of the 
transition to a floating NAV could be destabilizing to the financial 
markets. See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; 
Comment Letter from American Association of State Colleges and 
Universities (Jan. 21, 2011) (available in File No. 4-619).
---------------------------------------------------------------------------

    To avoid large numbers of preemptive redemptions by shareholders 
and allow sufficient time for funds and intermediaries to cost-
effectively adapt to the new requirements, we propose to delay 
compliance with this aspect of the proposed rules for a period of 2 
years from the effective date of our proposed rulemaking. Accordingly, 
money market funds subject to our floating NAV proposal could continue 
to price their shares as they do today for up to 2 years following this 
date. On or before the compliance date, all stable value money market 
funds not exempted from the floating NAV proposal would convert to a 
floating NAV. However, we note that, under our floating NAV proposal, 
investors who prefer a stable price product also could invest in a 
government or retail money market fund. We request comment on the 
proposed transition.
    If we were to adopt the floating NAV proposal, money market funds 
and their shareholders would have 2 years to understand the 
implications of and implement our reform. We believe this would benefit 
money market funds and their shareholders by allowing money market 
funds to make this transition at the optimal time and potentially not 
at the same time as all other money market funds (which may be more 
likely to have a disruptive effect on the short-term financing markets, 
and thus not be perceived as optimal by funds). It would also provide 
time for investors such as corporate treasurers to modify their 
investment guidelines or seek changes to any statutory or regulatory 
constraints to which they are subject to permit them to invest in a 
floating NAV money market fund or other investments as appropriate.
    Giving fund shareholders ample time to dispose of their investments 
in an orderly fashion also should benefit money market funds and their 
other shareholders because it would give funds additional time to 
respond appropriately to the level and timing of redemption 
requests.\332\ We recognize, however, that shareholders might still 
preemptively redeem shares at or near the time that the money market 
fund converts from a stable value to a floating NAV if they believe 
that the market value of their shares will be less than $1.00. We 
expect, however, that money market fund sponsors would use the 
relatively long compliance period to select an appropriate conversion 
date that would minimize this risk. We therefore expect that providing 
shareholders, funds, and others a relatively long time to assess the 
effects of the regulatory change if adopted would mitigate the risk 
that the transition to a floating NAV, itself, could prompt significant 
redemptions.\333\
---------------------------------------------------------------------------

    \332\ Comment Letter of Thrivent Mutual Funds (Jan. 10, 2011) 
(available in File No. 4-619) (``Any change [to a floating NAV] 
could be implemented with sufficient advanced notice to allow 
institutional investors to modify their investment guidelines to 
permit investment in a floating NAV fund, where appropriate. A mass 
exodus assumes that investors have a clear alternative, which they 
do not, and come to the same conclusion in tandem, which is 
improbable given the lack of clear alternatives.''); Richmond Fed 
PWG Comment Letter, supra note 139 (``If informed well ahead of a 
change [to a floating NAV], investors are more likely to move 
gradually, mitigating the disruption.''). In addition, a relatively 
long compliance period would provide money market funds sufficient 
time to modify and/or establish the systems necessary to transact 
permanently at a floating NAV.
    \333\ In its proposal, FSOC suggested a transition period of 5 
years. FSOC Proposed Recommendations, supra note 114, at 31.
---------------------------------------------------------------------------

    We considered an even longer transition period, including the 5-
year period in FSOC's proposed floating NAV recommendation.\334\ FSOC's

[[Page 36878]]

proposed recommendation, however, would have required money market 
funds to re-price their shares at $100 per share, and would have 
grandfathered existing money market funds (which could continue to 
maintain a stable value) but required investments after a specified 
date to be made in floating NAV money market funds. Money market fund 
sponsors therefore would have had to take a corporate action to re-
price their shares and, if they chose to rely on the grandfathering, to 
form new floating NAV money market funds to accept new investments 
after the specified date. Money market funds and others in the 
distribution chain may be better able to implement basis point rounding 
as we propose, and therefore may not need a 5-year transition period. 
Indeed, some commenters on FSOC's proposed recommendation, which could 
require a longer transition period than our proposal, supported a 2-
year transition period.\335\
---------------------------------------------------------------------------

    \334\ See FSOC Proposed Recommendations, supra note 114, at 31 
(``To reduce potential disruptions and facilitate the transition to 
a floating NAV for investors and issuers, existing MMFs could be 
grandfathered and allowed to maintain a stable NAV for a phase-out 
period, potentially lasting five years. Instead of requiring these 
grandfathered funds to transition to a floating NAV immediately, the 
SEC would prohibit any new share purchases in the grandfathered 
stable-NAV MMFs after a predetermined date, and any new investments 
would have to be made in floating-NAV MMFs.'').
    \335\ See BlackRock FSOC Comment Letter, supra note 204 (``We 
agree that a transition period is extremely important to avoid 
market disruption. Assuming existing funds are grandfathered as CNAV 
funds and no new shares are purchased, a transition period of two 
years from the effective date of a new rule should suffice.''); HSBC 
FSOC Comment Letter, supra note 196 (``[W]e believe a 2-3 year 
transition period should be sufficient for the industry, investors 
and regulators to prepare for any required changes to products, 
systems etc.''). But see U.S. Chamber Jan. 23, 2013 FSOC Comment 
Letter, supra note 248 (suggesting a transition period of up to 5 
years could be necessary).
---------------------------------------------------------------------------

    We request comment on our proposed compliance date.
     Would our proposed transition period mitigate operational 
or significant redemption risks that could result from requiring money 
market funds to use floating NAVs?
     If not, how much time would be sufficient to allow money 
market fund shareholders that do not wish to remain in a money market 
fund with a floating NAV to identify alternatives without posing 
operational or significant redemption risk?
     Do commenters agree that a compliance period of 2 years is 
sufficient to address operational issues associated with converting 
funds to floating NAVs? Should the compliance period be shorter or 
longer? Why? Would a 5-year transition period, consistent with FSOC's 
proposed floating NAV recommendation, be more appropriate?
     Do fund sponsors anticipate converting (at an appropriate 
time) existing stable value money market funds to floating NAV funds or 
would sponsors establish new funds? If sponsors expect to establish new 
funds, are there costs other than those we describe below (related to a 
potential grandfathering provision)?
     Are there other measures we could take that would minimize 
the risks that could arise from investors seeking preemptively to 
redeem their shares in advance of a fund's adoption of a floating NAV?
     Should we provide a grandfathering provision, in addition 
to, or in lieu of, a relatively long compliance date? If we adopted a 
grandfathering provision, how long should the grandfathering period 
last? Would a grandfathering provision better achieve our objective of 
facilitating an orderly transition?

B. Standby Liquidity Fees and Gates

    As an alternative to the floating NAV proposal discussed above, we 
are proposing to continue to allow money market funds to transact at a 
stable share price under normal conditions but to (1) require money 
market funds to institute a liquidity fee in certain circumstances and 
(2) permit money market funds to impose a gate in certain 
circumstances. In particular, this fees and gates alternative proposal 
would require that if a money market fund's weekly liquid assets fell 
below 15% of its total assets (the ``liquidity threshold''), the fund 
must impose a liquidity fee of 2% on all redemptions unless the board 
of directors of the fund (including a majority of its independent 
directors) determines that imposing such a fee would not be in the best 
interest of the fund. The board may also determine that a lower fee 
would be in the best interest of the fund.\336\
---------------------------------------------------------------------------

    \336\ We would not require, but would permit, government funds 
to impose fees and gates, as discussed below. Unlike under the 
floating NAV alternative, we are not proposing to exempt retail 
funds from our fees and gates proposal. See infra section III.B.5 of 
this Release.
---------------------------------------------------------------------------

    We also are proposing that when a money market fund's weekly liquid 
assets fall below 15% of total assets, the money market fund board 
would also have the ability to impose a temporary suspension of 
redemptions (also referred to as a ``gate'') for a limited period of 
time if the board determines that doing so is in the fund's best 
interest. Such a gate could be imposed, for example, if the liquidity 
fees were not proving sufficient in slowing redemptions to a manageable 
level.
    Under this option, rule 2a-7 would continue to permit money market 
funds to use the penny rounding method of pricing so long as the funds 
complied with the conditions of the rule, but would not permit use of 
the amortized cost method of valuation. We would eliminate the use of 
the amortized cost method of valuation for money market funds under the 
fees and gates alternative for the same reasons we are proposing to do 
so under the retail and government exemptions to the floating NAV 
alternative.\337\ We do not believe that allowing continued use of 
amortized cost valuation for all securities in money market funds' 
portfolios is appropriate given that these funds will already be 
valuing their securities using market factors on a daily basis due to 
new Web site disclosure requirements and given that penny rounding 
otherwise achieves the same level of price stability.
---------------------------------------------------------------------------

    \337\ See section III.A.3 and III.A.4 of this Release.
---------------------------------------------------------------------------

    As previously discussed, the financial crisis of 2007-2008 exposed 
contagion effects from heavy redemptions in money market funds that had 
significant impacts on investors, funds, and the markets. We have 
designed the fees and gates alternative to address certain of these 
issues. Although it is impossible to know what exactly would have 
happened if money market funds had operated with fees and gates at that 
time, we expect that if money market funds were armed with such tools, 
they would have been able to better manage the heavy redemptions that 
occurred and to limit the spread of contagion, regardless of the reason 
for the redemptions.
    During the crisis, some investors redeemed at the first sign of 
market stress, and could do so without bearing any costs even if their 
actions imposed costs on the fund and the remaining shareholders. As 
discussed in greater detail below, if money market funds had imposed 
liquidity fees during the crisis, it could have resulted in those 
investors re-assessing their redemption decisions because they would 
have been required to pay for the costs of their redemptions. Based on 
the level of redemption activity that occurred during the crisis, we 
expect that many money market funds would have faced liquidity 
pressures sufficient to cross the liquidity thresholds we are proposing 
today that would trigger the use of fees and gates. If funds therefore 
had imposed fees, this might have caused some investors to choose not 
to redeem because the direct costs of the liquidity fee may have been 
more tangible than the uncertain possibility of potential future 
losses. In addition, funds that imposed fees would likely have been 
able to better manage the impact of the redemptions that investors 
submitted, and any contagion effects may have been limited, because the 
fees would have helped offset the costs of the liquidity provided to 
redeeming

[[Page 36879]]

shareholders, and any excess could have been used to repair the NAV of 
the fund, if necessary. Regardless of the incentives to redeem, a 
liquidity fee would make redeeming investors pay for the costs of 
liquidity and, even if investors redeem from a fund, gates can directly 
respond to a run by halting redemptions.
    If a fund had been able to impose a redemption gate at the time, it 
also would have been able to stop mounting redemptions and possibly 
generate additional internal liquidity in the fund while the gate was 
in place. However, fees and gates do not address all of the factors 
that may lead to heavy redemptions in money market funds.\338\ For 
example, they do not eliminate the incentive to redeem in times of 
stress to receive the $1.00 stable share price before the fund breaks 
the buck, or prevent investors from seeking to redeem to obtain higher 
quality securities, better liquidity, or increased transparency. 
Nonetheless, for the reasons discussed above, they provide tools that 
should serve to address many of the types of issues that arose during 
the crisis by allocating more explicitly the costs of liquidity and 
stopping runs.
---------------------------------------------------------------------------

    \338\ See infra nn 361 and 362 and accompanying text.
---------------------------------------------------------------------------

    As discussed in section III.C, we also request comment on whether 
we should combine this option with our floating NAV alternative. This 
reform would be intended to achieve our goals of preserving the 
benefits of stable share price money market funds for the widest range 
of investors and the availability of short-term financing for issuers, 
while enhancing investor protection and risk transparency, making funds 
more resilient to mass redemptions, and improving money market funds' 
ability to manage and mitigate potential contagion from high levels of 
redemptions, as further discussed below.
1. Analysis of Certain Effects of Liquidity Fees and Gates
    As discussed in the RSFI Study and in section II above, 
shareholders may redeem money market fund shares for several reasons 
under stressed market conditions.\339\ One of these incentives relates 
to the current rounding convention in money market fund valuation and 
pricing that can allow early redeeming shareholders to redeem for $1.00 
per share, even when the market-based NAV per share of the fund is 
lower than that price. As discussed in section III.A above, the 
floating NAV proposal is principally focused on mitigating this 
incentive by causing redeeming shareholders to receive the market value 
of redeemed shares. However, as the RSFI Study details, there are a 
variety of other factors that may motivate shareholders to redeem 
assets from money market funds in times of stress. Adverse economic 
events or financial market conditions can cause shareholders to engage 
in flights to quality, liquidity, or transparency (or combinations 
thereof).\340\ When money market funds may have to absorb, suddenly, 
high levels of redemptions that are expected to be in excess of the 
fund's internal sources of liquidity, investors may expect that fund 
managers will deplete the fund's most liquid assets first to meet 
redemptions and may have to sell securities at a loss (because of 
transitory liquidity costs) or even ``fire sale'' prices.\341\ 
Accordingly, shareholder redemptions during such periods can impose 
expected future liquidity costs on the money market fund that are not 
reflected in a $1.00 share price based on current amortized cost 
valuation.
---------------------------------------------------------------------------

    \339\ See RSFI Study, supra note 21, at 2-4.
    \340\ See id. at 7-14; Qi Chen et al., Payoff Complementarities 
and Financial Fragility: Evidence from Mutual Fund Outflows, 97 J. 
Fin. Econ. 239-262 (2010). Prime money market funds can be 
particularly susceptible to redemptions in a flight to quality, 
liquidity or transparency because they hold similar portfolios and 
thus can present a correlated risk of loss of quality or loss of 
liquidity (and particularly when the financial system is strained 
because most of their non-governmental assets are short-term debt 
obligations of large banks.) See infra section III.J. See also 
Harvard Business School FSOC Comment Letter, supra note 24; Angel 
FSOC Comment Letter, supra note 60.
    \341\ See, e.g., Comment Letter of Americans for Financial 
Reform (Feb. 20, 2012) (available in File No. FSOC-2012-0003); 
BlackRock FSOC Comment Letter, supra note 204; Philip E. Strahan & 
Basak Tanyeri, Once Burned, Twice Shy: Money Market Fund Responses 
to a Systemic Liquidity Shock, Boston College Working Paper (July 
2012) (finding that in response to the September 2008 run on money 
market funds, the funds first responded by selling their safest and 
most liquid holdings). See also Stephan Jank & Michael Wedow, Sturm 
und Drang in Money Market Funds: When Money Market Funds Cease to be 
Narrow, Deutsche Bundesbank Discussion Paper No. 20/2008 (finding 
that German money market funds enhanced their yield by investing in 
less liquid securities in the lead up to the 2007-2008 subprime 
crisis, but then experienced runs during the crisis, while more 
liquid money market funds functioned as a safe haven). We note that 
other mutual funds also may tend to deplete their most liquid assets 
first to meet redemptions, but the incentive to redeem because of 
the potential for declining fund liquidity may be stronger in money 
market funds because of their use as a cash management vehicle and 
the resulting heightened sensitivity to potential losses.
---------------------------------------------------------------------------

    Because the circumstances under which liquidity becomes expensive 
historically have been infrequent, we expect that liquidity fees only 
will be imposed when the fund's board of directors considers the fund's 
liquidity costs to be at a premium and the liquidity fee, if imposed, 
will apply only to those shareholders who redeem and cause the fund to 
incur that cost. Under normal market conditions, fund shareholders 
would continue to enjoy unfettered liquidity for money market fund 
shares.\342\ As such, liquidity fees are designed to preserve the 
current benefits of principal stability, liquidity, and a market yield 
under most market conditions, but reduce the likelihood that ``when 
markets are dislocated, costs that ought to be attributed to a 
redeeming shareholder are externalized on remaining shareholders and on 
the wider market.'' \343\
---------------------------------------------------------------------------

    \342\ See Comment Letter of J.P. Morgan Asset Management (Jan. 
14, 2013) (available in File No. FSOC-2012-0003) (``J.P. Morgan FSOC 
Comment Letter'') (``the standby character of [fees and gates] 
proposals appropriately balances the goal of allowing MMFs to 
operate normally when not under stress, yet promote stability, 
flexibility and reasonable fairness when stressed.''); Comment 
Letter of Wells Fargo Funds Management, LLC (Jan. 17, 2013) 
(available in File No. FSOC-2012-0003) (``Wells Fargo FSOC Comment 
Letter'') (stating that standby fees and gates are narrowly 
tailored, ``imposed to address [run risk] while preserving money 
market funds' key attributes'').
    \343\ HSBC Global Asset Management, Liquidity Fees; a proposal 
to reform money market funds (Nov. 3, 2011) (``HSBC 2011 Liquidity 
Fees Paper'').
---------------------------------------------------------------------------

    In addition to liquidity fees, our proposal also would allow money 
market funds to impose redemption gates after the liquidity threshold 
is reached. Our proposal on liquidity fees and gates, however, could 
affect shareholders by potentially limiting the full, unfettered 
redeemability of money market fund shares under certain conditions, a 
principle embodied in the Investment Company Act.\344\ Currently, a 
money market fund generally can suspend redemptions only \345\ after 
obtaining an exemptive order from the Commission or in accordance with 
rule 22e-3, which requires the fund's board of directors to determine 
that the fund is about to ``break the buck''

[[Page 36880]]

(specifically, that the extent of deviation between the fund's 
amortized cost price per share and its current market-based net asset 
value per share may result in material dilution or other unfair results 
to investors).\346\ Under our proposal, a money market fund board could 
decide to temporarily suspend redemptions once it had crossed the same 
thresholds that can trigger the imposition of a liquidity fee.\347\ The 
fund could use such a gate to assess the viability of the fund, to 
create a ``circuit breaker'' giving time for a market panic to subside, 
or to create ``breathing room'' to permit more fund assets to mature 
and provide internal liquidity to the fund.\348\ In the 2009 Proposing 
Release, we requested comment on whether we should include a provision 
in rule 22e-3 that would permit fund directors to temporarily suspend 
redemptions during certain exigent circumstances.\349\ Many commenters 
on our 2009 Proposing Release supported our permitting such a temporary 
suspension of redemptions.\350\
---------------------------------------------------------------------------

    \344\ Section III.B.3 infra discusses the rationale for the 
exemptions from the Investment Company Act and related rules 
proposed to permit money market funds to impose standby liquidity 
fees and gates.
    \345\ There are limited exceptions specified in section 22(e) of 
the Act in which a money market fund (and any other mutual fund) may 
suspend redemptions, such as (i) for any period (A) during which the 
New York Stock Exchange is closed other than customary week-end and 
holiday closings or (B) during which trading on the New York Stock 
Exchange is restricted, or (ii) during any period in which an 
emergency exists as a result of which (A) disposal by the fund of 
securities owned by it is not reasonably practical or (B) it is not 
reasonably practical for the fund to determine the value of its net 
assets. The Commission also has granted orders in the past allowing 
funds to suspend redemptions. See, e.g., In the Matter of The 
Reserve Fund, Investment Company Act Release No. 28386 (Sept. 22, 
2008) [73 FR 55572 (Sept. 25, 2008)] (order); Reserve Municipal 
Money-Market Trust, et al., Investment Company Act Release No. 28466 
(Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)] (order).
    \346\ Rule 22e-3(a)(1).
    \347\ See proposed (Fees & Gates) rule 2a-7(c)(2)(ii).
    \348\ See, e.g., Angel FSOC Comment Letter, supra note 60 
(``gates that limit MMMF redemptions to the natural maturity of the 
MMMF portfolios can prevent the forced selling of assets and 
transform a disorderly run into an orderly walk to quality''); ICI 
Jan. 24 FSOC Comment Letter, supra note 25 (noting that a gate 
provides time for the fund to rebuild its liquidity as portfolio 
securities mature).
    \349\ Being able to impose a temporary suspension of redemptions 
to calm instances of heightened redemptions had been recommended by 
an industry report. ICI 2009 Report, supra note 56, at 85-89 
(recommending that the Commission permit a fund's directors to 
suspend temporarily the right of redemption if the board, including 
a majority of its independent directors, determines that the fund's 
net asset value is ``materially impaired'').
    \350\ See, e.g., Comment Letter of Charles Schwab Investment 
Management, Inc. (Sept. 4, 2009) (available in File No. S7-11-09) 
(``Schwab 2009 Comment Letter''); Comment Letter of the Dreyfus 
Corporation (Sept. 8, 2009) (available in File No. S7-11-09) 
(``Dreyfus 2009 Comment Letter''); Comment Letter of Federated 
Investors, Inc. (Sept. 8, 2009) (available in File No. S7-11-09); T. 
Rowe Price 2009 Comment Letter, supra note 208. One commenter 
opposed the Commission permitting a temporary suspension of 
redemptions. See Comment Letter of Fund Democracy and the Consumer 
Federation of America (Sept. 8, 2009) (available in File No. S7-11-
09) (stating that such a ``free time-out provision would increase 
incentives to run for the exits before the fund is closed and 
virtually guarantee that, once the fund was reopened, a flood of 
redemptions will follow. The provision provides a potential escape 
valve that will reduce fund managers' incentives to protect the 
fund's NAV. The provision provides virtually no benefit to 
shareholders while serving primarily to protect fund managers' 
interests.'').
---------------------------------------------------------------------------

    We are proposing a combination of liquidity fees and gates because 
we believe that liquidity fees and gates, while both aimed at helping 
funds better and more systematically manage high levels of redemptions, 
do so in different ways and thus with somewhat different tradeoffs. 
Liquidity fees are designed to reduce shareholders' incentives to 
redeem when it is abnormally costly for the fund to provide liquidity 
by requiring redeeming shareholders to bear at least some of the 
liquidity costs of their redemption (rather than transferring those 
costs to remaining shareholders).\351\ To the extent that liquidity 
fees paid exceed such costs, they also can help increase the fund's net 
asset value for remaining shareholders which would have a restorative 
effect if the fund has suffered a loss. As one commenter has said, a 
liquidity fee can ``provide a strong disincentive for investors to make 
further redemptions by causing them to choose between paying a premium 
for current liquidity or delaying liquidity and benefitting from the 
fees paid by redeeming investors.'' \352\ This explicit pricing of 
liquidity costs in money market funds could offer significant benefits 
to such funds and the broader short-term financing market in times of 
potential stress by lessening both the frequency and effect of 
shareholder redemptions.\353\ Unlike liquidity fees, gates are designed 
to halt a run by stopping redemptions long enough to allow (1) fund 
managers time to assess the appropriate strategy to meet redemptions, 
(2) liquidity buffers to grow organically as securities mature, and (3) 
shareholders to assess the level of liquidity in the fund and for any 
shareholder panic to subside. We also note that gates are the one 
regulatory reform discussed in this Release and the FSOC Proposed 
Recommendations that definitively stops a run on a fund (by blocking 
all redemptions).
---------------------------------------------------------------------------

    \351\ See, e.g., Wells Fargo FSOC Comment Letter, supra note 342 
(stating that a standby liquidity fee would ``provide an affirmative 
reason for investors to avoid redeeming from a distressed fund'' and 
``those who choose to redeem in spite of the liquidity fee will help 
to support the fund's market-based NAV and thus reduce or eliminate 
the potential harm associated with the timing of their redemptions 
to other remaining investors'').
    \352\ See ICI Jan. 24 FSOC Comment Letter, supra note 25.
    \353\ We note that investors owning securities directly--as 
opposed to through a money market fund--naturally bear these 
liquidity costs. They bear these costs both because they bear any 
losses if they have to sell a security at a discount in times of 
stress to obtain their needed liquidity and because they directly 
bear the risk of a less liquid investment portfolio if they sell 
their most liquid holdings first to obtain needed liquidity.
---------------------------------------------------------------------------

    Fees and gates also may have different levels of effectiveness 
under different stress scenarios. For example, we expect that liquidity 
fees will be able to reduce the harm to non-redeeming shareholders and 
the broader markets when a fund faces heavy redemptions during periods 
in which its true liquidity costs are less than the fund's imposed 
liquidity fee. Redemptions during this time will increase the value of 
the fund, which, in turn, will stabilize the fund to the extent 
remaining shareholders' incentive to redeem shares is decreased. 
However, it is possible that liquidity fees might not be fully 
effective during periods of systemic crises because, for example, 
shareholders might choose to redeem from money market funds 
irrespective of the level of a fund's true liquidity costs and 
imposition of the liquidity fee.\354\ In those cases, gates could 
function as useful circuit breakers, allowing the fund time to rebuild 
its own internal liquidity and shareholders to pause to reconsider 
whether a redemption is warranted.
---------------------------------------------------------------------------

    \354\ See RSFI Study, supra note 21, at 7-14 (discussing 
different possible explanations for why shareholders may redeem from 
money market funds in times of stress).
---------------------------------------------------------------------------

    Finally, research in behavioral economics suggests that liquidity 
fees may be particularly effective in dampening a run because, when 
faced with two negative options, investors tend to prefer possible 
losses over certain losses, even when the amount of possible loss is 
significantly higher than the certain loss.\355\ Unlike gates, when a 
liquidity fee is imposed, investors would make an economic decision 
over whether to redeem. Therefore, under this behavioral economic 
theory, investors fearing that a money market fund may suffer losses 
may prefer to stay in the money market fund and avoid payment of the 
liquidity fee (despite the possibility that the fund might suffer a 
future loss) rather than redeem and lock in payment of the liquidity 
fee.
---------------------------------------------------------------------------

    \355\ See, e.g., Daniel Kahneman, Thinking, Fast and Slow 
(2011), at 278-288.
---------------------------------------------------------------------------

    We are proposing a combination of fees and gates, with a fee as the 
initial default but with an optional ability for a fund's board to 
replace the fee with a gate, or impose a gate immediately, in each case 
as the board deems best for the fund.\356\ We are proposing this 
structure as the initial default (rather than imposing a gate as the 
default) because we believe that a fee has the potential to be less 
disruptive to fund shareholders and the short-term financing markets 
because a fee allows fund shareholders to continue to transact in times 
of stress (although at a cost).\357\ At the same time, if the board

[[Page 36881]]

determines that a fee is insufficient to protect the interests of non-
redeeming shareholders, it still has the option of imposing a gate (and 
perhaps later lifting the gate, but keeping in place the fee).
---------------------------------------------------------------------------

    \356\ See proposed (Fees & Gates) rule 2a-7(c)(2).
    \357\ See, e.g., Comment Letter of UBS on the IOSCO Consultation 
Report on Money Market Fund Systemic Risk Analysis and Reform 
Options (May 25, 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf) (``UBS IOSCO Comment Letter'') (``we are 
convinced that [partial single swinging pricing] is more efficient 
than gates as prices are more efficient signals of scarcity than 
quantitative rationing''); Comment Letter of BNP Paribas on the 
IOSCO Consultation Report on Money Market Fund Systemic Risk 
Analysis and Reform Options (May 25, 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf (``BNP Paribas 
IOSCO Comment Letter'') (``It would not make sense to restrict the 
redeemer willing to pay the price of liquidity.'').
---------------------------------------------------------------------------

    Many participants in the money market fund industry have expressed 
support for imposing some form of a liquidity fee or gate on redeeming 
money market fund investors when the fund comes under stress as a way 
of reducing, in a targeted fashion, the fund's susceptibility to heavy 
redemptions.\358\ Liquidity fees and gates are known to be able to 
reduce incentives to redeem,\359\ and they have been used successfully 
in the past by certain non-money market fund cash management pools to 
stem redemptions during times of stress.\360\
---------------------------------------------------------------------------

    \358\ See, e.g., BlackRock FSOC Comment Letter, supra note 204; 
J.P. Morgan FSOC Comment Letter, supra note 342; Northern Trust FSOC 
Comment Letter, supra note 174; Comment Letter of the Securities 
Industry and Financial Markets Association (``SIFMA'') (Jan. 14, 
2013) (available in File No. FSOC-2012-0003) (``SIFMA FSOC Comment 
Letter''); Vanguard FSOC Comment Letter, supra note 172. See also 
David M. Geffen & Joseph R. Fleming, Dodd-Frank and Mutual Funds: 
Alternative Approaches to Systemic Risk, Bloomberg Law Reports (Jan. 
2011) (``The alternative suggested here is that, during a period of 
illiquidity, as declared by a money market fund's board (or, 
alternatively, the SEC or another designated federal regulator), a 
money market fund may impose a redemption fee on a large share 
redemption approximately equal to the cost imposed by the redeeming 
shareholder and other redeeming shareholders on the money market 
fund's remaining shareholders. . . . The redemption fee causes the 
large redeeming shareholder to internalize the cost of the negative 
externality that the redemption otherwise would impose on non-
redeeming shareholders.''). But see, e.g., Comment Letter of the 
U.S. Chamber of Commerce on the IOSCO Consultation Report on Money 
Market Fund Systemic Risk Analysis and Reform Options (May 24, 
2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf (``Imposing a liquidity fee is akin to implementing a 
variable NAV, and as such, would preclude a number of companies from 
investing in money market mutual funds. Although the liquidity fee 
may not be imposed until the fund's portfolio falls below a 
specified threshold or when there is a high volume of redemptions, 
corporate treasurers have an obligation to ensure that ``a dollar in 
will be a dollar out'' and therefore, will not risk investing cash 
in an investment product that may not return 100 cents on the 
dollar.''); Comment Letter of Federated Investors, Inc. on the IOSCO 
Consultation Report on Money Market Fund Systemic Risk Analysis and 
Reform Options (May 25, 2012) available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf (``Federated IOSCO Comment 
Letter'') (``Federated believes that liquidity fees . . . are simply 
a different way to break the dollar . . . and would generate large 
preemptive redemptions from MMFs'').
    \359\ Cf. G.W. Schwert & P.J. Seguin, Securities Transaction 
Taxes: An Overview of Costs, Benefits and Unresolved Questions, 49 
Financial Analysts Journal 27 (1993); K.A. Froot & J. Campbell, 
International Experiences with Securities Transaction Taxes, in The 
Internationalization of Equity Markets (J. Frankel, ed., 1994), at 
277-308.
    \360\ A Florida local government investment pool experienced a 
run in 2007 due to its holdings in SIV securities. The fund 
suspended redemptions and ultimately reopened but after the fund 
(and each shareholder's interest) had been split into two separate 
funds: One holding the more illiquid securities previously held by 
the pool (called ``Fund B'') and one holding the remaining 
securities of the fund. Fund B reopened with a 2% redemption fee and 
did not generate a run upon its reopening. See David Evans and 
Darrell Preston, Florida Investment Chief Quits; Fund Rescue 
Approved, Bloomberg (Dec. 4, 2007); Helen Huntley, State Wants Fund 
Audit, Tampa Bay Times (Dec. 11, 2007). Some European enhanced cash 
funds also successfully used fees or gates during the financial 
crisis to stem redemptions. See Elias Bengtsson, Shadow Banking and 
Financial Stability: European Money Market Funds in the Global 
Financial Crisis (2011) (``Bengtsson''), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1772746&download=yes; 
Julie Ansidei, et al., Money Market Funds in Europe and Financial 
Stability, European Systemic Risk Board Occasional Paper No. 1, at 
36 (June 2012), available at http://www.esrb.europa.eu/pub/pdf/occasional/20120622_occasional_paper.pdf.
---------------------------------------------------------------------------

    We recognize that the prospect of a fund imposing a liquidity fee 
or gate could raise a concern that shareholders will engage in 
preemptive redemptions if they fear the imminent imposition of fees or 
gates (either because of the fund's situation or because such 
redemption restrictions have been triggered in other money market 
funds).\361\ We expect the opportunity for preemptive redemptions will 
decrease as a result of the amount of discretion fund boards would have 
in imposing liquidity fees and gates, because shareholders would not be 
able to accurately predict when, and under what circumstances, fees and 
gates may be imposed.\362\ Shareholders also might rationally choose to 
follow other shareholders' redemptions even when those other 
shareholders' decisions are not necessarily based on superior private 
information.\363\ General stress in the short-term markets or fears of 
stress at a particular fund could trigger redemptions as shareholders 
try to avoid the fee.
---------------------------------------------------------------------------

    \361\ See, e.g., FSOC Proposed Recommendations, supra note 114, 
at 62-63; Harvard Business School FSOC Comment Letter, supra note 24 
(``news that one MMF has initiated redemption restrictions could set 
off a system-wide run by panic-stricken investors who are anxious to 
redeem their shares before other funds also initiate 
restrictions''); Comment Letter of The Systemic Risk Council (Jan. 
18, 2013) (available in File No. FSOC 2012-0003) (``Systemic Risk 
Council FSOC Comment Letter'') (stating that temporary gates or fees 
that come down in a crisis do not address the structural problem of 
the $1.00 NAV and would move up a run on money market funds). 
Empirical evidence in the equity and futures markets demonstrates 
that investors may trade in advance of circuit breakers being 
triggered so as to not be left in temporarily illiquid positions. 
Investors have been found to trade ahead of predictable market 
closings and price limit hits. Empirical studies document trading 
pressure before trading halts. See Y. Amihud & H. Mendelson, Trading 
Mechanisms and Stock Returns: An Empirical Investigation, 42 J. Fin. 
533-553 (1987); Y. Amihud & H. Mendelson, Volatility, Efficiency and 
Trading: Evidence from the Japanese Stock Market, 46 J. Fin. 1765-
1789 (1991); H.R. Stoll & R. E. Whaley, Stock Market Structure and 
Volatility, 3 Review of Financial Studies 37-71 (1990); M.S. Gerety 
& J.H. Mulherin, Trading Halts and Market Activity: An Analysis of 
Volume at the Open and the Close, 47 J. Fin. 1765-1784 (1992). 
Empirical studies show trading volume accelerates before a price 
limit hits. See Y. Du, et al., An Analysis of the Magnet Effect 
under Price Limits, 9 International Review of Fin. 83-110 (2009); 
G.J. Kuserk & P.R. Locke, Market Making With Price Limits, 16 J. 
Futures Markets 677-696 (1996). An experimental study finds that 
mandated market closures accelerate trading activity when an 
interruption is imminent. See L.F. Ackert, et al., An Experimental 
Study of Circuit Breakers: The Effects of Mandated Market Closures 
and Temporary Halts on Market Behavior, 4 J. Financial Markets 185-
208 (2001). Empirical studies report trading volume increases 
following trading halts and price limit hits. See, e.g., S.A. Corwin 
& M.L. Lipson, Order Flow and Liquidity around NYSE Trading Halts, 
55 J. Fin. 1771-1801 (2000); W.G. Christie, et al., Nasdaq Trading 
Halts: The Impact of Market Mechanisms on Prices, Trading Activity, 
and Execution Costs, 57 J. Fin. 1443-1478 (2002); and C.M.C. Lee, et 
al., Volume, Volatility, and New York Stock Exchange Trading Halts, 
49 J. Fin. 183-213 (1994). See also K.A. Kim & S.G. Rhee, Price 
Limit Performance: Evidence from the Tokyo Stock Exchange, 52 J. 
Fin. 885-901 (1997).
    \362\ See A. Subrahmanyam, On Rules Versus Discretion in 
Procedures to Halt Trade, 47 J. Economics and Business 1-16 (1995); 
A. Subrahmanyam, The Ex-Ante Effects of Trade Halting Rules on 
Informed Trading Strategies and Market Liquidity, 6 Rev. Financial 
Economics 1-14 (1997).
    \363\ Theoretical models show investors may rationally follow 
others' actions, even though these other investors' decisions are 
not necessarily based on superior private information. See S. 
Bikhchandani, et al., A Theory of Fads, Fashion, Custom, and 
Cultural Change as Informational Cascades, 100 J. Pol. Econ. 992-
1026 (1992); I. Welch, Sequential Sales, Learning, and Cascades, 47 
J. Fin. 695-732 (1992). Experimental data demonstrates investors may 
overreact to uninformative trades. See C. Camerer & K. Weigelt, 
Information Mirages in Experimental Asset Markets, 64 J. Bus. 463-
493 (1991). Price limits, which are loosely akin to trading 
suspensions, may help to protect markets from destabilizing trades. 
See F. Westerhoff, Speculative markets and the effectiveness of 
price limits, 28 J. Econ. Dynamics and Control 493-508 (2003).
---------------------------------------------------------------------------

    While we acknowledge that liquidity fees may not always preclude 
redemptions, fees are designed so that as redemptions begin to 
increase, if liquidity costs exceed the prescribed threshold for 
imposing a fee and the fund imposes a fee, the run will be halted. The 
fees, once imposed, should both curtail the level of redemptions, and 
fees paid by those that do redeem should, at least partially, cover 
liquidity costs incurred by funds and may even potentially repair the 
NAV of any funds that have suffered losses. One

[[Page 36882]]

circumstance under which liquidity fees would not self-correct is if 
the amount of the fee is less than or exactly equal to the fund's 
realized liquidity costs. Gates would not be self-correcting in the 
event of realized portfolio losses, but they can help the fund preserve 
assets and generate more internal liquidity as assets mature. Some 
commenters have considered whether liquidity fees and gates might 
precipitate a run. For example, some commenters have expressed their 
view that a liquidity fee or gate would not accelerate a run, stating 
that such redemptions would likely trigger the fee or gate and that, 
once triggered, the fee or gate would then lessen or halt 
redemptions.\364\ Even if investors have an incentive to redeem, their 
redemptions eventually will cause a fee or gate to come down and halt 
the run.
---------------------------------------------------------------------------

    \364\ See, e.g., HSBC EC Letter, supra note 156 (``Some 
commentators have objected that a trigger-based liquidity fee would 
cause investors to seek to redeem prior to the imposition of the 
fee. We disagree with this argument, which misunderstands the cause 
of investor redemptions. . . . A liquidity fee would be imposed as a 
consequence of investors' loss of confidence/flight to quality. It 
could not, therefore, be the cause of investors' loss of confidence/
flight to quality.'') (emphasis in original); J.P. Morgan FSOC 
Comment Letter, supra note 342 (standby liquidity fees ``do not 
prevent an initial run, but they do provide a useful tool to slow a 
run after one has begun''); SIFMA FSOC Comment Letter, supra note 
358 (``the operation of the proposed gate and liquidity fee 
themselves will stem any exodus and damper its effect''); Wells 
Fargo FSOC Comment Letter, supra note 342 (``To the extent that 
investor redemptions made for the purpose of avoiding a liquidity 
fee have the effect of accelerating a run . . . the redemption gate 
and liquidity fee apply an equally strong countermeasure. First, the 
redemption gate would halt the run, and second, the ensuing 
imposition of liquidity fees would either cause further redemption 
activity to cease or monetize further redemptions into transactions 
that are accretive, rather than dilutive, to a fund's market-to-
market NAV. The redemption gate and liquidity fee operate to 
effectively reverse and repair any accelerated redemption activity 
the existence of the liquidity fee might otherwise induce. 
Redemption gates and liquidity fee mechanisms applying to all other 
money market funds would also mitigate any contagion risk.'').
---------------------------------------------------------------------------

    Under this proposal, money market funds would have the benefit of 
being able to use the penny rounding method of pricing for their 
portfolios. As discussed further below in section III.F.4 and III.F.5, 
they would also have to provide much fuller transparency of the market-
based NAV per share of the funds and the marked-based value of the 
funds' portfolio securities. This increased transparency is designed to 
allow better shareholder understanding of deviations between the fund's 
value using market-based factors and its stable price. It also is aimed 
at helping investors better understand any risk involved in money 
market fund investments as a result of rule 2a-7's rounding convention. 
However, retaining these valuation and pricing methods for money market 
funds does not eliminate the ability of investors to redeem ahead of 
other investors from a money market fund that is about to ``break the 
buck'' and consequently may permit those early redeemers to receive 
$1.00 per share instead of its market value as discussed in section 
III.A above. Nevertheless, in times of fund or market stress the fund 
is likely to impose either liquidity fees or gates, which will limit 
the ability of redeeming shareholders to receive more than their pro-
rata share of the market-based value of the fund's assets.
    Requiring that boards impose liquidity fees absent a finding that 
the fee is not in the best interest of the fund, and permitting them to 
impose gates once the fund has crossed certain thresholds could offer 
advantages to the fund in addition to better and more systematically 
managing liquidity and redemption activity. They could provide fund 
managers with a powerful incentive to carefully monitor shareholder 
concentration and shareholder flow to lessen the chance that the fund 
would have to impose liquidity fees or gates in times of market stress 
(because larger redemptions are more likely to cause the fund to breach 
the threshold). Such a requirement also could encourage portfolio 
managers to increase the level of daily and weekly liquid assets in the 
fund, as that would tend to lessen the likelihood of a liquidity fee or 
gate being imposed.\365\ Further, because our proposal provides the 
board discretion not to impose the liquidity fee (or to impose a lower 
liquidity fee) and gives boards the option to impose gates, the boards 
of directors can impose fees or gates when the board determines that it 
is in the best interest of the fund to do so.
---------------------------------------------------------------------------

    \365\ See, e.g., Vanguard FSOC Comment Letter, supra note 172 (a 
standby liquidity fee along with daily disclosure of the fund's 
liquidity levels ``will serve as an effective tool to force 
investment advisors, particularly those managing funds with highly 
concentrated shareholder bases, to manage their funds with adequate 
liquidity to prevent the [standby liquidity fee] from ever being 
triggered'').
---------------------------------------------------------------------------

    The prospect of facing fees and gates when a fund is under stress 
serves to make the risk of investing in a money market fund more 
transparent and to better inform and sensitize investors to the 
inherent risks of investing in money market funds. Fees and gates also 
could encourage shareholders to monitor and exert market discipline 
over the fund to reduce the likelihood that either the imposition of 
fees or gates will become necessary in that fund.\366\ An additional 
benefit to the board's determination of liquidity fees and gates is 
that they create an incentive for money market fund managers to better 
and more systemically manage redemptions in all market conditions.\367\
---------------------------------------------------------------------------

    \366\ See, e.g., Vanguard FSOC Comment Letter, supra note 172 (a 
standby liquidity fee ``will encourage advisors and investors to 
self-police to avoid triggering the fee'').
    \367\ See, e.g., HSBC 2011 Liquidity Fees Letter, supra note 343 
(a liquidity fee ``will result in more effective pricing of risk (in 
this case, liquidity risk) . . . [and] act as a market-based 
mechanism for improving the robustness and fairness'' of money 
market funds); BlackRock FSOC Comment Letter, supra note 204 (``A 
fund manager will focus on managing both assets and liabilities to 
avoid triggering a gate. On the liability side, a fund manager will 
be incented to know the underlying clients and model their behavior 
to anticipate cash flow needs under various scenarios. In the event 
a fund manager sees increased redemption behavior or sees reduced 
liquidity in the markets, the fund manager will be incented to 
address potential problems as early as possible.'')
---------------------------------------------------------------------------

    Our proposal on liquidity fees and gates, however, could affect 
shareholders by potentially limiting the full, unfettered redeemability 
of money market fund shares under certain conditions, a principle 
embodied in the Investment Company Act.\368\ Thus, this alternative, if 
adopted, could result in some shareholders redeeming their money market 
fund shares and moving their assets to alternative products (or 
government money market funds) out of concern that the potential 
imposition of a liquidity fee or gate could make investment in a money 
market fund less attractive due to less certain liquidity.\369\ We also 
recognize that the imposition of a gate may affect the efficiency of 
money market fund shareholders' investment allocations and have 
corresponding impacts on capital formation if the redemption

[[Page 36883]]

restriction prevents shareholders from moving cash invested in money 
market funds to other investment alternatives that might be preferable 
at the time.
---------------------------------------------------------------------------

    \368\ Section III.B.3 infra discusses the rationale for the 
exemptions from the Investment Company Act and related rules 
proposed to permit money market funds to impose standby liquidity 
fees and gates.
    \369\ See infra section III.E for a discussion of the potential 
effects on money market fund investments and capital formation as a 
result of this alternative, if adopted. See also Comment Letter of 
Fidelity (Feb. 3, 2012) (available in File No. 4-619) (finding in a 
survey of their retail money market fund customers that 43% would 
stop using a money market fund with a 1% non-refundable redemption 
fee charged if the fund's NAV per share fell below $0.9975 and 27% 
would decrease their use of such a fund); Federated IOSCO Comment 
Letter, supra note 358 (stating that they anticipate ``that many 
investors will choose not to invest in MMFs that are subject to 
liquidity fees, and will redeem existing investments in MMFs that 
impose a liquidity fee'' but noting that ``[s]hareholder attitudes 
to redemption fees on MMFs are untested''). But see HSBC EC Letter, 
supra note 156 (``A liquidity fee [triggered by a fall in the fund's 
market-based NAV] should also be acceptable to investors, because it 
can be rationalized in terms of investor protection. (When we've 
presented the case for a liquidity fee in these terms to our 
investors, they have generally been receptive.)'').
---------------------------------------------------------------------------

    We request comment on our discussion of the economic basis and 
tradeoffs for this alternative.
     Would our proposal on liquidity fees and gates achieve our 
goals of preserving the benefits of stable share price money market 
funds for the widest range of investors and the availability of short-
term financing for issuers while enhancing investor protection and risk 
transparency, making funds more resilient to mass redemptions and 
improving money market funds' ability to manage and mitigate potential 
contagion from high levels of redemptions? Are there other benefits 
that we have not identified and discussed?
     Would a liquidity fee provide many of the same potential 
benefits as the proposed floating NAV? If not, what are the differences 
in potential benefits? Would it result in a more effective pricing of 
liquidity risk into the funds' share prices and a fairer allocation of 
that cost among shareholders? Would a liquidity fee that potentially 
restores the fund's shadow price reduce some remaining shareholders 
incentive to redeem?
     Would the prospect of a fee or gate encourage investors to 
limit their concentration in a particular fund? Would an appropriately 
structured threshold for liquidity fees and gates provide an incentive 
for fund managers to monitor shareholder concentration and flows as 
well as portfolio composition to minimize the possibility of a fund 
applying a fee or gate? Would it encourage better board monitoring of 
the fund? Would it encourage shareholders to monitor and exert 
appropriate discipline over the fund? Would shareholders underestimate 
whether a fee or gate would ever be imposed by the board? How would the 
prospect of a fee or gate affect shareholder behavior?
     How will the liquidity fees or gates affect the fund's 
portfolio choices? Will it affect the way funds manage their weekly 
liquid assets?
     Funds currently have the ability to delay the payment of 
redemption proceeds for up to seven days.\370\ Are there considerations 
that make funds hesitant to impose this delay that would also make 
funds hesitant to impose fees or gates? What are those factors?
---------------------------------------------------------------------------

    \370\ See section 22(e) of the Investment Company Act.
---------------------------------------------------------------------------

     Would the expected imposition of a liquidity fee or gate 
increase redemption activity as the fund's liquidity levels near the 
threshold? Would the prospect of a liquidity fee or gate create an 
incentive to redeem during times of potential stress by shareholders 
fearing that such a fee or gate might be imposed, thus inciting a run? 
If so, do commenters agree that in such a case the redemptions would 
trigger a fee or gate and slow or halt redemptions? If not, are there 
ways in which we could modify our proposed threshold for liquidity fees 
and gates such that a run could not arise without triggering fees or 
gates? What information would be needed for investors to reliably 
predict that a fund is on the verge of imposing fees or gates? Would 
the necessary information be readily available under our proposal?
     Are some types of shareholders more likely than other 
types of shareholders to attempt to redeem in anticipation of the 
imposition of the fee or gate? Are there ways that we could reduce the 
risk of pre-emptive redemptions? Would imposition of a fee or gate as a 
practical matter lead to liquidation of that fund? If so, should this 
be a concern?
     Is penny rounding sufficient to allow government money 
market funds to maintain a stable price? Should we also permit these 
funds to use amortized cost valuation? If so, why?
     Should we prohibit advisers to money market funds from 
charging management fees while the fund is gated? How might this affect 
advisers' incentives to make recommendations to the board when it is 
considering whether to not impose a liquidity fee or gate?
    We note that we are not proposing to repeal or otherwise modify 
rule 17a-9 (permitting sponsors to support money market funds through 
portfolio purchases in some circumstances) under this proposal. 
Therefore, money market fund sponsors would be able to continue to 
support the money market funds they manage by purchasing securities 
from money market fund portfolios at their amortized cost value (or 
market price, if greater). Instead, we are requiring greater and more 
timely disclosure of any sponsor support of a money market fund, as 
further described in section III.F.1 below. We note that some sponsors 
could use such support to prevent a money market fund from breaching a 
threshold that would otherwise require the board to consider imposition 
of a liquidity fee. Such support could benefit fund shareholders by 
preventing them from incurring the costs or loss of liquidity that a 
liquidity fee or gate may entail. However, because such support would 
be discretionary, its possibility may create uncertainty about whether 
fund investors will have to bear the costs and burdens of a liquidity 
fee or gate in times of stress, which could lead to unpredictable 
shareholder behavior and inefficient shareholder allocation of 
investments if their expectations of risk turn out to be misplaced. Our 
continuing to permit sponsor support of money market funds, albeit with 
greater transparency,\371\ also could favor money market fund groups 
with a well-capitalized sponsor that is better able to provide 
discretionary support to its affiliated money market funds and thus 
avoid the imposition of fees or gates. Nonetheless, even the 
expectation of possible discretionary sponsor support may tend to slow 
redemptions. We request comment on the retention of rule 17a-9 under 
this proposal.
---------------------------------------------------------------------------

    \371\ See infra section III.F.
---------------------------------------------------------------------------

     Should we continue to allow this type of sponsor support 
of money market funds, given the enhanced transparency requirements? 
Would allowing sponsor support prevent or limit this proposal from 
achieving the goal of enhancing investor protection and improving money 
market funds' ability to manage high levels of redemptions? If so, how? 
Should we instead prohibit sponsor support under this option? If so, 
why? If we prohibited sponsor support, how would this advance investor 
protection if such support would protect the value or liquidity of the 
fund? Should we modify rule 17a-9 to limit or condition sponsor 
support?
     Would sponsors provide support to prevent a money market 
fund from breaching a liquidity threshold? Would sponsors be more 
willing and able to provide support to stabilize the fund under the 
liquidity fees and gates proposal than they were to support money 
market funds before the 2007-2008 financial crisis? Why or why not?
    As discussed further below, we also are proposing to require that 
money market funds disclose their market-based NAVs and levels of daily 
and weekly liquid assets on a daily basis on the funds' Web sites.\372\
---------------------------------------------------------------------------

    \372\ See infra section III.F.
---------------------------------------------------------------------------

2. Terms of the Liquidity Fees and Gates
    We are proposing that if a money market fund's weekly liquid assets 
fall or remain below 15% of its total assets at the end of any business 
day, the next business day it must impose a 2% liquidity fee on each 
shareholder's redemptions, unless the fund's board of directors 
(including a majority of its independent directors) determines that

[[Page 36884]]

such a fee would not be in the best interest of the fund or determines 
that a lower fee would be in the best interest of the fund.\373\ Any 
fee imposed would be lifted automatically once the money market fund's 
level of weekly liquid assets had risen to or above 30%, and it could 
be lifted at any time by the board of directors (including a majority 
of its independent directors) if the board determines to impose a 
different fee or if it determines that imposing the fee is no longer in 
the best interest of the fund.\374\
---------------------------------------------------------------------------

    \373\ Proposed (Fees & Gates) rule 2a-7(c)(2)(i). A ``business 
day,'' defined in rule 2a-7 as ``any day, other than Saturday, 
Sunday, or any customary business holiday,'' would end after 11:59 
p.m. on that day. See rule 2a-7(a)(4). If the shareholder of record 
making the redemption was a direct shareholder (and not a financial 
intermediary), we would expect the fee to apply to that 
shareholder's net redemptions for the day. In order to provide the 
money market fund flexibility, if a liquidity fee were in place for 
more than one business day, the fund's board could vary the level of 
the liquidity fee (subject to the 2% limit) if the board determined 
that a different fee level was in the best interest of the fund. 
Proposed (Fees & Gates) rule 2a-7(c)(2)(i)(A). The new fee level 
would take effect the next business day following the board's 
determination. Id.
    \374\ Proposed (Fees & Gates) rule 2a-7(c)(2)(i)(B).
---------------------------------------------------------------------------

    In addition, once the fund had crossed below the 15% threshold, the 
fund's board of directors (including a majority of its independent 
directors) would be able to temporarily suspend redemptions and gate 
the fund if the board determines that doing so is in the best interest 
of the fund.\375\ Any gate imposed also would be automatically lifted 
once the fund's weekly liquid assets had risen back to or above 30% of 
its total assets (although the board of directors (including a majority 
of its independent directors) could lift the gate earlier.\376\ Any 
money market fund that imposes a gate would need to lift that gate 
within 30 days and a money market fund could not impose a gate for more 
than 30 days in any 90-day period.\377\ Under this proposal, we also 
would amend rule 22e-3 to permit the suspension of redemptions and 
liquidation of a money market fund if the fund's level of weekly liquid 
assets falls below 15% of its total assets.\378\
---------------------------------------------------------------------------

    \375\ The fund must reject any redemption requests it receives 
while the fund is gated. See proposed (Fees & Gates) rule 2a-
7(c)(2)(ii).
    \376\ Proposed (Fees & Gates) rule 2a-7(c)(2)(ii).
    \377\ Proposed (Fees & Gates) rule 2a-7(c)(2)(ii). We also note 
that an adviser to a money market fund could seek an exemptive order 
from the Commission to allow for continued gating beyond 30 days if 
such gating would be necessary or appropriate 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.
    \378\ See proposed (Fees & Gates) rule 22e-3.
---------------------------------------------------------------------------

a. Discretionary Versus Mandatory Liquidity Fees and Gates
    We are proposing a default liquidity fee that the money market 
fund's board of directors can modify or remove if it is in the best 
interest of the fund, because this structure offers the possibility of 
achieving many of the benefits of both fully discretionary and 
automatic (regulatory mandated) redemption restriction triggers. A 
purely discretionary trigger allows a fund board the flexibility to 
determine when a restriction is necessary, and thus allows tailoring of 
the triggering of the fee to the market conditions at the time, and the 
specific circumstances of the fund. However, a purely discretionary 
trigger creates the risk that a fund board may be reluctant to impose 
restrictions, even when they would benefit the fund and the short-term 
financing markets. They may not impose such restrictions out of fear 
that doing so signals trouble for the individual fund or fund complex 
(and thus may incur significant business and reputational effects) or 
could incite redemptions in other money market funds in anticipation 
that fees may be imposed in those funds as well. Fully discretionary 
triggers also provide shareholders with little advance knowledge of 
when such a restriction might be triggered and fund boards could end up 
applying them in a very disparate manner. Fully discretionary triggers 
also may present operational difficulties for fund managers who 
suddenly may need to implement a liquidity fee and may not have systems 
in place that can rapidly institute a fee whose trigger and size was 
previously unknown.
    Automatic triggers set by the Commission may mitigate these 
potential concerns, but they create a risk of imposing costs on 
shareholders when funds are not truly distressed or when liquidity is 
not abnormally costly. Establishing thresholds that result in the 
imposition of a fee, unless the board makes a finding that such a fee 
is not in the best interest of the fund, balances these tradeoffs by 
providing some transparency to shareholders on potential fee or gate 
triggers and giving some guidance to boards on when a fee or gate might 
be appropriate. At the same time, it also allows boards to avoid 
imposing a fee or gate when it would be inappropriate in light of the 
circumstances of the fund and the conditions in the market.
    Our proposed rule essentially creates a default liquidity fee of a 
pre-determined size, imposed when the fund's weekly liquid assets have 
dropped below a certain threshold. However, it provides the fund's 
board flexibility to alter the default option--for example, by imposing 
a gate instead of a fee or by imposing a fee at a different threshold 
or imposing a lower percentage fee--as long as it determines that doing 
so is in the best interest of the fund.
    We request comment on our proposed default structure for the 
liquidity fees and gates.
     Should the imposition of a liquidity fee or gate be fully 
discretionary or should it have a completely automatic trigger? Why?
     Would a money market fund's board of directors impose a 
fully discretionary fee or gate during times of stress on the money 
market fund despite its possible unpopularity with investors and 
potential competitive disadvantage for the fund or fund group if other 
funds are not imposing a liquidity fee or gate? On the other hand, 
would a fund's board of directors be able to best determine when a fee 
or gate should be imposed rather than an automatic trigger?
     What operational complexities would be involved in a fully 
discretionary liquidity fee? Would fund complexes and their 
intermediaries be able to program systems in advance to accommodate the 
immediate imposition of a liquidity fee whose trigger and size were 
unknown in advance?
b. Threshold for Liquidity Fees and Gates
    We are proposing that a liquidity fee automatically be imposed on 
money market fund redemptions if the fund's weekly liquid assets fall 
below 15% of its total assets, unless the fund's board of directors 
(including a majority of its independent directors) determines that a 
fee would not be in the best interest of the fund.\379\ We also are 
proposing that, once the fund has crossed below this threshold, the 
money market fund board also would have the ability to impose a 
temporary gate for a limited period of time provided that the board of 
directors (including a majority of its independent directors) 
determines that imposing a gate is in the fund's best interest.\380\ 
Any fee or gate imposed would be automatically lifted when the fund's 
weekly liquid assets had risen back to or above 30% of its total assets 
(although the board of directors (including a majority of its 
independent directors) could lift the fee or gate earlier if the board 
determined it was in the best interest of the fund.\381\
---------------------------------------------------------------------------

    \379\ See proposed (Fees & Gates) rule 2a-7(c)(2)(i).
    \380\ See proposed (Fees & Gates) rule 2a-7(c)(2)(ii).
    \381\ Proposed (Fees & Gates) rule 2a-7(c)(2).

---------------------------------------------------------------------------

[[Page 36885]]

    Our proposed 15% weekly liquid asset threshold is a default for 
money market funds imposing liquidity fees that requires the board to 
consider taking action. Fund boards of directors have the flexibility 
to impose a liquidity fee or gate if weekly liquid assets fall below 
this threshold (or they may determine not to impose a liquidity fee or 
gate at all), and can continue to reconsider their decision in light of 
new events as long as the fund is below this liquidity threshold.\382\ 
Several industry commenters have recommended basing imposition of a 
liquidity fee on the money market fund's level of weekly liquid assets, 
with their proposed thresholds ranging from 7.5% to 15% of weekly 
liquid assets.\383\ As shown in the chart below, our staff's analysis 
of Form N-MFP data shows that, between March 2011 and October 2012, 
there were two months in which funds reported weekly liquid assets 
below 15% (one fund in May 2011, and four funds in June 2011) and there 
were two months in which funds reported weekly liquid assets of at 
least 15% but below 20% (one fund in March 2011, and one fund in 
February 2012).
---------------------------------------------------------------------------

    \382\ See infra text preceding n.385.
    \383\ See, e.g., BlackRock FSOC Comment Letter, supra note 204 
(recommending an automatic trigger of 15% weekly liquid assets); ICI 
Jan. 24 FSOC Comment Letter, supra note 25 (recommending an 
automatic trigger of between 7.5% and 15% weekly liquid assets); 
Vanguard FSOC Comment Letter, supra note 172 (recommending an 
automatic trigger of 15% weekly liquid assets).
---------------------------------------------------------------------------

    Fees and gates are a tool to mitigate problems in funds, so we 
selected a threshold that would indicate distress in a fund, but also 
one that few funds would cross in the ordinary course of business, 
allowing funds and their boards to avoid the costs of frequent 
unnecessary consideration of fees and gates. The analysis below shows 
that if the triggering threshold was between 25-30% weekly liquid 
assets, funds would have crossed this threshold every month except one 
during the period, and if it was set at between 20-25% weekly liquid 
assets, some funds would have crossed it nearly every other month. 
However, the analysis shows that funds rarely cross the threshold of 
between 15-20% weekly liquid assets during normal operations, and that 
during the time period analyzed, there were only 2 months that had any 
funds below the 15% weekly liquid assets threshold.

                            Distribution of Weekly Liquid Assets in Prime Money Market Funds, March 2011--October 2012 \384\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  Date                      [0.00-0.05]     [0.05-0.10]     [0.10-0.15]     [0.15-0.20]     [0.20-0.25]     [0.25-0.30]        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mar-11..................................  ..............  ..............  ..............               1               1              11             259
Apr-11..................................  ..............  ..............  ..............  ..............  ..............               3             261
May-11..................................  ..............               1  ..............  ..............               2               9             260
Jun-11..................................  ..............  ..............               4  ..............               2              25             257
Jul-11..................................  ..............  ..............  ..............  ..............  ..............               3             257
Aug-11..................................  ..............  ..............  ..............  ..............               3              10             256
Sep-11..................................  ..............  ..............  ..............  ..............  ..............               5             256
Oct-11..................................  ..............  ..............  ..............  ..............               1               6             258
Nov-11..................................  ..............  ..............  ..............  ..............  ..............               4             257
Dec-11..................................  ..............  ..............  ..............  ..............  ..............               7             256
Jan-12..................................  ..............  ..............  ..............  ..............  ..............               3             256
Feb-12..................................  ..............  ..............  ..............               1  ..............               2             255
Mar-12..................................  ..............  ..............  ..............  ..............  ..............               5             251
Apr-12..................................  ..............  ..............  ..............  ..............  ..............  ..............             248
May-12..................................  ..............  ..............  ..............  ..............  ..............               7             247
Jun-12..................................  ..............  ..............  ..............  ..............               1               4             245
Jul-12..................................  ..............  ..............  ..............  ..............               1               3             245
Aug-12..................................  ..............  ..............  ..............  ..............  ..............               4             244
Sep-12..................................  ..............  ..............  ..............  ..............               1               6             241
Oct-12..................................  ..............  ..............  ..............  ..............  ..............               2             241
--------------------------------------------------------------------------------------------------------------------------------------------------------


---------------------------------------------------------------------------

    \384\ For purposes of our analysis, the monthly distribution of 
prime money market funds with weekly liquid assets above 30% is not 
shown.
---------------------------------------------------------------------------

    Because the data on liquidity is reported at the end of the month, 
it could be the case that more than four money market funds' level of 
weekly liquid assets fell below 15% on other days of the month during 
our period of study. However, this number may overestimate the 
percentage of funds that are expected to impose a fee or gate because 
we expect that funds would increase their risk management around their 
level of weekly liquid assets in response to the fees and gates 
requirement to avoid breaching the liquidity threshold. Using this 
information to inform our choice of the appropriate level for a weekly 
liquid asset threshold, we are proposing a 15% weekly liquid assets 
threshold to balance the desire to have such consideration triggered 
while the fund still had liquidity reserves to meet redemptions but 
also not set the trigger at a level that frequently would be tripped by 
normal fluctuations in liquidity levels that typically would not 
indicate a fund under stress.
    We are proposing to require that any fee or gate be lifted 
automatically once the fund's weekly liquid assets have risen back 
above 30% of the fund's assets--the minimum currently mandated under 
rule 2a-7--and thus a fee or gate would appear to be no longer 
justified. We considered whether a fee or gate should be lifted 
automatically before the fund's weekly liquid assets were completely 
restored to their required minimum--for example, once they had risen to 
25%. However, we preliminarily believe that automatically removing such 
a restriction before the fund's level of weekly liquid assets was fully 
replenished may result in a fund being unable to maintain a liquidity 
fee or gate to protect the fund even when the fund is still under 
stress and before stressed market conditions have fully subsided. We 
note that a fund's board can always determine to lift a fee or gate 
before the fund's level of weekly liquid assets is restored to 30% of 
its assets.
    There are a number of factors that a fund's board of directors may 
consider in determining whether to impose a liquidity fee once the 
fund's weekly liquid assets have fallen below 15% of its total assets. 
For example, it may want to consider why the level of weekly

[[Page 36886]]

liquid assets has fallen. Is it because the fund is experiencing 
mounting redemptions during a time of market stress or is it because a 
few large shareholders unexpectedly redeemed for idiosyncratic reasons 
unrelated to current market conditions? Another relevant factor to the 
fund board may be whether the fall in weekly liquid assets has been 
accompanied by a fall in the fund's shadow price. The fund board also 
may want to consider whether the fall in weekly liquid assets is likely 
to be very short-term. For example, will the fall in weekly liquid 
assets be cured in the next day or two when securities currently in the 
fund's portfolio qualify as weekly liquid assets? Many money market 
funds ``ladder'' the maturities of their portfolio securities, and thus 
it could be the case that a fall in weekly liquid assets will be 
rapidly cured by the portfolio's maturity structure.
    We considered instead proposing a threshold based on the shadow 
price of the money market fund. For example, one money market fund 
sponsor has suggested that we require money market funds' boards of 
directors to consider charging a liquidity fee on redeeming 
shareholders if the shadow price of a fund's portfolio fell below a 
specified threshold.\385\ This commenter asserted that such a trigger 
would ensure that shareholders only pay a fee when redemptions would 
actually cause the fund to suffer a loss and thus redemptions clearly 
disadvantage remaining shareholders. However, we are concerned that a 
money market fund being able to impose a fee only when the fund's 
shadow price has fallen by some amount below $1.00 in certain cases may 
come too late to mitigate the potential consequences of heavy 
redemptions and to fully protect investors. Heavy redemptions can 
impose adverse economic consequences on a money market fund even before 
the fund actually suffers a loss. They can deplete the fund's most 
liquid assets so that the fund is in a substantially weaker position to 
absorb further redemptions or losses. In addition, our proposed 
threshold is a default trigger for the liquidity fee--the board is not 
required to impose a liquidity fee when the fund's weekly liquid assets 
have fallen below 15%. Thus, a board can take into account whether the 
money market fund's shadow price has deteriorated in determining 
whether to impose a liquidity fee or gate when the fund's weekly liquid 
assets have fallen below the threshold. A threshold based on shadow 
prices also raises questions about whether and to what extent 
shareholders differentiate between realized (such as those from 
security defaults) and market-based losses (such as those from market 
interest rate changes) when considering a money market fund's shadow 
price. If shareholders do not redeem in response to market-based losses 
(as opposed to realized losses), it may be inappropriate to base a fee 
on a fall in the fund's shadow price if such a fall is only temporary. 
On the other hand, a temporary decline in the shadow price using 
market-based factors can lead to realized losses from a shareholder's 
perspective if redemptions cause a fund with an impaired NAV to ``break 
the buck.''
---------------------------------------------------------------------------

    \385\ HSBC FSOC Comment Letter, supra note 196 (suggesting 
setting the market-based NAV trigger at $0.9975).
---------------------------------------------------------------------------

    We also considered proposing a threshold based on the level of 
daily liquid assets rather than weekly liquid assets. We expect that a 
money market fund would meet heightened shareholder redemptions first 
by depleting the fund's daily liquid assets and next by depleting its 
weekly liquid assets, as daily liquid assets tend to be the most 
liquid. Accordingly, basing this threshold on weekly liquid assets thus 
provides a deeper picture of the fund's overall liquidity position, as 
a fund whose weekly liquid assets have fallen to 15% has likely 
depleted all of its daily liquid assets. In addition, a fund's levels 
of daily liquid assets may be more volatile because they are one of the 
first assets used to satisfy day-to-day shareholder redemptions, and 
thus more difficult to use as a gauge of true fund distress. Finally, 
as noted above, funds are able under the Investment Company Act to 
delay payment of redemption requests for up to seven days. Thus, 
substantial depletion of weekly liquid assets may be a better indicator 
of true fund distress. We also considered a trigger that would combine 
liquidity and market-based NAV thresholds but have preliminarily 
concluded that a single threshold would accomplish our goals without 
undue complexity and would be easier for investors to understand.
    We request comment on our default threshold for liquidity fees and 
our threshold on when a money market fund's board may impose a gate.
     What should be the trigger either for a default liquidity 
fee or for a board's ability to impose a gate? Rather than our proposed 
trigger based on a fund's level of weekly liquid assets, should it be 
based on the fund's shadow price or its level of daily liquid assets? 
Should it be based on a certain fall in either the fund's weekly liquid 
assets or shadow price? Why and what extent of a fall? Should it be 
based on some other factor? Should it be based on a combination of 
factors?
     If we considered a threshold based on the fund's shadow 
price, do shareholders differentiate between realized and market-based 
losses (such as those from security defaults versus those from market 
interest rate changes) when considering a money market fund's shadow 
price? If so, how does it affect their propensity to redeem shares when 
one or more funds have losses?
     Should we permit a fund board to impose a liquidity fee or 
gate even before a fund passes the trigger requiring the default fee to 
be considered if the board determines that an early imposition of a 
liquidity fee or gate would be in the best interest of the fund? Would 
that reduce the benefits discussed above of having an automatic default 
trigger? What concerns would arise from permitting imposition of a fee 
or gate before a fund passes the thresholds we may establish?
     What extent of decline in weekly liquid assets should 
trigger consideration of a fee or gate and why? Should it be more or 
less than 15% weekly liquid assets, such as 10% or 20%?
     How do fund holdings of weekly liquid assets vary within 
the calendar month, between Form N-MFP filing dates? How do net 
shareholder redemptions vary within the calendar month, between Form N-
MFP filing dates? How accurately can the fund forecast the net 
redemptions of its shareholders? When is the fund more likely to make 
forecasting errors?
     Should a liquidity fee or gate not be required until the 
fund suffers an actual loss in value? Why or why not and if so, how 
much of a loss in value?
     Is one type of threshold less susceptible to preemptive 
runs? If so, why?
     Are there other factors that a board might consider in 
determining whether to impose a fee or gate? Should we require that 
boards consider certain factors? If so, which factors and why?
c. Size of Liquidity Fee
    We are proposing that the liquidity fee be set at a default rate of 
2%, although a fund's board could impose a lower liquidity fee (or no 
fee at all) if it determines that a lower level is in the best interest 
of the fund.\386\ Commenters have suggested that liquidity fee levels 
ranging from 1% to 3% could be effective.\387\ We selected a default 
fee of

[[Page 36887]]

2% because we believe that a liquidity fee set at this level is high 
enough that it may impose sufficient costs on redeeming shareholders to 
deter redemptions in a crisis, but is low enough to permit investors 
who wish to redeem despite the cost to receive their proceeds without 
bearing unwarranted costs.\388\ A 2% level should also permit a fund to 
recoup the costs of liquidity it may bear, while repairing the fund if 
it has incurred losses.\389\ We recognize that establishing any fixed 
fee level may not precisely address the circumstances of a particular 
fund in a crisis, and accordingly are proposing to make this 2% level a 
default, which a fund board may lower or eliminate in accordance with 
the circumstances of any individual fund.
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    \386\ See proposed (Fees & Gates) rule 2a-7(c)(2)(i)(A).
    \387\ See, e.g., Vanguard FSOC Comment Letter, supra note 172 
(recommending a fee of between 1 and 3%); BlackRock FSOC Comment 
Letter, supra note 204 (recommending a standby liquidity fee of 1%); 
ICI Jan. 24 FSOC Comment Letter, supra note 25 (recommending a 1% 
fee).
    \388\ See, e.g., Vanguard FSOC Comment Letter, supra note 172 
(``We believe a fee in this amount [1-3%] will serve as an adequate 
deterrent to investors who may attempt to flee a fund out of fear, 
but would still allow those investors who have a need to access 
their cash the ability to redeem a portion of their holdings.''); 
ICI Jan. 24 FSOC Comment Letter, supra note 25 (``A liquidity fee 
set at this level [1%] would discourage redemptions, but allow the 
fund to continue to provide liquidity to investors. . . . Investors 
truly in need of liquidity would have access to it, but at a pre-
determined cost.'').
    \389\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 
(``Insofar as investors choose to redeem, the fee would benefit 
remaining shareholders by mitigating liquidation costs and 
potentially rebuilding NAVs.'').
---------------------------------------------------------------------------

    We also considered whether we should require a liquidity fee with 
an amount explicitly tied to market indicators of changes in liquidity 
costs for money market funds. For example, one fund manager suggested 
that the amount of the liquidity fee charged could be based on the 
anticipated change in the market-based NAV of the fund's portfolio from 
the redemption, assuming a horizontal slice of the fund's portfolio was 
sold to meet the redemption request.\390\ This firm asserted that such 
a liquidity fee would proportionately target the extent that the 
redemption was causing a material disadvantage to remaining investors 
in the fund and it would be clear to investors how the fee would 
advance investor protection.
---------------------------------------------------------------------------

    \390\ HSBC FSOC Comment Letter, supra note 196.
---------------------------------------------------------------------------

    There may be a number of drawbacks to such a ``market-sized'' 
liquidity fee, however. First, it does not provide significant 
transparency in advance to shareholders of the size of the liquidity 
fee they may have to pay in times of stress. It could also reduce the 
fees' efficacy in stemming redemptions if investors fear that the fee 
might go up in the future. This lack of transparency may hinder 
shareholders' ability to make well-informed decisions. It also may be 
difficult for money market funds to rapidly determine precise liquidity 
costs in times of stress when the short-term financing markets may be 
generally illiquid. Indeed, our staff gave no-action assurances to 
money market funds relating to valuation during the 2008 financial 
crisis because determining pricing in the then-illiquid markets was so 
difficult.\391\ We also understand that a liquidity fee that is not 
fixed in advance and indeed may change from day-to-day may be 
considerably more difficult and expensive for money market funds to 
implement and administer from an operational perspective. Such a fee 
would require real-time inputs of pricing factors into fund systems 
that would need to be rapidly disseminated through chains of financial 
intermediaries in order to apply to daily redemptions from the large 
number of beneficial owners that hold money market fund shares through 
omnibus accounts. A floating fee would assume sale of a horizontal 
cross section of assets but we do not think that is how portfolio 
securities would be sold to meet redemptions.
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    \391\ See Investment Company Institute, SEC Staff No-Action 
Letter (Oct. 10, 2008) (not recommending enforcement action through 
January 12, 2009, if money market funds used amortized cost to 
shadow price portfolio securities with maturities of 60 days or less 
in accordance with Commission interpretive guidance and noting: 
``You state that under current market conditions, the shadow pricing 
provisions of rule 2a-7 are not working as intended. You believe 
that the markets for short-term securities, including commercial 
paper, may not necessarily result in discovery of prices that 
reflect the fair value of securities the issuers of which are 
reasonably likely to be in a position to pay upon maturity. You 
further assert that pricing vendors customarily used by money market 
funds are at times not able to provide meaningful prices because 
inputs used to derive those prices have become less reliable 
indicators of price.'').
---------------------------------------------------------------------------

    These factors have led us to propose a default liquidity fee of a 
fixed size, but to allow the board of directors (including a majority 
of its independent directors) to impose a smaller-sized liquidity fee 
if it determines that such a smaller fee would be in the best interest 
of the fund.\392\ We preliminarily believe that such a default may 
provide the best combination of directing boards of directors to a 
liquidity fee size that may be appropriate in many stressed market 
conditions, but providing flexibility to boards to lower the size of 
that liquidity fee if it determines that a smaller fee would better and 
more fairly estimate and allocate liquidity costs to redeeming 
shareholders. Some factors that boards of directors may want to 
consider in determining whether to impose a smaller-sized liquidity fee 
than 2% include the shadow price of the money market fund at the time, 
relevant market indicators of liquidity stress in the markets, changes 
in spreads for portfolio securities (whether based on actual sales, 
dealer quotes, pricing vendor mark-to-model or matrix pricing, or 
otherwise), changes in the liquidity profile of the fund in response to 
redemptions and expectations regarding that profile in the immediate 
future, and whether the money market fund and its intermediaries are 
capable of rapidly putting in place a fee of a different amount. We are 
not proposing to allow fund boards to impose a larger liquidity fee 
than 2% because we understand that, even in ``fire sales'' or other 
crisis situations, money market funds typically have not realized 
haircuts greater than 2% when selling portfolio securities, and believe 
that investors should not face unwarranted costs when redeeming their 
shares. In addition, the staff has noted in the past that fees greater 
than 2% raise questions regarding whether a fund's securities remain 
``redeemable.'' \393\ If a fund continues to be under stress even with 
a 2% liquidity fee, the fund board may consider imposing a redemption 
gate or liquidating the fund pursuant to rule 22e-3.
---------------------------------------------------------------------------

    \392\ See proposed (Fees & Gates) rule 2a-7(c)(2)(i).
    \393\ Section 2(a)(32) of the Act [15 U.S.C. 80a-2(a)(32)] 
defines the term ``redeemable security'' as a security that entitles 
the holder to receive approximately his proportionate share of the 
fund's net asset value. The Division of Investment Management 
informally took the position that a fund may impose a redemption fee 
of up to 2% to cover the administrative costs associated with 
redemption, ``but if that charge should exceed 2 percent, its shares 
may not be considered redeemable and it may not be able to hold 
itself out as a mutual fund.'' See John P. Reilly & Associates, SEC 
Staff No-Action Letter (July 12, 1979). This position is currently 
reflected in our rule 23c-3(b)(1) under the Act [17 CFR 270.23c-
3(b)(1)], which permits a maximum 2% repurchase fee for interval 
funds and rule 22c-2(a)(1)(i) [17 CFR 270.22c-2(a)(1)(i)] which 
similarly permits a maximum 2% redemption fee to deter frequent 
trading in mutual funds.
---------------------------------------------------------------------------

    We request comment on our proposed default size for the liquidity 
fee.
     What should be the amount of the liquidity fee? Should it 
be a default amount, a fixed amount, or an amount directly tied to the 
cost of liquidity in times of stress? If as proposed, we adopt a 
default fee, should it be 2%, 1%, or some other level? Should we give 
boards discretion to impose a higher fee if the board determines that 
it is in the best interest of the fund? Commenters are requested to 
please provide data to support your suggested fee level.
     If the amount of the liquidity fee is tied to the cost of 
liquidity at the time of the redemption, how would that

[[Page 36888]]

amount be determined? Would a liquidity fee that changes depending on 
market circumstances provide shareholders with sufficient transparency 
on the size of the fee to be able to affect their purchase and 
redemption behavior? If the size of the liquidity fee changed depending 
on market circumstances, would money market funds be able to determine 
readily the amount of the liquidity fee during times of market 
dislocation? Would such a fee affect one type of investor more than 
another type of investor?
     Is a flat, fixed liquidity fee preferable to a variable 
fee that might be higher than the flat fee? Will the fund's ability to 
choose a lower liquidity fee result in any conflicts of interest 
between redeeming shareholders, non-redeeming shareholders, and the 
investment adviser?
     How should we weigh the risk that a flat liquidity fee may 
be higher or lower than the actual liquidity costs to the money market 
fund from the redemption, against the risk that a market-based 
liquidity fee may not provide sufficient advance transparency to 
shareholders and may be difficult to set appropriately in a crisis?
     How difficult would it be for money market funds and 
various intermediaries in the distribution chain of money market fund 
shares to handle from an operational perspective a liquidity fee that 
varied?
d. Default of Liquidity Fees
    Our proposal provides that a liquidity fee be imposed once a non-
government money market fund's weekly liquid assets has fallen below 
15% of its total assets (which is one-half of its required 30% 
minimum), unless the board of directors determines that such a fee 
would not be in the best interest of the fund. After the fund has 
crossed that 15% liquidity threshold, the board could also impose a 
gate. Based on this default choice, the implicit ordering of redemption 
restrictions thus would be a liquidity fee, and if that fee is not 
sufficiently slowing redemptions, a gate (although once the liquidity 
fee threshold was crossed, a board would be able to immediately impose 
a gate instead of a fee). We proposed a liquidity fee, rather than a 
gate, as the default because we believe that a fee has the potential to 
be less disruptive to fund shareholders and the short-term financing 
markets because a fee allows fund shareholders to continue to transact 
in times of stress (although at a cost). Some industry commenters 
instead have suggested that money market funds impose a gate 
first.\394\ Such a pause in redemption activity could provide time for 
any spike in redemptions to subside before redemptions were allowed 
with a fee. We request comment on liquidity fees being the default 
under this proposal.
---------------------------------------------------------------------------

    \394\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; 
Vanguard FSOC Comment Letter, supra note 172.
---------------------------------------------------------------------------

     Should the implicit ordering in the proposed rule be 
reversed, with a default of the fund imposing a gate once the fund has 
crossed the weekly liquid asset threshold, unless or until the board 
determines to re-open with a liquidity fee? Why?
     Should there be a different threshold for consideration of 
a gate if we adopted a gate as the default? Why or why not? Should a 
gate be mandatory under certain circumstances? If so, under what 
circumstances? Should any mandatory gate have a pre-specified window? 
If so, how long should that gate be imposed?
e. Time Limit on Gates
    We are proposing that a money market fund board must lift any gate 
it imposes within 30 days and that a board could not impose a gate for 
more than 30 days in any 90-day period. As noted above, a fund board 
could only impose a gate if it determines that the gate is in the best 
interest of the fund, and we would expect the board would lift the gate 
as soon as it determines that a gate is no longer in the best interest 
of the fund. This time limitation for the gate is designed to balance 
protecting the fund in times of stress while not unduly limiting the 
redeemability of money market fund shares, given the strong preference 
embodied in the Investment Company Act for the redeemability of open-
end investment company shares.\395\ We understand that investors use 
money market funds for cash management, and that lack of access to 
their money market fund investment for a long period of time can impose 
substantial costs and hardships.\396\ Indeed, many shareholders in The 
Reserve Primary Fund informed us about these costs and hardships during 
that fund's lengthy liquidation.\397\
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    \395\ See Investment Trusts and Investment Companies: Hearings 
on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and 
Currency, 76th Cong., 3d Sess. 291-292 (1940) (statement of David 
Schenker, Chief Counsel, Investment Trust Study, SEC).
    \396\ See, e.g., Comment Letter of Thrivent Financial for 
Lutherans (Feb. 15, 2013) (available in File No. FSOC-2012-0003) 
(``Thrivent FSOC Comment Letter'') (``The proposed liquidity fees 
reduce the simplicity, reduce the liquidity for the majority of 
shareholders, increase the potential for losses, and as a result, 
dramatically alter the product. Money market funds' intended purpose 
is to be a liquidity product, but if the product is only liquid for 
the first 15% of investors that redeem, then it is no longer a 
liquidity product for the remaining 85%.'').
    \397\ See Kevin McCoy, Primary Fund Shareholders Put in a Bind, 
USA Today, Nov. 11, 2008, available at http://usatoday30.usatoday.com/money/perfi/funds/2008-11-11-market-fund-side_N.htm (discussing hardships faced by Reserve Primary Fund 
shareholders due to having their shareholdings frozen, including a 
small business owner who almost was unable to launch a new business, 
and noting that ``Ameriprise has used `hundreds of millions of 
dollars' of its own liquidity for temporary loans to clients who 
face financial hardships while they await final repayments from the 
Primary Fund''); John G. Taft, Stewardship: Lessons Learned from the 
Lost Culture of Wall Street (2012), at 2 (``Now that the Reserve 
Primary Fund had suspended redemptions of Fund shares for cash, our 
clients had no access to their cash. This meant, in many cases, that 
they had no way to settle pending securities purchase and therefore 
no way to trade their portfolios at a time of historic market 
volatility. No way to make minimum required distributions from 
retirement plans. No way to pay property taxes. No way to pay 
college tuition. It meant bounced checks and, for retirees, 
interruption of the cash flow distributions they were counting on to 
pay their day-to-day living expenses.'').
---------------------------------------------------------------------------

    These concerns motivated us to propose a time period that would not 
freeze shareholders' money market fund investments for an excessively 
long period of time. On the other hand, we do want to provide some time 
for stressed market conditions to subside, for portfolio securities to 
mature and provide internal liquidity to the fund, and for potentially 
distressed fund portfolio securities to recover or be held to maturity. 
As of February 28, 2013, 43% of prime money market fund assets had a 
maturity of 30 days or less.\398\ Accordingly, within a 30-day window 
for a gate, a substantial amount of a money market fund's assets could 
mature and provide cash to the fund to meet redemptions when the fund 
re-opened. We also note that some commenters suggested a 30-day time 
limit on any gate.\399\ Balancing all of these factors led us to 
propose a 30-day time limit for any gate imposed. So that this 30-day 
time limit could not be circumvented, for example, by reopening the 
fund on the 29th day for a day before re-imposing the gate for 
potentially another 30-day period, we also are proposing that the fund 
cannot impose a gate for more than 30 days in any 90-day period. The 
30-day limit is a maximum, and a money market fund board likely would 
need to meet regularly during any period in which a redemption gate is 
in place and would lift the gate promptly when it

[[Page 36889]]

determines that the gate is no longer in the best interest of the 
fund.\400\
---------------------------------------------------------------------------

    \398\ Based on Form N-MFP data, with maturity determined in the 
same manner as it is for purposes of computing the fund's weighted 
average life.
    \399\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25.
    \400\ The fund's board may also consider permanently suspending 
redemptions in preparation for fund liquidation under rule 22e-3 if 
the fund approaches the 30 day gating limit.
---------------------------------------------------------------------------

     Does a 30-day limit appropriately balance these 
objectives? Should there be a shorter time limit, such as 10 days? 
Should there be a longer time limit, such as 45 days? Why?
     Will our proposed limit on the number of days a fund can 
be gated in any 90-day period effectively prevent ``gaming'' of the 30-
day gate limitation? Should it be a shorter window or larger window? 60 
days? 120 days?
     Should we impose additional restrictions on a money market 
fund's use of a gate? Should we, for example, require the board of 
directors of a money market fund that has imposed a gate to meet each 
day or week that the gate is in place, and permit the gate to remain in 
place only if the board makes specified findings at these meetings? We 
could provide that a gate may only remain in place if the board, 
including a majority of the independent directors, finds that lifting 
the gate and meeting shareholder redemptions could result in material 
dilution or other unfair results to investors or existing shareholders. 
Would requiring the board to make such a finding to continue to use a 
gate help to prevent a fund from imposing a gate for longer than is 
necessary or appropriate? Would a different required finding better 
achieve this goal? Would fund boards be able to make such findings 
accurately, particularly during a crisis when a board may be more 
likely to impose a gate? Would such a requirement deter fund boards 
from keeping a gate in place when doing so may be in the best interest 
of the fund?
f. Application of Liquidity Fees to Omnibus Accounts
    For beneficial owners holding mutual fund shares through omnibus 
accounts, we understand that, with respect to redemption fees imposed 
to deter market timing of mutual fund shares, financial intermediaries 
generally impose any redemption fees themselves to record or beneficial 
owners holding through that intermediary.\401\ We understand that they 
do so often in accordance with contractual arrangements between the 
fund or its transfer agent and the intermediary. We would expect any 
liquidity fees to be handled in a similar manner, although we 
understand that some money market fund sponsors will want to review 
their contractual arrangements with their funds' financial 
intermediaries and service providers to determine whether any 
contractual modifications would be necessary or advisable to ensure 
that any liquidity fees are appropriately applied to beneficial owners 
of money market fund shares. We also understand that some money market 
fund sponsors may seek certifications or other assurances that these 
intermediaries and service providers will apply any liquidity fees to 
the beneficial owners of money market fund shares. We also recognize 
that money market funds and their transfer agents and intermediaries 
will need to engage in certain communications regarding a liquidity 
fee.
---------------------------------------------------------------------------

    \401\ See rule 22c-2. Our understanding of how financial 
intermediaries handle redemption fees in mutual funds is based on 
Commission staff discussions with industry participants and service 
providers.
---------------------------------------------------------------------------

    We request comment on the application of liquidity fees and gates 
to shares held through omnibus accounts.
     Do commenters agree with our view that liquidity fees 
likely will be handled by intermediaries in a manner similar to how 
they currently impose redemption fees? If not, how would liquidity fees 
be applied to shares held through financial intermediaries? Is our 
understanding correct that financial intermediaries generally apply any 
liquidity fees themselves to record or beneficial owners holding 
through that intermediary? Would they do so based on existing 
contractual arrangements or would funds make contractual modifications? 
What cost would be involved in any contractual modifications?
     Would funds in addition or instead seek certifications 
from financial intermediaries that they will apply any liquidity fees? 
What cost would be involved in any such certifications?
     What other methods might money market funds use to gain 
assurances that financial intermediaries will apply any liquidity fees 
appropriately? At what costs? Will some intermediaries not offer prime 
money market funds to avoid operational costs involved with fees and 
gates?
3. Exemptions To Permit Liquidity Fees and Gates
    The Commission is proposing exemptions from various provisions of 
the Investment Company Act to permit a fund to institute liquidity fees 
and gates.\402\ In the absence of an exemption, imposing gates could 
violate section 22(e) of the Act, which generally prohibits a mutual 
fund from suspending the right of redemption or postponing the payment 
of redemption proceeds for more than seven days, and imposing liquidity 
fees could violate rule 22c-1, which (together with section 22(c) and 
other provisions of the Act) requires that each redeeming shareholder 
receive his or her pro rata portion of the fund's net assets. The 
Commission is proposing to exercise its authority under section 6(c) of 
the Act to provide exemptions from these and related provisions of the 
Act to permit a money market fund to institute liquidity fees and gates 
notwithstanding these restrictions.\403\ As discussed in more detail 
below, we believe that such exemptions do not implicate the concerns 
that Congress intended to address in enacting these provisions, and 
thus they are necessary and appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the Act.
---------------------------------------------------------------------------

    \402\ See proposed (Fees & Gates) rule 2a-7(c).
    \403\ 15 U.S.C. 80a-6(c). In order to clarify the application of 
liquidity fees and gates to variable contracts, we also would amend 
rule 2a-7 to provide that, notwithstanding section 27(i) of the Act, 
a variable contract sold by a registered separate account funding 
variable insurance contracts or the sponsoring insurance company of 
such account may apply a liquidity fee or gate to contract owners 
who allocate all or a portion of their contract value to a 
subaccount of the separate account that is either a money market 
fund or that invests all of its assets in shares of a money market 
fund. See proposed (Fees & Gates) rule 2a-7(c)(2)(iv). Section 
27(i)(2)(A) makes it unlawful for any registered separate account 
funding variable insurance contracts or the sponsoring insurance 
company of such account to sell a variable contract that is not a 
``redeemable security.''
---------------------------------------------------------------------------

    We do not believe that gates would conflict with the purposes 
underlying section 22(e), which was designed to prevent funds and their 
investment advisers from interfering with the redemption rights of 
shareholders for improper purposes, such as the preservation of 
management fees.\404\ The board of a money market fund would impose 
gates to benefit the fund and its shareholders by making the fund 
better able to handle substantial redemptions, as discussed above.
---------------------------------------------------------------------------

    \404\ See 2009 Proposing Release, supra note 31, at n.281 and 
accompanying text.
---------------------------------------------------------------------------

    We also propose to provide exemptions from rule 22c-1 to permit a 
money market fund to impose liquidity fees because a money market fund 
would impose liquidity fees to benefit the fund and its shareholders by 
providing a more systematic allocation of liquidity costs.\405\ 
Remaining shareholders also may benefit if the fees help repair any 
decline in the fund's shadow price or lead to an increased

[[Page 36890]]

dividend paid to remaining fund shareholders. The amount of additional 
fees that the fund might collect in this regard would be only to 
further the purpose of the provision and could only be imposed under 
circumstances of stress on the fund.
---------------------------------------------------------------------------

    \405\ See proposed (Fees & Gates) rule 2a-7(c) (providing that, 
notwithstanding rule 22c-1, among other provisions, a money market 
fund may impose a liquidity fee under the circumstances specified in 
the proposed rule).
---------------------------------------------------------------------------

    A gate would also be similarly limited. It could only be imposed 
for a limited period of time and only under circumstances of stress on 
the fund. This aspect of gates, therefore, is akin to rule 22e-3, which 
also provides an exemption from section 22(e) to permit money market 
fund boards to suspend redemptions of fund shares in order to protect 
the fund and its shareholders from the harmful effects of a run on the 
fund, and to minimize the potential for disruption to the securities 
markets.\406\ We are proposing to permit money market funds to be able 
to impose fees and gates because they may provide substantial benefits 
to money market funds and the short-term financing markets for issuers, 
as discussed above. However, because we recognize that fees and gates 
may impose hardships on investors who rely on their ability to freely 
redeem shares (or to redeem shares without paying a fee), we also have 
proposed limitations on when and for how long money market funds could 
impose these restrictions.\407\
---------------------------------------------------------------------------

    \406\ See 2010 Adopting Release, supra note 92, at text 
following n.379.
    \407\ See proposed (Fees & Gates) rule 2a-7(c)(2). Cf. 2010 
Adopting Release, supra note 92, at text following n.379 (``Because 
the suspension of redemptions may impose hardships on investors who 
rely on their ability to redeem shares, the conditions of [rule 22e-
3] limit the fund's ability to suspend redemptions to circumstances 
that present a significant risk of a run on the fund and potential 
harm to shareholders.'')
---------------------------------------------------------------------------

    We request comment on our proposed amendments allowing money market 
funds to institute fees and gates.
     Would the proposed amendments to rule 2a-7 provide 
sufficient exemptive relief to permit a money market fund to institute 
fees or gates with both the requirements of rule 2a-7 and the 
Investment Company Act? Are there other provisions of the Investment 
Company Act from which the Commission should consider providing an 
exemption?
4. Amendments to Rule 22e-3
    Under this proposal, we also would amend rule 22e-3 to permit (but 
not require) the permanent suspension of redemptions and liquidation of 
a money market fund if the fund's level of weekly liquid assets falls 
below 15% of its total assets.\408\ This will allow a money market fund 
that imposes a fee or a gate, but determines that it would not be in 
the best interest of the fund to continue operating, to permanently 
suspend redemptions and liquidate. As such, it will provide an 
additional tool to fund boards of directors to manage a fund in the 
best interest of the fund when that fund comes under stress regarding 
its liquidity buffers. It will allow fund boards to suspend redemptions 
and liquidate a fund that the board determines would be unable to stay 
open (or, if gated, re-open) without further harm to the fund, and 
prevents such a fund from waiting until its shadow price has declined 
so far that it is about to ``break the buck.''
---------------------------------------------------------------------------

    \408\ See proposed (Fees & Gates) rule 22e-3.
---------------------------------------------------------------------------

    We considered whether a money market fund's level of weekly liquid 
assets should have to fall further than the 15% threshold that allows 
the imposition of fees and gates for the fund to be able to permanently 
suspend redemptions and liquidate. A permanent suspension of 
redemptions could be considered more draconian because there is no 
prospect that the fund will re-open--instead the fund will simply 
liquidate and return money to shareholders. Accordingly, one could 
consider a lower weekly liquid asset threshold than 15% justified. 
However, we believe such considerations must be balanced against the 
risk that might be caused by establishing a lower threshold for 
enabling a permanent suspension of redemptions. For example, a fund 
with a fee or gate in place might know (based on market conditions or 
discussions with its shareholders or otherwise) that upon lifting the 
fee or gate it will experience a severe run. We would not want to force 
such a fund to lift the fee or re-open and weather enough of that run 
to deplete its weekly liquid assets below a lower threshold. We 
preliminarily believe this risk is great enough to warrant allowing 
money market funds to suspend redemptions permanently once the fund's 
weekly liquid assets fall below 15% of its total assets.
    As under existing rule 22e-3, a money market fund also would still 
be able to suspend redemptions and liquidate if it determines that the 
extent of the deviation between its shadow price and its market-based 
NAV per share may result in material dilution or other unfair results 
to investors or existing shareholders.\409\ Accordingly, a money market 
fund that suffers a default would still be able to suspend redemptions 
and liquidate before that credit loss lead to redemptions and a fall in 
its weekly liquid assets.
---------------------------------------------------------------------------

    \409\ See proposed (Fees & Gates) rule 22e-3.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to rule 22e-3 under 
this proposal.
     Is it appropriate to allow a money market fund to suspend 
redemptions and liquidate if its level of weekly liquid assets falls 
below 15% of its total assets? Is there a different threshold based on 
daily or weekly assets that would better protect money market fund 
shareholders?
     Should a fund's ability to suspend redemptions and 
liquidate be tied only to adverse deviations in its shadow price? If 
so, is our current standard under rule 22e-3 appropriate or is there a 
different level of shadow price decline that should trigger a money 
market fund's ability to suspend redemptions and liquidate?
5. Exemptions From the Liquidity Fees and Gates Requirement
    We are proposing that government money market funds (including 
Treasury money market funds) be exempt from any fee or gate requirement 
but that these funds be permitted to impose such a fee or gate under 
the regime we have described above if the ability to impose such fees 
and gates were disclosed in the fund's prospectus.\410\ This exemption 
is based on a similar analysis to our proposed exemption of government 
money market funds from the floating NAV proposal and also on our 
desire to facilitate investor choice by providing a money market fund 
investment option for an investor who was unwilling or unable to invest 
in a money market fund that could impose liquidity fees or gates in 
times of stress.
---------------------------------------------------------------------------

    \410\ See proposed (Fees & Gates) rule 2a-7(c)(2)(iii).
---------------------------------------------------------------------------

    As discussed in the RSFI Study, government money market funds 
historically have experienced inflows, rather than outflows, in times 
of stress due to flights to quality, liquidity, and transparency.\411\ 
The assets of government money market funds tend to appreciate in value 
in times of stress rather than depreciate.\412\ Accordingly,

[[Page 36891]]

the portfolio composition of government money market funds means that 
these funds are less likely to need to use these restrictions. We also 
expect that some money market fund investors may be unwilling or unable 
to invest in a money market fund that could impose a fee or gate. For 
example, there could be some types of investors, such as sweep 
accounts, that may be unwilling or unable to invest in a money market 
fund that could impose a gate because such an investor requires the 
ability to immediately redeem at any point in time, regardless of 
whether the fund or the markets are distressed. Accordingly, exempting 
government money market funds from the fees and gates requirement would 
allow fund sponsors to offer a choice of money market fund investment 
products that meet differing liquidity needs, while minimizing the risk 
of adverse contagion effects from heavy money market fund redemptions. 
Based on our evaluation of these considerations and tradeoffs, and the 
more limited risk of heavy redemptions in government money market 
funds, we preliminarily believe that on balance it is preferable to 
exempt these funds from this potential requirement, but permit them to 
use liquidity fees and gates if they choose.
---------------------------------------------------------------------------

    \411\ See RSFI Study, supra note 21, at 6-13.
    \412\ Government money market funds tend to attract significant 
inflows of investments during times of broader market distress, 
which can appreciate their value. See, e.g., figure 1 in supra 
section I.B (showing that during the 2008 Lehman crisis 
institutional share classes of government money market funds, which 
include Treasury and government funds, experienced heavy inflows). 
Also see, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 
(noting government money market funds attracted an inflow of $192 
billion during the week following the Lehman bankruptcy in September 
2008); HSBC FSOC Comment Letter, supra note 196 (``As evidenced 
during the credit crisis of 2008, Treasury and government funds 
benefitted from a ``flight to quality'' during these systemic 
events''); Dreyfus FSOC Comment Letter, supra note 174 (noting its 
institutional government and institutional Treasury money market 
funds generally experienced high levels of net inflows during 2008).
---------------------------------------------------------------------------

    We note that Treasury money market funds generally would be exempt 
from any liquidity fees and gates requirement because at least 80% of 
their assets generally must be Treasury securities and overnight 
repurchase agreements collateralized with Treasury securities, each of 
which is a weekly liquid asset. Accordingly, it is highly unlikely for 
a Treasury money market fund to breach the 15% weekly liquid asset 
threshold that would allow imposition of a fee or gate. Most government 
money market funds similarly always would have at least 15% weekly 
liquid assets because of the nature of their portfolio, but it is 
possible to have a government money market fund with below 15% weekly 
liquid assets. We also note that government money market funds and 
Treasury money market funds do not necessarily have the same risk 
profile. For example, government money market funds generally have a 
much higher portion of their portfolios invested in securities issued 
by the Federal Home Loan Mortgage Corporation (Freddie Mac), the 
Federal National Mortgage Association (Fannie Mae), and the Federal 
Home Loan Banks and thus a higher exposure to the home mortgage market 
than Treasury money market funds. We note that this exemption would not 
apply to tax-exempt (or municipal) money market funds. As discussed 
above, because tax-exempt money market funds are not required to 
maintain 10% daily liquid assets, these funds may be less liquid than 
other money market funds, which could raise concerns that tax-exempt 
retail funds might not be able to manage even the lower level of 
redemptions expected in a retail money market fund. In addition, 
municipal securities typically present greater credit and liquidity 
risk than government securities and thus could come under pressure in 
times of stress.
    We request comment on our proposed exemption of government money 
market funds from the proposed liquidity fees and gates requirement.
     Is this exemption appropriate, particularly in light of 
the redemptions from government funds in late June and early July 2011? 
Why or why not?
     Is it appropriate to give government money market funds 
the option to have the ability to impose fees and gates so long as they 
disclose the option to investors? Why or why not? What factors might 
lead a government fund to exercise this option?
     Should the exemption for government money market funds be 
extended to municipal money market funds? Why or why not?
    We also considered whether there should be other exemptions from 
the proposed liquidity fees and gates requirement. For example, as 
discussed in section III.A.4 above, we are proposing an exemption for 
retail money market funds from any floating NAV requirement. We noted 
in that section how retail money market funds experienced fewer 
redemptions during the 2007-2008 financial crisis and thus may be less 
likely to suffer heavy redemptions in the future. However, unlike with 
government money market funds, a retail prime money market fund 
generally is subject to the same credit and liquidity risk as an 
institutional prime money market fund. In addition, a floating NAV 
requirement affects a shareholder's experience with a money market fund 
on a daily basis. Given the costs and burdens associated with a 
floating NAV requirement, and the potential limited benefit to retail 
shareholders on an ongoing basis given that they are less likely to 
engage in heavy redemptions, a retail exemption might be more 
appropriate on balance under a floating NAV requirement than under a 
liquidity fees and gates requirement. In contrast, a fee or gate 
requirement would not affect a money market fund unless the fund's 
weekly liquid assets fell below 15% of its total assets--i.e., unless 
it came under stress. Exempting retail money market funds from this 
requirement thus could leave only institutional (and not retail) 
shareholders protected when the money market fund in which they have 
invested comes under stress. Given that such an exemption would merely 
relieve them in normal times of the costs and burden on those investors 
created by the prospect that the fund could impose a fee or gate if 
someday it came under stress, we preliminarily believe that a retail 
exemption may not be warranted for this alternative. We also considered 
methods of exempting some retail investors from a fee or gate 
requirement. For example, we could exempt small redemption requests, 
such as those below $10,000, or $100,000 per day, from any fee or gate 
requirement. Such small redemptions are less likely to materially 
impact the liquidity position of the fund. This type of exemption could 
retain the benefits of fees and gates for retail money market funds 
generally while providing some relief from the burdens for investors 
with smaller redemption needs. However, we are concerned that granting 
such exemptions could complicate the fees and gates requirement both as 
an operational matter and in terms of ease of shareholder understanding 
without providing substantial benefits.
    We also have considered whether irrevocable redemption requests 
submitted at least a certain period in advance should be exempt as the 
fund should be able to plan for such liquidity demands and hold 
sufficient liquid assets. However, we are concerned that shareholders 
could try to ``game'' the fee or gate requirement through such 
exemptions, for example, by redeeming a certain amount every week and 
then reinvesting the redemption proceeds immediately if the cash is not 
needed. We also are concerned that allowing such an exception would add 
significantly to the cost and complexity of this requirement, as fund 
groups would need to be able to separately track which shares are 
subject to a fee or gate and which are not.
    We request comment on other potential exemptions from the proposed 
liquidity fees and gates requirement.
     Should retail money market funds (including tax-exempt 
money market funds) or retail investors be exempt from any liquidity 
fee or gate provision? Should there be an exemption for small 
redemption requests, such as redemptions below $10,000? If so, below 
what level? If a retail money

[[Page 36892]]

market fund crossed the thresholds we are proposing for board 
consideration of a fee or gate, is there a reason not to allow the 
fund's board to protect the fund and its shareholders through the use 
of a liquidity fee or gate? Would investors ``game'' such exemptions?
     Should we create an exemption for shareholders that submit 
an irrevocable redemption request at least a certain period in advance 
of the needed redemption? Why or why not? With what period of advance 
notice? For each of these exemptions, could funds track the shares that 
are not subject to the fee or gate? What operational costs would be 
involved in including such an exemption? Would shareholders ``game'' 
such exemptions?
     Would further exemptions undermine the goal of the 
liquidity fee or gate in deterring or stopping heavy redemptions? Why 
or why not? Would exemptions from the fee or gate proposal make it more 
difficult or costly to implement or operationalize? How would any such 
difficulties compare to the benefits that could be obtained from such 
exemptions?
6. Operational Considerations Relating to Liquidity Fees and Gates
    Money market funds and others in the distribution chain (depending 
on how they are structured) likely would incur some operational costs 
in establishing or modifying systems to administer a liquidity fee or 
gate. These costs likely would be incurred by, or spread amongst, a 
fund's transfer agents, sub-transfer agents, recordkeepers, 
accountants, portfolio accounting departments, and custodian. Money 
market funds and others also may be required to develop procedures and 
controls, and may incur other costs, for example to update systems 
necessary for confirmations and account statements to reflect the 
deduction of a liquidity fee from redemption proceeds. Money market 
funds and their intermediaries may need to establish new, or modify 
existing, systems or procedures that would allow them to administer 
temporary gates. Money market fund shareholders also might be required 
to modify their own systems to prepare for possible future liquidity 
fees, or manage gates, although we expect that only some shareholders 
would be required to make these changes.\413\ They also may modify 
contracts or seek certifications from financial intermediaries that 
they will apply any liquidity fee.
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    \413\ Many shareholders use common third party-created systems 
and thus would not each need to modify their systems.
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    These costs would vary depending on how a liquidity fee or gate is 
structured, including its triggering event, as well as on the 
capabilities, functions, and sophistication of the fund's and others' 
current systems. These factors will vary among money market funds, 
shareholders, and others, and particularly because we request comment 
on a number of ways in which we could structure a liquidity fee or gate 
requirement, we cannot ascertain at this stage the systems and other 
modifications any particular money market fund or other affected entity 
would be required to make to administer a liquidity fee or manage a 
gate. Indeed, we believe that money market funds and other affected 
entities themselves would need to engage in an in-depth analysis of 
this alternative in order to estimate the costs of the necessary 
systems modifications. While we do not have the information necessary 
to provide a point estimate of the potential costs of systems 
modifications needed to administer a liquidity fee or gate, our staff 
has estimated a range of hours and costs that may be required to 
perform activities typically involved in making systems 
modifications.\414\ In estimating these hours and costs, our staff 
considered the need to modify the systems described above.
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    \414\ Staff estimates that these costs would be attributable to 
the following activities: (i) Planning, coding, testing, and 
installing system modifications; (ii) drafting, integrating, and 
implementing related procedures and controls; and (iii) preparing 
training materials and administering training sessions for staff in 
affected areas. See also supra note 245 (discussing the bases of our 
staff's estimates of operational and related costs).
---------------------------------------------------------------------------

    If a money market fund determines that it would only impose a flat 
liquidity fee of a fixed percentage known in advance (e.g., it would 
only impose the default 2% liquidity fee) and have the ability to 
impose a gate, our staff estimates that a money market fund (or others 
in the distribution chain) would incur one-time systems modification 
costs (including modifications to related procedures and controls) that 
ranges from $1,100,000 to $2,200,000.\415\ Our staff estimates that the 
one-time costs for entities to communicate with shareholders (including 
systems costs related to communications) about the liquidity fee or 
gate would range from $200,500 to $340,000.\416\ In addition, we 
estimate that the costs for a shareholder mailing would range between 
$1.00 and $3.00 per shareholder.\417\ We also recognize that adding new 
capabilities or capacity to a system will entail ongoing annual 
maintenance costs and understand that those costs generally are 
estimated as a percentage of initial costs of building or expanding a 
system. Our staff estimates that the costs to maintain and modify these 
systems required to administer a liquidity fee and the ability to 
administer a standby gate (to accommodate future programming changes), 
to provide ongoing training, and to administer the liquidity fee or 
gate on an ongoing basis would range from 5% to 15% of the one-time 
costs. Our staff understands that if a fund board imposes a liquidity 
fee whose amount could vary, the cost could exceed this range, but 
because such costs depend on to what extent the fee might vary, we do 
not have the information necessary to provide a reasonable estimate of 
how much more a varying fee might cost to implement.
---------------------------------------------------------------------------

    \415\ Staff estimates that these costs would be attributable to 
the following activities: (i) Project planning and systems design; 
(ii) systems modification, integration, testing, installation, and 
deployment; (iii) drafting, integrating, implementing procedures and 
controls; and (iv) preparation of training materials. See also supra 
note 245 (discussing the bases of our staff's estimates of 
operational and related costs).
    \416\ Staff estimates that these costs would be attributable to 
the following activities: (i) modifying the Web site to provide 
online account information and (ii) written and telephone 
communications with investors. See also supra note 245 (discussing 
the bases of our staff's estimates of operational and related 
costs).
    \417\ Total costs of the mailing for individual funds would vary 
significantly depending on the number of shareholders that receive 
information from the fund by mail (as opposed to electronically).
---------------------------------------------------------------------------

    Although our staff has estimated the costs that a single affected 
entity would incur, we anticipate that many money market funds, 
transfer agents, and other affected entities may not bear the estimated 
costs on an individual basis. Instead, the costs of systems 
modifications likely would be allocated among the multiple users of the 
systems, such as money market fund members of a fund group, money 
market funds that use the same transfer agent or custodian, and 
intermediaries that use systems purchased from the same third party. 
Accordingly, we expect that the cost for many individual entities may 
be less than the estimated costs due to economies of scale in 
allocating costs among this group of users.
    Moreover, depending on how a liquidity fee or gate is structured, 
mutual fund groups and other affected entities already may have systems 
that could be adapted to administer a liquidity fee or gate at minimal 
cost, in which case the costs may be less than the range we estimate 
above. For example, some money market funds may be part of mutual fund 
groups in which one or more funds impose deferred sales loads or 
redemption fees

[[Page 36893]]

under rule 22c-2, both of which require the capacity to administer a 
fee upon redemptions and may involve systems that could be adapted to 
administer a liquidity fee.
    Our staff estimates that a money market fund shareholder whose 
systems (including related procedures and controls) required 
modifications to account for a liquidity fee or gate would incur one-
time costs ranging from $220,000 to $450,000.\418\ Our staff estimates 
that the costs to maintain and modify these systems and to provide 
ongoing training would range from 5% to 15% of the one-time costs.
---------------------------------------------------------------------------

    \418\ Staff estimates that these costs would be attributable to 
the following activities: (i) Project planning and systems design; 
(ii) systems modification, integration, testing, installation; and 
(iii) drafting, integrating, implementing procedures and controls. 
See also supra note 245 (discussing the bases of our staff's 
estimates of operational and related costs).
---------------------------------------------------------------------------

    We request comment on our estimate of operational costs associated 
with the liquidity fees and gates alternative.
     Do commenters agree with our estimates of operational 
costs?
     Are there operational costs in addition to those we 
estimate above? What systems would need to be reprogrammed and to what 
extent? What types of ongoing maintenance, training, and other 
activities to administer the liquidity fee or gate would be required, 
and to what extent?
     Are our estimates too high or too low and, if so, by what 
amount? To what extent would the estimate vary based on the event that 
would trigger the imposition of a liquidity fee or the manner in which 
the fee would be calculated once triggered? To what extent would the 
estimate vary based on how the gate is structured?
     To what extent would money market funds or others 
experience the economies of scale that we identify?
7. Tax Implications of Liquidity Fees
    We understand that liquidity fees may have certain tax implications 
for money market funds and their shareholders. Similar to the liquidity 
fee we are proposing today, rule 22c-2 allows mutual funds to recover 
costs associated with frequent mutual fund share trading by imposing a 
redemption fee on shareholders who redeem shares within seven days of 
purchase. We understand that for tax purposes, shareholders of these 
mutual funds generally treat the redemption fee as offsetting the 
shareholder's amount realized on the redemption (decreasing the 
shareholder's gain, or increasing the shareholder's loss, on 
redemption).\419\ Consistent with this characterization, funds 
generally treat the redemption fee as having no associated tax effect 
for the fund. We understand that our proposed liquidity fee, if 
adopted, would be treated for tax purposes consistently with the way 
that funds and shareholders treat redemption fees under rule 22c-
2.\420\
---------------------------------------------------------------------------

    \419\ Cf. 26 CFR 1.263(a)-2(e) (commissions paid in sales of 
securities by persons who are not dealers are treated as offsets 
against the selling price). See also Investment Income and Expenses 
(Including Capital Gains and Losses), IRS Publication 550, at 44 
(``fees and charges you pay to acquire or redeem shares of a mutual 
fund are not deductible. You can usually add acquisition fees and 
charges to your cost of the shares and thereby increase your basis. 
A fee paid to redeem the shares is usually a reduction in the 
redemption price (sales price).''), available at http://www.irs.gov/pub/irs-pdf/p550.pdf.
    \420\ Referring to IRS guidance in a different context, one 
commenter suggested that our proposed liquidity fee also might be 
characterized for tax purposes as an investment expense for the 
shareholder and income to the fund. See ICI Jan. 24 FSOC Comment 
Letter, supra note 25. This commenter noted that, if the fund were 
required to treat the liquidity fee as ordinary income, the fund 
would have to distribute the income to avoid liability for the 
corporate level income tax and a 4% excise tax on the amount 
retained. In that case, the fund would not realize all of the 
benefit the liquidity fee is designed to provide. Id. (citing IRS 
Revenue Procedure 2009-10 as supporting the position that the fee 
received by the fund should be treated as a capital gain because it 
is being used to offset capital losses incurred by the fund on its 
portfolio in order to pay the redeeming shareholder and noting that 
because the capital gain would offset the capital loss, the fund 
would not have an additional distribution requirement). This 
commenter suggests that the IRS provide guidance to this effect 
(noting that in Revenue Procedure 2009-10, which provided only 
temporary administrative guidance, the IRS took this position with 
respect to amounts paid to a money market fund by the fund's adviser 
to prevent the fund from breaking the buck). Id. See also Arrowsmith 
et al. v. Commissioner of Internal Revenue, 344 U.S. 6 (1952).
---------------------------------------------------------------------------

    If, as described above, a liquidity fee has no direct tax 
consequences for the money market fund, that tax treatment would allow 
the fund to use 100% of the fee to repair a market-based price per 
share that was below $1.0000. If redemptions involving liquidity fees 
cause the money market fund's shadow price to reach $1.0050, however, 
the fund may need to distribute to the remaining shareholders 
sufficient value to prevent the fund from breaking the buck (and thus 
rounding up to $1.01 in pricing its shares).\421\ We understand that 
any such distribution would be treated as a dividend to the extent that 
the money market fund has sufficient earnings and profits. Both the 
fund and its shareholders would treat these additional dividends the 
same as they treat the fund's routine dividend distributions. That is, 
the additional dividends would be taxable as ordinary income to 
shareholders and would be eligible for deduction by the funds.
---------------------------------------------------------------------------

    \421\ See proposed (Fees & Gates) rule 2a-7(g)(2).
---------------------------------------------------------------------------

    In the absence of sufficient earnings and profits, however, some or 
all of these additional distributions would be treated as a return of 
capital. Receipt of a return of capital would reduce the recipient 
shareholders' basis (and thus could decrease a loss, or create or 
increase a gain for the shareholder in the future when the shareholder 
redeems the affected shares).\422\ Thus, in the event of any return of 
capital distributions, the shareholders, the fund, and other 
intermediaries might become subject to tax-payment or tax-reporting 
obligations that do not affect stable NAV funds currently operating 
under rule 2a-7.\423\
---------------------------------------------------------------------------

    \422\ If the payment of liquidity fees forces a money market 
fund to make a return of capital distribution to avoid re-pricing 
its shares above $1.00, this could also create tax consequences for 
remaining shareholders in the fund.
    \423\ See the discussion above of the additional obligations 
that would be created by gains and losses recognized with respect to 
floating NAV funds.
---------------------------------------------------------------------------

    Finally, we understand that the tax treatment of a liquidity fee 
may impose certain operational costs on money market funds and their 
financial intermediaries and on shareholders. Either fund groups or 
their intermediaries would need to track the tax basis of money market 
fund shares as the basis changed due to any return of capital 
distributions, and shareholders would need to report in their annual 
tax filings any gains \424\ or losses upon the sale of affected money 
market fund shares. We are unable to quantify any of the tax and 
operational costs discussed in this section because we are unable to 
predict how often liquidity fees will be imposed by money market funds 
and how often redemptions subject to liquidity fees would cause the 
funds to make return of capital distributions to the remaining 
shareholders.
---------------------------------------------------------------------------

    \424\ Redemptions subject to a liquidity fee would almost always 
result in losses, but gains are possible if a shareholder received a 
return of capital distribution with respect to some shares and the 
shareholder later redeemed the shares for $1.0000 each.
---------------------------------------------------------------------------

    We request comment on this aspect of our proposal.
     If liquidity fees cause the fund's shadow price to exceed 
$1.0049, will that result cause the fund to make a special distribution 
to current shareholders?
     Do money market funds and other intermediaries already 
have systems in place to track and report the variations in basis, and 
the gains and losses that might result from imposing liquidity fees? If 
not, what costs would be

[[Page 36894]]

expected to be incurred to establish this capability? In light of the 
fact that it may be necessary to establish new systems to track this 
information, how does the cost of these new systems compare with the 
costs that would be incurred to accommodate floating NAVs?
8. Disclosure Regarding Liquidity Fees and Gates
    In connection with the liquidity fees and gates alternative, we are 
also proposing alternate disclosure-related amendments to rule 2a-7, 
rule 482 under the Securities Act,\425\ and Form N-1A. We anticipate 
that the proposed rule and form amendments would provide current and 
prospective shareholders with information regarding the operations and 
risks of this reform alternative, as well as current and historical 
information regarding the imposition of fees and gates. In keeping with 
the enhanced disclosure framework we adopted in 2009,\426\ the proposed 
amendments are intended to provide a layered approach to disclosure in 
which key information about the proposed new features of money market 
funds would be provided in the summary section of the statutory 
prospectus (and, accordingly, in any summary prospectus, if used) with 
more detailed information provided elsewhere in the statutory 
prospectus and in the SAI.
---------------------------------------------------------------------------

    \425\ See supra note 303.
    \426\ See Summary Prospectus Adopting Release, supra note 304, 
at paragraph preceding section III.
---------------------------------------------------------------------------

a. Disclosure Statement
    The Commission's liquidity fees and gates alternative proposal 
would permit funds to charge liquidity fees and impose redemption 
restrictions on money market fund investors. As a measure to achieve 
this reform, we propose to require that each money market fund (other 
than government money market funds that have chosen to rely on the 
proposed rule 2a-7 exemption for government money market funds from any 
fee or gate requirements), include a bulleted statement, disclosing the 
particular risks associated with investing in a fund that may impose 
liquidity fees or redemption restrictions, on any advertisement or 
sales material that it disseminates (including on the fund Web site). 
We also propose to include wording designed to inform investors about 
the primary general risks of investing in money market funds in this 
bulleted disclosure statement. While money market funds are currently 
required to include a similar disclosure statement on their 
advertisements and sales materials,\427\ we propose amending this 
disclosure statement to emphasize that money market fund sponsors are 
not obligated to provide financial support, and that money market funds 
may not be an appropriate investment option for investors who cannot 
tolerate losses.\428\
---------------------------------------------------------------------------

    \427\ See id. Rule 482(b)(4) currently requires a money market 
fund to include to following disclosure statement on its 
advertisements and sales materials: An investment in the Fund is not 
insured or guaranteed by the Federal Deposit Insurance Corporation 
or any other government agency. Although the Fund seeks to preserve 
the value of your investment at $1.00 per share, it is possible to 
lose money by investing in the Fund.
    \428\ See infra note 607 and accompanying text (discussing the 
extent to which discretionary sponsor support has the potential to 
confuse money market fund investors); supra note 141 and 
accompanying text (noting that survey data shows that some investors 
are unsure about the amount of risk in money market funds and the 
likelihood of government assistance if losses occur).
---------------------------------------------------------------------------

    Specifically, we would require each money market fund (other than 
government money market funds that have chosen to rely on the proposed 
rule 2a-7 exemption for government money market funds from any fee or 
gate requirements) to include the following bulleted disclosure 
statement on their advertisements and sales materials:
     You could lose money by investing in the Fund.
     The Fund seeks to preserve the value of your investment at 
$1.00 per share, but cannot guarantee such stability.
     The Fund may impose a fee upon sale of your shares when 
the Fund is under considerable stress.
     The Fund may temporarily suspend your ability to sell 
shares of the Fund when the Fund is under considerable stress.
     An investment in the Fund is not insured or guaranteed by 
the Federal Deposit Insurance Corporation or any other government 
agency.
     The Fund's sponsor has no legal obligation to provide 
financial support to the Fund, and you should not expect that the 
sponsor will provide financial support to the Fund at any time.\429\
---------------------------------------------------------------------------

    \429\ See proposed (Fees & Gates) rule 482(b)(4)(i). Rule 
482(b)(4) currently requires a money market fund to include to 
following disclosure statement on its advertisements and sales 
materials: An investment in the Fund is not insured or guaranteed by 
the Federal Deposit Insurance Corporation or any other government 
agency. Although the Fund seeks to preserve the value of your 
investment at $1.00 per share, it is possible to lose money by 
investing in the Fund.
    If an affiliated person, promoter, or principal underwriter of 
the fund, or an affiliated person of such person, has entered into 
an agreement to provide financial support to the fund, the fund 
would be permitted to omit this bulleted sentence from the 
disclosure statement for the term of the agreement. See Note to 
paragraph (b)(4), proposed (Fees & Gates) rule 482(b)(4).
---------------------------------------------------------------------------

We also propose to require a substantially similar bulleted disclosure 
statement in the summary section of the statutory prospectus (and, 
accordingly, in any summary prospectus, if used).\430\
---------------------------------------------------------------------------

    \430\ See proposed (Fees & Gates) Item 4(b)(1)(ii)(A) of Form N-
1A. Item 4(b)(1)(ii) currently requires a money market fund to 
include the following statement in its prospectus: An investment in 
the Fund is not insured or guaranteed by the Federal Deposit 
Insurance Corporation or any other government agency. Although the 
Fund seeks to preserve the value of your investment at $1.00 per 
share, it is possible to lose money by investing in the Fund.
---------------------------------------------------------------------------

    As discussed above, the liquidity fees and gates proposal would 
exempt government money market funds from any fee or gate requirement, 
but a government money market fund would be permitted to charge 
liquidity fees and impose gates if the ability to charge liquidity fees 
and impose gates were disclosed in the fund's prospectus. Accordingly, 
the proposed amendments to rule 482 and Form N-1A would require 
government money market funds that have chosen to rely on this 
exemption to include a bulleted disclosure statement on the fund's 
advertisements and sales materials and in the summary section of the 
fund's statutory prospectus (and, accordingly, in any summary 
prospectus, if used) that does not include disclosure of the risks of 
liquidity fees and gates, but that includes additional detail about the 
risks of investing in money market funds generally. We propose to 
require each government money market fund that relies on the exemption 
to include the following bulleted disclosure statement in the summary 
section of its statutory prospectus (and, accordingly, in any summary 
prospectus, if used), and on any advertisement or sales material that 
it disseminates (including on the fund Web site):
     You could lose money by investing in the Fund.
     The Fund seeks to preserve the value of your investment at 
$1.00 per share, but cannot guarantee such stability.
     An investment in the Fund is not insured or guaranteed by 
the Federal Deposit Insurance Corporation or any other government 
agency.
     The Fund's sponsor has no legal obligation to provide 
financial support to the Fund, and you should not expect that the 
sponsor will provide financial support to the Fund at any time.\431\
---------------------------------------------------------------------------

    \431\ See proposed (Fees & Gates) rule 482(b)(4)(ii) and 
proposed (Fees & Gates) Item 4(b)(1)(ii)(B) of Form N-1A. If an 
affiliated person, promoter, or principal underwriter of the fund, 
or an affiliated person of such person, has entered into an 
agreement to provide financial support to the fund, the fund would 
be permitted to omit this bulleted sentence from the disclosure 
statement that appears on a fund advertisement or fund sales 
material, for the term of the agreement. See Note to paragraph 
(b)(4), proposed (Fees & Gates) rule 482(b)(4).
    Likewise, if an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
entered into an agreement to provide financial support to the fund, 
and the term of the agreement will extend for at least one year 
following the effective date of the fund's registration statement, 
the fund would be permitted to omit this bulleted sentence from the 
disclosure statement that appears on the fund's registration 
statement. See Instruction to proposed (Fees & Gates) Item 
4(b)(1)(ii) of Form N-1A.

---------------------------------------------------------------------------

[[Page 36895]]

    The proposed disclosure statements are intended to be one measure 
to change the investment expectations of money market fund investors, 
including the expectation that a money market fund is a stable, 
riskless investment.\432\ In addition, we are concerned that investors, 
under the liquidity fees and gates proposal, will not be fully aware of 
potential restrictions on fund redemptions. In proposing the disclosure 
statement, we have taken into consideration investor preferences for 
clear, concise, and understandable language and have also considered 
whether language that was stronger in conveying potential risks 
associated with money market funds would be effective for 
investors.\433\ In addition, we considered whether the proposed 
disclosure statement should be limited to only money market fund 
advertisements and sales materials, as discussed above. Although we 
acknowledge that the summary section of the prospectus must contain a 
discussion of key risk factors associated with a money market fund, we 
believe that the importance of the disclosure statement merits its 
placement in both locations, similar to how the current money market 
fund legend is required in both money market fund advertisements and 
sales materials and the summary section of the prospectus.\434\
---------------------------------------------------------------------------

    \432\ See supra section II.B.3.
    \433\ See supra notes 316 and 317.
    \434\ See supra notes 429 and 430.
---------------------------------------------------------------------------

    We request comment on the proposed disclosure statement.\435\
---------------------------------------------------------------------------

    \435\ In the questions that follow, we use the term ``disclosure 
statement'' to mean the new disclosure statement that we propose to 
require money market funds other than those exempted from the fees 
and gates requirements to incorporate into their prospectuses and 
advertisements and sales materials or, alternatively and as 
appropriate, the new disclosure statement that we propose to require 
government funds (that choose to rely on the rule 2a-7 exemption 
from the fees and gates requirements) to incorporate into their 
prospectuses and advertisements and sales materials.
---------------------------------------------------------------------------

     Would the proposed disclosure statement adequately alert 
investors to the risks of investing in a money market fund, including a 
fund that could impose liquidity fees or gates under certain 
circumstances? Would investors understand the meaning of each part of 
the proposed disclosure statement? If not, how should the proposed 
disclosure statement be amended? Would the following variations on the 
proposed disclosure statement be any more or less useful in alerting 
shareholders to potential investment risks?
    [cir] Removing or amending the following bullet in the proposed 
disclosure statement: ``The Fund's sponsor has no legal obligation to 
provide financial support to the Fund, and you should not expect that 
the sponsor will provide financial support to the Fund at any time.''
    [cir] Including additional disclosure of the possibility that a 
temporary suspension of redemptions could become permanent if the board 
determines that the fund should liquidate.
    [cir] Including additional disclosure to the effect that retail 
shareholders should not invest all or most of the cash that they might 
need for routine expenses (e.g., mortgage payments, credit card bills, 
etc.) in any one money market fund, on account of the possibility that 
the fund could impose a liquidity fee or suspend redemptions.
    [cir] Amending the final bullet in the proposed disclosure 
statement to read: ``Your investment in the Fund therefore may 
experience losses.''
     Will the proposed disclosure statement respond effectively 
to investor preferences for clear, concise, and understandable 
language?
     Would investors benefit from requiring this disclosure 
statement also to be included on the front cover page of a non-
government money market fund's prospectus (and on the cover page or 
beginning of any summary prospectus, if used)?
     Should we provide any instruction or guidance in order to 
highlight the proposed disclosure statement on fund advertisements and 
sales materials (including the fund's Web site) and/or lead investors 
efficiently to the disclosure statement? \436\ For example, with 
respect to the fund's Web site, should we instruct that the proposed 
disclosure statement be posted on the fund's home page or be accessible 
in no more than two clicks from the fund's home page?
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    \436\ Such instruction or guidance would supplement current 
requirements for the presentation of the disclosure statement 
required by rule 482(b)(4). See supra note 429; rule 482(b)(5).
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b. Disclosure of the Effects of Liquidity Fees and Gates on Redemptions
    Currently, funds are required to disclose any restrictions on fund 
redemptions in their registration statements.\437\ We expect that, to 
comply with these requirements, money market funds (besides government 
money market funds that have chosen to rely on the proposed rule 2a-7 
exemption from the fees and gates requirements) would disclose in the 
registration statement the effects that the potential imposition of 
fees and/or gates may have on a shareholder's ability to redeem shares 
of the fund. We believe that this disclosure would help investors 
understand the potential effect of their redemption decisions during 
periods that the fund experiences stress, and to evaluate the full 
costs of redeeming fund shares--one of the goals of this 
rulemaking.\438\ Specifically, we would expect money market funds to 
briefly explain in the prospectus that if the fund's weekly liquid 
assets have fallen below 15% of its total assets, the fund will impose 
a liquidity fee of 2% on all redemptions, unless the board of directors 
of the fund (including a majority of its independent directors) 
determines that imposing such a fee would not be in the best interest 
of the fund or determines that a lesser fee would be in the best 
interest of the fund. We also would expect money market funds to 
briefly explain in the prospectus that if the fund's weekly liquid 
assets have fallen below 15% of its total assets, the fund board would 
be able to impose a temporary suspension of redemptions for a limited 
period of time and/or liquidate the fund. We also would expect money 
market funds to disclose in the prospectus that information about the 
historical occasions on which the fund's weekly liquid assets have 
fallen below 15% of its total assets, or the fund has imposed liquidity 
fees or redemption restrictions, appears in the funds' SAI (as 
applicable).\439\
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    \437\ See Item 11(c)(1) and Item 23 of Form N-1A.
    \438\ See supra note 351 and accompanying text (discussing the 
extent to which standby liquidity fees can provide a disincentive 
for money market fund investors to redeem their shares during times 
of stress).
    \439\ See infra section III.B.8.d.
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    In addition, we would expect money market funds to incorporate 
additional disclosure in the prospectus or SAI, as the fund determines 
appropriate, discussing the operations of fees and gates in more 
detail.\440\ This could

[[Page 36896]]

include disclosure regarding the following:
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    \440\ Prospectus disclosure regarding any restrictions on 
redemptions is currently required by Item 11(c)(1) of Form N-1A. 
However, we believe that funds could determine that more detailed 
disclosure about the operations of fees and gates, as further 
discussed in this section, would appropriately appear in a fund's 
SAI, and that this more detailed disclosure is responsive to Item 23 
of Form N-1A (``Purchase, Redemption, and Pricing of Shares''). In 
determining whether to include this disclosure in the prospectus or 
SAI, money market funds should rely on the principle that funds 
should limit disclosure in prospectuses generally to information 
that is necessary for an average or typical investor to make an 
investment decision. Detailed or highly technical discussions, as 
well as information that may be helpful to more sophisticated 
investors, dilute the effect of necessary prospectus disclosure and 
should be placed in the SAI. See Registration Form Used by Open-End 
Management Investment Companies, Investment Company Act Release No. 
23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)], at section I. 
Based on this principle, we anticipate that funds would generally 
consider the disclosure topics covered by the first two bullets on 
the above list (means of notifying shareholders of fees and gates 
and the timing of the imposition and removal of fees and gates) to 
be appropriate prospectus disclosure.
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     Means of notifying shareholders about the imposition and 
lifting of fees and/or gates (e.g., press release, Web site 
announcement);
     Timing of the imposition and lifting of fees and gates, 
including an explanation that if a fund's weekly liquid assets fall 
below 15% of its total assets at the end of any business day, the next 
business day it must impose a 2% liquidity fee on shareholder 
redemptions unless the fund's board of directors determines otherwise, 
and an explanation of the 30-day limit for imposing gates;
     Use of fee proceeds by the fund, including any possible 
return to shareholders in the form of a distribution;
     The tax consequences to the fund and its shareholders of 
the fund's receipt of liquidity fees; and
     General description of the process of fund liquidation 
\441\ if the fund's weekly liquid assets fall below 15%, and the fund's 
board of directors determines that the fund would be unable to stay 
open (or, if gated, re-open) without further harm to the fund.
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    \441\ See supra note 408 and accompanying text.
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    We request comment on the disclosure that we expect funds to 
include in their registration statements regarding the operations and 
effects of liquidity fees and redemption gates.
     Would the disclosure that we discuss above adequately 
assist money market fund investors in understanding the potential 
effect of their redemption decisions, and in evaluating the full costs 
of redeeming fund shares? Should we require funds to include this 
disclosure in their prospectuses and/or SAIs? Should we require funds 
to include any additional prospectus and SAI disclosure discussing, in 
detail, the operations and effects of fees and redemption gates? In 
particular, should we require funds to include any additional details 
about the fund's liquidation process? \442\ Alternatively, should any 
of the proposed prospectus and SAI disclosure not be required, and if 
so, why not?
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    \442\ Disclosure about the process of fund liquidation might 
include, for example, disclosure regarding any fees, including 
advisory fees, that the adviser will collect during the liquidation 
process.
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     Should we require any information about the basic 
operations and effects of fees and redemption gates to be disclosed in 
the summary section of the statutory prospectus (and any summary 
prospectus, if used)?
     Should we require disclosure to investors of the 
particular risks associated with buying fund shares when the fund or 
market is stressed, especially when the fund is imposing either a 
liquidity fee or a gate?
     Should Form N-1A or its instructions be amended to more 
explicitly require any of the proposed disclosure to be included in a 
fund's prospectus and/or SAI? If so, how should it be amended?
c. Disclosure of the Imposition of Liquidity Fees and Gates
    If we were to adopt a reform alternative involving liquidity fees 
and gates, we believe that it would be important for money market funds 
(other than government money market funds that have chosen to rely on 
the proposed rule 2a-7 exemption from the fees and gates requirements) 
to inform existing and prospective shareholders when: (i) The fund's 
weekly liquid assets fall below 15% of its total assets; (ii) the 
fund's board of directors imposes a liquidity fee pursuant to rule 2a-
7; or (iii) the fund's board of directors temporarily suspends the 
fund's redemptions pursuant to rule 2a-7 or permanently suspends 
redemptions pursuant to rule 22e-3. This information would be important 
for shareholders to receive, as it could influence prospective 
shareholders' decision to purchase shares of the fund, as well as 
current shareholders' decision or ability to sell fund shares. To this 
end, we are proposing an amendment to rule 2a-7 that would require a 
fund to post prominently on its Web site certain information that the 
fund would be required to report to the Commission on Form N-CR \443\ 
regarding the imposition of liquidity fees, suspension of fund 
redemptions, and the removal of liquidity fees and/or resumption of 
fund redemptions.\444\ The amendment would require a fund to include 
this Web site disclosure on the same business day as the fund files an 
initial report with the Commission in response to any of the events 
specified in Parts E, F, and G of Form N-CR,\445\ and, with respect to 
any such event, to maintain this disclosure on its Web site for a 
period of not less than one year following the date on which the fund 
filed Form N-CR concerning the event.\446\
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    \443\ See infra section III.G.
    \444\ See proposed (Fees & Gates) rule 2a-7(h)(10)(v); proposed 
(Fees & Gates) Form N-CR Parts E, F, and G; see also infra section 
III.G (discussing the proposed Form N-CR requirements). With respect 
to the events specified in Part E of Form N-CR (imposition of a 
liquidity fee) and Part F of Form N-CR (suspension of fund 
redemptions), a fund would be required to post on its Web site only 
the preliminary information required to be filed on Form N-CR on the 
first business day following the triggering event. See Instructions 
to proposed (Fees & Gates) Form N-CR Parts E and F.
    \445\ A fund must file an initial report on Form N-CR in 
response to any of the events specified in Parts E, F, or G within 
one business day after the occurrence of any such event. We believe 
that funds should disclose these events within one business day 
following the event because it is particularly important to provide 
shareholders with information that could directly affect their 
redemption of fund shares, and that could be a material factor in 
determining whether to purchase or redeem fund shares, as soon as 
reasonably possible.
    \446\ See proposed (Fees & Gates) rule 2a-7(h)(10)(v). We 
believe that the one-year minimum time frame for Web site disclosure 
is appropriate because this time frame would effectively oblige a 
fund to post the required information in the interim period until 
the fund files an annual post-effective amendment updating its 
registration statement, which update would incorporate the same 
information. See infra notes 450 and 451 and accompanying text. 
Although a fund would inform prospective investors of any redemption 
fee or gate currently in place by means of a prospectus supplement 
(see infra note 449 and accompanying text), the prospectus 
supplement would not inform shareholders of any fees or gates that 
were imposed, and then were removed, during the previous 12 months.
---------------------------------------------------------------------------

    We believe that this Web site disclosure would provide greater 
transparency to shareholders regarding occasions on which a fund's 
weekly liquid assets drop below 15% of the fund's total assets, as well 
as the imposition of liquidity fees and suspension of fund redemptions, 
because many investors currently obtain important information about the 
fund on the fund's Web site.\447\ We understand that investors have, in 
past years, become accustomed to obtaining money market fund 
information on funds' Web sites.\448\ While we believe

[[Page 36897]]

that it is important to have a uniform, central place for investors to 
access the required disclosure, we note that nothing in this proposal 
would prevent a fund from supplementing its Form N-CR filing and Web 
site posting with complementary shareholder communications, such as a 
press release or social media update disclosing a fee or gate imposed 
by the fund.
---------------------------------------------------------------------------

    \447\ For example, fund investors may access the fund's proxy 
voting guidelines, and proxy vote report, as well as the fund's 
prospectus, SAI, and shareholder reports if the fund uses a summary 
prospectus, on the fund Web site.
    \448\ See, e.g., 2010 Adopting Release, supra note 92 (adopting 
amendments to rule 2a-7 requiring money market funds to disclose 
information about their portfolio holdings each month on their Web 
sites); SIFMA FSOC Comment Letter, supra note 358 (noting that some 
industry participants now post on their Web sites portfolio 
holdings-related information beyond that which is required by the 
money market reforms adopted by the Commission in 2010, as well as 
daily disclosure of market value per share); see also infra note 659 
(discussing recent decisions by a number of money market fund firms 
to begin reporting funds' daily shadow prices on the fund Web site).
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    A fund currently must update its registration statement to reflect 
any material changes by means of a post-effective amendment or a 
prospectus supplement (or ``sticker'') pursuant to rule 497 under the 
Securities Act.\449\ We would expect that, to meet this requirement, 
promptly after a money market fund imposes a redemption fee or gate, it 
would inform prospective investors of any fees or gates currently in 
place by means of a prospectus supplement.
---------------------------------------------------------------------------

    \449\ See 17 CFR 230.497.
---------------------------------------------------------------------------

    We request comment on the proposed requirement for money market 
funds to inform existing and prospective shareholders, on the fund's 
Web site and in the fund's registration statement, of any present 
occasion in which the fund's weekly liquid assets fall below 15% of its 
total assets, the fund's board imposes a liquidity fee, or the fund's 
board temporarily suspends the fund's redemptions.
     Should any more, any less, or any other information be 
required to be posted on the fund's Web site than that disclosed on 
Form N-CR?
     As proposed, should we require this information to be 
posted ``prominently'' on the fund's Web site? Should we provide any 
other instruction as to the presentation of this information, in order 
to highlight the information and/or lead investors efficiently to the 
information, for example, should we require that the information be 
posted on the fund's home page or be accessible in no more than two 
clicks from the fund's home page?
     Should this information be posted on the fund's Web site 
for a longer or shorter period than one year following the date on 
which the fund filed Form N-CR to disclose any of the events specified 
in Part E, F, or G of Form N-CR?
     Besides requiring a money market fund that imposes a 
liquidity fee or gate to file a prospectus supplement and include 
related disclosure on the fund's Web site, should we also require the 
fund to notify shareholders individually about the effects of the fee 
or gate? Should we require a fund to engage in any other supplemental 
shareholder communications, such as issuing a press release or 
disclosing the fee or gate on any form of social media that the fund 
uses?
     How will the disclosure of the imposition of a fee or gate 
affect the willingness of current or prospective investors to purchase 
shares of the fund? How will this disclosure affect investors' 
purchases and redemptions in other funds? How will it affect other 
market participants? Will these effects differ based on the number of 
funds that concurrently impose fees and/or gates?
d. Historical Disclosure of Liquidity Fees and Gates
    We also believe that money market funds' current and prospective 
shareholders should be informed of post-compliance-period historical 
occasions in which the fund's weekly liquid assets have fallen below 
15% or the fund has imposed liquidity fees or redemption gates. While 
we recognize that historical occurrences are not necessarily indicative 
of future events, we anticipate that current and prospective fund 
investors could use this information as one factor to compare the risks 
and potential costs of investing in different money market funds.
    We are therefore proposing an amendment to Form N-1A to require 
money market funds (other than government money market funds that have 
chosen to rely on the proposed rule 2a-7 exemption from the fees and 
gates requirements) to provide disclosure in their SAIs regarding any 
occasion during the last 10 years (but not before the compliance 
period) on which the fund's weekly liquid assets have fallen below 15%, 
and with respect to each such occasion, whether the fund's board of 
directors determined to impose a liquidity fee and/or suspend the 
fund's redemptions.\450\ With respect to each occasion, we propose 
requiring funds to disclose: (i) The length of time for which the 
fund's weekly liquid assets remained below 15%; (ii) the dates and 
length of time for which the fund's board of directors determined to 
impose a liquidity fee and/or temporarily suspend the fund's 
redemptions; and (iii) a short discussion of the board's analysis 
supporting its decision to impose a liquidity fee (or not to impose a 
liquidity fee) and/or temporarily suspend the fund's redemptions.\451\ 
We would expect that this disclosure could include (as applicable, and 
taking into account considerations regarding the confidentiality of 
board deliberations) a discussion of the following factors relating to 
the board's decision to impose a liquidity fee and/or suspend 
redemptions: The fund's shadow price; relevant market indicators of 
liquidity stress in the markets; changes in spreads for portfolio 
securities; the fund's future liquidity profile (taking into account 
predicted redemptions and other expectations); the fund's ability to 
apply any collected fees quickly to rebuild fund liquidity; and the 
predicted time for portfolio securities to mature and provide internal 
liquidity to the fund, and for potentially distressed portfolio 
securities to mature or recover. The required disclosure would permit 
current and prospective shareholders to assess, among other things, any 
patterns of stress experienced by the fund, as well as whether the 
fund's board has previously imposed fees and/or redemption gates in 
light of significant drops in portfolio liquidity. This disclosure also 
would provide investors with historical information about the board's 
past analytical process in determining how to handle liquidity issues 
when the fund experiences stress, which could influence an investor's 
decision to purchase shares of, or remain invested in, the fund. In 
addition, the required disclosure may encourage portfolio managers to 
increase the level of daily and weekly liquid assets in the fund, as 
that would tend to lessen the likelihood of a liquidity fee or gate 
being needed, and the fund being required to disclose the fee or gate 
to current and prospective investors.\452\
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    \450\ See proposed (Fees & Gates) Item 16(g)(1) of Form N-1A. We 
believe that the proposed 10-year look-back period would provide 
shareholders and the Commission with a historical perspective that 
would be long enough to provide a useful understanding of past 
events, and to analyze patterns with respect to fees and gates, but 
not so long as to include circumstances that may no longer be a 
relevant reflection of the fund's management or operations.
    \451\ See instructions to proposed (Fees & Gates) Item 16(g)(1) 
of Form N-1A.
    \452\ See supra note 365.
---------------------------------------------------------------------------

    We request comment on the proposed requirement for money market 
funds to include SAI disclosure regarding the historical occasions in 
which the fund's weekly liquid assets have fallen below 15% or the fund 
has imposed liquidity fees or redemption gates.
     Would the proposed disclosure requirement assist current 
and prospective fund investors in comparing the risks and potential 
costs of investing in different money market funds, and would retail 
investors as well as

[[Page 36898]]

institutional investors benefit from the proposed disclosure? Would the 
proposed requirement to include a short discussion of the board's 
analysis supporting its decision whether to impose a fee or suspend 
redemptions result in meaningful and succinct disclosure? Should any 
more, any less, or any other disclosure be required to be included in 
the fund's SAI? Should the disclosure instead be required in the 
prospectus?
     Keeping in mind the compliance period we propose,\453\ 
should the ``look-back'' period for this historical disclosure be 
longer or shorter than 10 years?
---------------------------------------------------------------------------

    \453\ See infra section III.N.
---------------------------------------------------------------------------

     Should the proposed SAI disclosure be permitted to be 
incorporated by reference in a fund's registration statement, on 
account of the fact that funds will have previously disclosed the 
information proposed to be required in this SAI disclosure on Form N-
CR? \454\
---------------------------------------------------------------------------

    \454\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G.
---------------------------------------------------------------------------

     Should we require this historical disclosure to be 
included anywhere else, for example, on the fund's Web site?
e. Prospectus Fee Table
    Under the proposed liquidity fees and gates alternative, a 
liquidity fee would only be imposed when a fund experiences stress 
(i.e., we believe that shareholders would not pay the liquidity fee in 
connection with their typical day-to-day transactions with the fund 
under normal conditions and many funds may never need to impose the 
fee). Because funds are anticipated to rarely, if at all, impose this 
fee,\455\ we do not believe that the prospectus fee table, which is 
intended to help shareholders compare the costs of investing in 
different mutual funds, should include the proposed liquidity fee.\456\ 
Therefore, we propose clarifying in the instructions to Item 3 of Form 
N-1A (``Risk/Return Summary: Fee Table'') that the term ``redemption 
fee,'' for purposes of the prospectus fee table, does not include a 
liquidity fee that may be imposed in accordance with rule 2a-7.\457\ As 
discussed above, we do believe that shareholders should be able to 
compare the extent to which money market funds have historically 
imposed liquidity fees, and to this end, we have proposed SAI 
amendments requiring this disclosure.\458\ Also, as previously 
discussed, funds would disclose in the summary section of the statutory 
prospectus (and, accordingly, any summary prospectus, if used) that 
they may impose a liquidity fee, and also would include a detailed 
description of the size of the fees, and when the fees might be 
imposed, elsewhere in the statutory prospectus.\459\
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    \455\ See supra text following note 383.
    \456\ Instruction 2(b) to Item 3 of Form N-1A currently defines 
``redemption fee'' to include any fee charged for any redemption of 
the Fund's shares, but does not include a deferred sales charge 
(load) imposed upon redemption.
    \457\ See instruction 2(b) to proposed (Fees & Gates) Item 3 of 
Form N-1A.
    \458\ See supra notes 450 and 451 and accompanying text.
    \459\ See supra notes 429, 431 and 440 and accompanying text.
---------------------------------------------------------------------------

    We request comment on the proposed Form N-1A instruction that would 
clarify that, for purposes of the prospectus fee table, the term 
``redemption fee'' does not include a liquidity fee imposed in 
accordance with rule 2a-7.
     Would shareholders find it instructive for funds to 
disclose the proposed liquidity fee in the prospectus fee table? Why or 
why not? If we were to require money market funds to include liquidity 
fees in the fee table, how should the fee table account for the 
contingent nature of liquidity fees and inform investors that liquidity 
fees will only be imposed in certain circumstances? Should the 
possibility of a liquidity fee be disclosed in a footnote of the fee 
table? Should a cross-reference to the fund's SAI disclosure regarding 
historical occasions on which the fund has imposed liquidity fees be 
disclosed in a footnote of the fee table?
     Would the proposed SAI amendments requiring disclosure of 
the historical occasions on which the fund has imposed liquidity fees 
be an effective way for shareholders to compare the extent to which 
money market funds have historically imposed liquidity fees, and 
analyze the probability that a fund will impose such fees in the 
future?
f. Economic Analysis
    The liquidity fees and gates proposal makes significant changes to 
the nature of money market funds as an investment vehicle. The proposed 
disclosure requirements in this section are intended to communicate to 
shareholders the nature of the risks that follow from the liquidity 
fees and gates proposal. In section III.B, we discussed why we are 
unable to estimate how the liquidity fees and gates proposal will 
affect shareholders' use of money market funds or the resulting effects 
on the short-term financing markets because we do not have the 
information necessary to provide a reasonable estimate. For similar 
reasons, we are unable to estimate the incremental effects that the 
proposed disclosure requirements will have on either shareholders or 
the short-term financing markets. However, we believe that the proposed 
disclosure will better inform shareholders about the changes, which 
should result in shareholders making investment decisions that better 
match their investment preferences. We expect that this will have 
similar effects on efficiency, competition, and capital formation as 
those outlined in section III.E rather than to introduce new effects. 
We further believe that the effects of the proposed disclosure 
requirements will be small relative to the liquidity fees and gates 
proposal. The Commission staff has not measured the quantitative 
benefits of these proposed requirements at this time because of 
uncertainty about how increased transparency may affect different 
investors' understanding of the risks associated with money market 
funds.\460\ Where it is relevant, we request the data needed to make 
these calculations below.
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    \460\ Likewise, uncertainty regarding how the proposed 
disclosure may affect different investors' behavior makes it 
difficult for the SEC staff to measure the quantitative benefits of 
the proposed requirements. With respect to the proposed disclosure 
statement, there are many possible permutations on specific wording 
that would convey the specific concerns identified in this Release, 
and the breadth of these permutations makes it difficult for SEC 
staff to test how investors would respond to each wording variation.
---------------------------------------------------------------------------

    We anticipate that money market funds would incur costs to amend 
their registration statements, and to update their advertising and 
sales materials (including the fund Web site), to include the proposed 
disclosure statement. We also anticipate that money market funds 
(besides government money market funds that have chosen to rely on the 
proposed rule 2a-7 exemption from the fees and gates requirements) 
would incur costs to (i) amend their registration statements to 
incorporate disclosure regarding the effects of fees and gates on 
redemptions; (ii) include disclosure of the post-compliance-period 
historical occasions in which the fund's weekly liquid assets have 
fallen below 15% or the fund has imposed liquidity fees or gates; and 
(iii) update the prospectus fee table. These funds also would incur 
costs to disclose current instances of liquidity fees or gates on the 
fund's Web site. These costs would include initial, one-time costs, as 
well as ongoing costs. Our staff estimates that the average one-time 
costs for a money market fund (except government money market funds 
that have chosen to rely on the proposed rule 2a-7 exemption from the 
fees and

[[Page 36899]]

gates requirements) to comply with these proposed disclosure amendments 
would be approximately $1,480, and that the average one-time compliance 
costs for a government money market fund that has chosen to rely on the 
proposed rule 2a-7 exemption from the fees and gates requirements would 
be approximately $592.\461\
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    \461\ Staff estimates that these costs would be attributable to 
amending the fund's disclosure statement and updating the fund's 
advertising and sales materials. See supra note 245 (discussing the 
bases of our staff's estimates of operational and related costs). 
The costs associated with these activities are all paperwork-related 
costs and are discussed in more detail in infra section IV.B.7.
    We expect the new required disclosure would add minimal length 
to the current required registration statement disclosure, and thus 
would not increase the number of pages in, or change the printing 
costs of, a fund's registration statement. Based on conversations 
with fund representatives, the Commission understands that, in 
general, unless the page count of a registration statement is 
changed by at least four pages, printing costs would remain the 
same.
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    Ongoing compliance costs include the costs for money market funds 
periodically to update disclosure in their registration statements 
regarding historical occasions in which the fund's weekly liquid assets 
have fallen below 15% or the fund has imposed fees or gates, and also 
to disclose current instances of any of these events on the fund's Web 
site. Because the required registration statement and Web site 
disclosure overlaps with the information that a fund must disclose on 
Form N-CR when the fund's weekly liquid assets fall below 15%, or the 
fund imposes or removes a fee or gate,\462\ we anticipate that the 
costs a fund will incur to draft and finalize the disclosure that will 
appear in its registration statement and on its Web site will largely 
be incurred when the fund files Form N-CR, as discussed below in 
section III.G.3. In addition, we estimate that a fund (besides a 
government money market fund that has chosen to rely on the proposed 
rule 2a-7 exemption from the fees and gates requirements) would incur 
average annual costs of $296 \463\ to review and update the historical 
disclosure in its registration statement (plus printing costs), and 
costs of $207 \464\ each time that it updates its Web site to include 
the required disclosure.
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    \462\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G.
    \463\ The costs associated with updating the fund's registration 
statement are paperwork-related costs and are discussed in more 
detail in infra section IV.B.7.
    \464\ The costs associated with updating the fund's Web site are 
paperwork-related costs and are discussed in more detail in infra 
section IV.B.1.g.iv.
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    We request comment on this economic analysis:
     Are any of the proposed disclosure requirements unduly 
burdensome, or would they impose any unnecessary costs?
     We request comment on the staff's estimates of the 
operational costs associated with the proposed disclosure requirements.
     We request comment on our analysis of potential effects of 
these proposed disclosure requirements on efficiency, competition, and 
capital formation.
9. Alternative Redemption Restrictions
a. Stand-Alone Liquidity Fees or Stand-Alone Gates
    We are proposing that money market fund boards of directors be 
permitted to institute liquidity fees or gates (and potentially one 
followed by the other). This proposal is designed to provide money 
market funds with multiple tools to manage heightened redemptions in 
the best interest of the fund and to mitigate potential contagion 
effects on the short-term financing markets for issuers.
    We also have considered whether we should permit these money market 
funds to institute only liquidity fees or only gates. As discussed 
above, fees and gates can accomplish somewhat different objectives and 
have somewhat different tradeoffs and effects on shareholders and the 
short-term financing markets for issuers. For shareholders valuing 
principal preservation in their evaluation of money market fund 
investments, a gate may be preferable to a liquidity fee particularly 
if the fund expects to rebuild liquidity through maturing assets. In 
contrast, shareholders preferring liquidity over principal preservation 
may prefer a liquidity fee because it allows full liquidity of that 
investor's money market fund shareholdings--it just imposes a greater 
cost for that liquidity if the fund is under stress.\465\
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    \465\ See, e.g., Comment Letter of BlackRock, Inc. on the IOSCO 
Consultation Report on Money Market Fund Systemic Risk Analysis and 
Reform Options (May 28, 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf. (stating their preference for 
liquidity fees over gates ``because clients with an extreme need for 
liquidity can choose to pay for that liquidity in a crisis''); BNP 
Paribas IOSCO Comment Letter, supra note 357 (stating that it 
``would not make sense to restrict the redeemer willing to pay the 
price of liquidity'').
---------------------------------------------------------------------------

    Because fees and gates can accomplish somewhat different objectives 
and one may be better suited to one set of market circumstances than 
the other, we preliminarily believe that providing funds with the 
ability to use either tool, as the board determines is in the best 
interest of the fund, is a better approach to preserve the benefits of 
money market funds for investors and the short-term financing markets 
for issuers, enhance investor protection, and improve money market 
funds' ability to manage and mitigate high levels of redemptions. It 
also may better allow funds to tailor the redemption restrictions they 
employ to their experience with the preferences and behavior of their 
particular shareholder base and to adapt the restriction they institute 
as they or the industry gains experience over time employing such 
restrictions. We request comment on stand-alone liquidity fees or 
stand-alone gates.
     Should we adopt rule amendments that would just permit 
money market funds to institute liquidity fees or just permit these 
money market funds to institute a gate? Why might it be preferable to 
allow only a fee or only a gate? If we allowed only a fee or only a 
gate, should there be different parameters or restrictions around when 
the fee or gate could be imposed or lifted than what we have proposed? 
If so, what should they be and why?
b. Partial Gates
    We are proposing to permit money market funds to institute a 
complete gate in certain circumstances--a temporary suspension of 
redemptions. Some have suggested that we allow money market funds to 
impose partial gates in times of stress.\466\ For example, once the 
money market fund had crossed the 15% weekly liquid asset threshold, we 
could permit the board of directors (including a majority of its 
independent directors) to limit redemptions by any particular 
shareholder to a certain percentage of their shareholdings, to a 
certain percentage of the fund's outstanding shares, or to a certain 
dollar amount per day. Those limited redemptions would not be charged a 
liquidity fee.
---------------------------------------------------------------------------

    \466\ See, e.g., HSBC EC Letter, supra note 156 (stating that a 
money market fund should be able to limit the total number of shares 
that the fund is required to redeem on any trading day to 10% of the 
shares in issue, that any such gate be applied pro rata to 
redemption requests, and that any redemption requests not met be 
carried over to the next business day and so forth until all 
redemption requests have been met).
---------------------------------------------------------------------------

    A partial gate can operate to prevent ``fire sales'' of assets in 
the fund and provide some liquidity to investors while allowing time 
for the fund to satisfy the remaining portion of redemptions requests 
under better market conditions or with internally generated liquidity. 
It can act as a gradual brake on redemptions, reducing

[[Page 36900]]

them to the extent that they no longer impact the fund's value or 
liquidity. In doing so, they can have a less severe impact on fund 
shareholders because they know they will be able to redeem without cost 
at least a certain portion of their investment on any particular day, 
even in times of stress. A partial gate could be imposed in lieu of a 
liquidity fee or could be combined with a liquidity fee (e.g., once the 
fund imposed a partial gate, a shareholder could redeem 10% of their 
shareholdings at no cost and the rest of their shareholdings by paying 
a liquidity fee). Similarly, we could consider adopting a partial gate 
in lieu of our full gate proposal or as an additional tool that would 
be available to fund boards on the same terms as a full gate is 
available.
    On the other hand, a partial gate may not impose a substantial 
enough deterrent on redemption activity in times of stress to 
effectively reduce the contagion impact of heavy redemptions on 
remaining investors and the short-term financing markets. For example, 
in 2007 when a Florida local government investment pool suspended 
redemptions in response to a run, it re-opened with a combined partial 
gate and liquidity fee--local governments could take out the greater of 
15% of their holdings or $2 million without penalty, and the remainder 
of any redemptions were subject to a 2% redemption fee.\467\ We 
understand that only a few investors redeemed more than what was 
allowed without a fee, but that investors redeemed most of what was 
allowed under the partial gate without triggering the redemption 
fee.\468\ We also are concerned that a partial gate would operate in 
substantially the same manner as an exemption from the fee or gate 
requirement for small withdrawals, discussed above in section III.B.5, 
and thus may be subject to many of the same drawbacks in terms of 
operational costs and added complexity compared to our liquidity fees 
and gates proposal.
---------------------------------------------------------------------------

    \467\ See David Evans and Darrell Preston, Florida Investment 
Chief Quits; Fund Rescue Approved, Bloomberg (Dec. 4, 2007).
    \468\ See, e.g., Neil Weinberg, Florida Fund Meltdown: Bad to 
Worse, Forbes (Dec. 6, 2007) (noting that investors withdrew $1.2 
billion from the $14 billion pool after it re-opened, while 
depositing only $7 million, but that only 3 out of about 1,700 
participants in the pool chose to pay the redemption fee to withdraw 
additional assets).
---------------------------------------------------------------------------

    We request comment on whether we should require or permit partial 
gates in certain circumstances.
     Should we allow partial gates? If so, why? Under what 
conditions and of what nature? Should they limit each shareholder's 
redemptions to a certain percentage of his or her shareholdings (e.g., 
10% or 25%), to a certain percentage of the fund's outstanding shares 
(e.g., 1% or 5%), or to a certain dollar amount per day (e.g., $10,000 
or $50,000)? If so, what percentage or dollar amount and why?
     How would partial gates affect shareholder redemption 
decisions compared to our proposal of liquidity fees and full gates? 
Would they achieve our goals of preserving the benefits of money market 
funds for investors and the short-term financing markets for issuers, 
while mitigating the risk of runs, enhancing investor protection and 
improving money market funds' ability to manage and mitigate high 
levels of redemptions to the same extent as our proposed liquidity fees 
and gates? Why or why not?
     If we allowed partial gates, should they be allowed in 
addition to liquidity fees and full gates or in lieu of fees or full 
gates? What operational and other costs would be involved if we allowed 
partial gates in addition to or in lieu of fees and/or full gates?
c. In-Kind Redemptions
    In 2009, we requested comment on requiring that funds satisfy 
redemption requests in excess of a certain size through in-kind 
redemptions.\469\ We also requested comment on this type of redemption 
restriction when we requested comment on the PWG Report.\470\ In-kind 
redemptions might lessen the effect of large redemptions on remaining 
money market fund shareholders, and they would ensure that the 
redeeming investors bear part of the cost of their liquidity needs. 
During the 2008 financial crisis, one money market fund stated that it 
would honor certain large redemptions in-kind in an attempt to decrease 
the level of redemptions in that fund.\471\
---------------------------------------------------------------------------

    \469\ See 2009 Proposing Release, supra note 31, at section 
III.B. An in-kind redemption occurs when a shareholder's redemption 
request to a fund is satisfied by distributing to that shareholder 
portfolio assets of that fund instead of cash.
    \470\ See PWG Report, supra note 111, at section 3.c (discussing 
requiring that money market funds satisfy certain redemptions in-
kind).
    \471\ See 2009 Proposing Release, supra note 31, at n.309.
---------------------------------------------------------------------------

    In both instances, almost all commenters addressing this potential 
reform option opposed it.\472\ Most commenters believed that requiring 
in-kind redemptions would be technically unworkable due to the complex 
valuation and operational issues that would be imposed on both the fund 
and on investors receiving portfolio securities.\473\ They also 
asserted that required in-kind redemptions could result in disrupting, 
rather than stabilizing, markets if redeeming shareholders needing 
liquidity were forced to sell into declining markets.\474\ Several 
commenters stated that investors would dislike the prospect of 
receiving redemptions in-kind and would structure their holdings to 
avoid the requirement, but would nevertheless still collectively engage 
in redemptions if the money market funds were to come

[[Page 36901]]

under stress with similar adverse consequences for the funds and the 
short-term financing markets.\475\
---------------------------------------------------------------------------

    \472\ But see Comment Letter of Forward Management (Aug. 21, 
2009) (available in File No. S7-11-09) (supporting in-kind 
redemption requirement); Comment Letter of the American Bar 
Association (Committee on Federal Regulation of Securities) (Sept. 
9, 2009) (available in File No. S7-11-09) (same). In addition, two 
PWG Report commenters expressed concern that redemptions in-kind 
would be technically unworkable, but were open to further 
examination of this option. See Comment Letter of Invesco Advisers, 
Inc. (Jan. 10, 2011) (available in File No. 4-619) (``We have 
previously expressed our concern that requiring money market funds 
to satisfy redemptions in-kind under certain circumstances would 
likely be technically unworkable and could result in disrupting, 
rather than stabilizing, markets. While we continue to harbor these 
concerns, we would be supportive in principle of a mandatory in-kind 
redemption requirement if these technical challenges could be 
addressed successfully in a partnership with regulatory 
authorities.''); Comment Letter of Federated Investors, Inc. (Jan. 
7, 2011) (available in File No. 4-619) (``Federated Jan 2011 PWG 
Comment Letter'') (``we have identified some of the major problems 
associated with redemption in-kind and included these in our comment 
letter to the Commission on the recent money market fund reforms. . 
. . At the appropriate time, we would be willing to meet with the 
Commission or its staff to review our analysis of the issues raised 
in responding to such events and to discuss approaches to resolving 
these issues.'').
    \473\ See, e.g., Comment Letter of BlackRock Inc. (Jan. 10, 
2011) (available in File No. 4-619) (``BlackRock PWG Comment 
Letter''); Comment Letter of The Dreyfus Corporation (Jan. 10, 2011) 
(available in File No. 4-619) (``Dreyfus PWG Comment Letter''); 
Comment Letter of Investment Company Institute (Jan. 10, 2011) 
(available in File No. 4-619) (``ICI Jan 2011 PWG Comment Letter''); 
Comment Letter of Fidelity Investments (Jan. 10, 2011) (available in 
File No. 4-619) (``Fidelity Jan 2011 PWG Comment Letter''). For 
example, the BlackRock PWG Comment Letter stated that some 
shareholders cannot receive and hold direct investments in money 
market assets and some portfolio securities, such as repurchase 
agreements and Eurodollar time deposits, are OTC contracts and 
cannot be transferred to retail or to multiple investors. The 
Fidelity Jan 2011 PWG Comment Letter added that advisers may only be 
able to transfer the most liquid securities, leaving a less liquid 
portfolio for non-redeeming shareholders and with odd-lot positions 
that are more difficult and expensive to trade.
    \474\ See, e.g., Comment Letter of Goldman Sachs Asset 
Management, L.P. (Jan. 10, 2011) (available in File No. 4-619) (``a 
potential result of forced in-kind redemptions is simply to transfer 
the selling responsibility from presumably sophisticated and 
experienced asset managers to a disparate group of investors who do 
not necessarily have any reason to know how to dispose of these 
securities effectively''); Comment Letter of SVB Asset Management 
(Jan. 10, 2011) (available in File No. 4-619); Comment Letter of T. 
Rowe Price Associates, Inc. (Jan. 10, 2011) (available in File No. 
4-619).
    \475\ See, e.g., ICI Jan 2011 PWG Comment Letter, supra note 
473; Richmond Fed PWG Comment Letter, supra note 139; Comment Letter 
of Wells Fargo Funds Management, LLC (Jan. 10, 2011) (available in 
File No. 4-619) (``Wells Fargo PWG Comment Letter'').
---------------------------------------------------------------------------

    These comments led us to believe that requiring in-kind redemptions 
would create operational difficulties that could prevent funds from 
operating fairly to investors in practice and that it would not 
necessarily mitigate money market funds' susceptibility to runs and 
related adverse effects on the short-term financing markets and capital 
formation. Thus, we expect that the liquidity fees and gates approach 
described above would better achieve our goals of preserving the 
benefits of money market funds for investors and the short-term 
financing markets for issuers while enhancing investor protection and 
improving money market funds' ability to manage and mitigate potential 
contagion from high levels of redemptions. Liquidity fees and gates 
also may be easier to implement than required in-kind redemptions. We 
request comment on whether we are correct in our analysis of the 
relative merits and costs of in-kind redemptions as compared to the 
other forms of redemption restrictions described in this Release as 
well as any others that money market funds could seek to impose.
    We also request comment on all the redemption restriction 
alternatives discussed in this Release.
     Are there other alternatives that we should consider? Do 
commenters agree with our discussion about the advantages and 
disadvantages of the various alternatives? Do commenters agree with our 
discussion of their potential benefits and costs and other economic 
effects?

C. Potential Combination of Standby Liquidity Fees and Gates and 
Floating Net Asset Value

    Today, we are proposing two alternative methods of reforming money 
market funds. Although these two proposals are designed to achieve many 
of the same goals, by their nature they would do so to different 
degrees and with different tradeoffs. As discussed above, our first 
alternative would require money market funds (other than government and 
retail funds) to adopt floating NAVs. This proposal is designed 
primarily to address the incentive for shareholders to redeem shares 
ahead of other investors in times of fund and market stress. It also is 
intended to improve the transparency of funds' investment risks through 
more transparent valuation and pricing methods. It makes explicit the 
risk and reward relation for money market funds. We recognize, however, 
that the proposal does not necessarily address shareholders' incentive 
to redeem from money market funds due to their liquidity risk or for 
other reasons as discussed below. In times of severe market stress when 
the secondary markets for funds' assets become illiquid, investors may 
still have incentives to redeem shares before their fund's liquidity 
dries up. It also may not alter money market fund shareholders' 
incentive to redeem in times of market stress when investors are 
engaging in flights to quality, liquidity, and transparency and the 
related contagion effects from such high levels of redemptions.
    Our second proposal, which requires funds to impose liquidity fees 
unless the fund's board determines that it would not be in the best 
interest of the fund and permits them to impose gates in certain 
circumstances, is primarily focused on helping money market funds 
manage heightened redemptions and reducing shareholders' incentive to 
redeem under stress. It also could improve the transparency of funds' 
liquidity risks through a more transparent and systematic allocation of 
liquidity costs. In doing so, it addresses a principal drawback of our 
floating NAV proposal by imposing a cost on redemptions in times of 
market stress that may incorporate not just investment risk but also 
liquidity risk. The prospect of facing liquidity fees and gates will 
give the additional benefit of better informing and sensitizing 
investors to the risks of investing in money market funds. We 
recognize, however, that our liquidity fees and gates proposal does not 
entirely eliminate the incentive of shareholders to redeem when the 
fund's shadow price falls below a dollar. Moreover, it does not 
eliminate the lack of valuation transparency in the pricing of money 
market funds and any corresponding lack of shareholder appreciation of 
money market fund valuation risks.
    We are considering addressing the limitations of the two proposals 
by combining them into a single reform package; that is, requiring 
money market funds (other than government money market funds and, 
regarding the floating NAV, retail money market funds) to both use a 
floating NAV and potentially impose liquidity fees or gates in times of 
fund and market stress.\476\ Doing so would address some of the 
drawbacks of each proposal individually, but would present other 
tradeoffs, as further discussed below.
---------------------------------------------------------------------------

    \476\ As discussed in supra section III.A.4, retail money market 
funds would also be exempt from our proposed floating NAV 
requirement.
---------------------------------------------------------------------------

1. Potential Benefits of a Combination
    A combined reform approach could reduce investors' incentive to 
quickly redeem assets from money market funds in a crisis, improve the 
transparency of funds' investment and liquidity risks, and enhance 
money market funds' ability to manage and mitigate potential contagion 
from high levels of redemptions relative to either proposal alone. 
Under a combined approach, the floating NAV should reduce investors' 
incentive to redeem early to avoid a market-based loss embedded in the 
fund's portfolio because the fund would be transacting at the fair 
value of its portfolio at all times. Doing so should reduce the 
likelihood that investors engage in preemptive redemptions that could 
trigger the imposition of fees and gates.\477\ Requiring a fund to 
operate with a floating NAV with potential imposition of fees and gates 
in times of fund or market stress should thus reduce the risk that 
funds would face heavy redemptions. Early redeeming shareholders would 
be less likely to be able to exit the fund without bearing the cost of 
their redemptions, and thereby it will be less likely to concentrate 
losses for the remaining shareholders. At the same time, requiring a 
floating NAV fund to consider imposing liquidity fees or impose gates 
when the fund's liquidity buffer comes under strain should enhance its 
ability to manage its liquidity risk before it results in portfolio 
losses.
---------------------------------------------------------------------------

    \477\ See supra section III.B.1 (discussing shareholders' 
potential incentive to engage in preemptive redemptions in a stable 
price money market fund that can impose fees or gates).
---------------------------------------------------------------------------

    The combination would provide a broader range of tools to a 
floating NAV money market fund to manage redemptions in a crisis, 
thereby avoiding ``fire sales'' of assets that would affect all 
shareholders and potentially the short-term financing markets for 
issuers. The combined approach also should further enhance the ability 
of money market funds to treat shareholders equitably, and could allow 
better management of funds' portfolios in a crisis to minimize 
shareholder losses.
    Requiring funds that can impose liquidity fees and gates to have a 
floating NAV provides fuller transparency of fund valuation and

[[Page 36902]]

liquidity risk. This enhanced transparency may better inform investors 
to the risk profile of their money market fund investment, and may make 
investors less sensitive to fluctuations in a money market fund's NAV. 
As a result of this familiarity with money market fund NAV 
fluctuations, investors may be less likely to redeem shares in times of 
fund and market stress because of the possibility that a fund's NAV 
might change, and correspondingly reducing the chances that fees or 
gates may be triggered.\478\ Liquidity fees also can encourage funds to 
better and more systematically manage liquidity and redemption activity 
and encourage shareholders to monitor and exert market discipline over 
the fund to reduce the likelihood that the imposition of fees or gates 
will become necessary in that fund.
---------------------------------------------------------------------------

    \478\ See supra section III.A.1.
---------------------------------------------------------------------------

    We request comment on the potential benefits of combining our two 
alternatives into a single proposal.
     Would combining the floating NAV alternative with the 
liquidity fees and gates alternative have the benefits we discuss 
above? Are there any other benefits that we have not discussed? If so, 
what would they be?
     Would combining the floating NAV alternative with only 
liquidity fees or only gates provide different benefits?
2. Potential Drawbacks of a Combination
    Some drawbacks may result from combining the two proposals.\479\ 
One potential drawback is that combining a floating NAV with liquidity 
fees and gates does not preserve the benefits of stable price money 
market funds for investors as our liquidity fees and gates alternative 
does. Although any combination likely would include an exemption to the 
floating NAV requirement for government and retail money market 
funds,\480\ most other money market funds would have a floating NAV, 
thereby incurring the costs and operational issues associated with that 
proposal. As discussed more fully in the section on that alternative, 
some investors may be deterred from investing in a floating NAV fund 
for a variety of reasons. We have designed our liquidity fees and gates 
alternative in large part to preserve the benefits of stable price 
funds for those investors while enhancing investor protection and 
improving money market funds' ability to manage and mitigate potential 
contagion from high levels of redemptions. Combining the proposals thus 
may not fully accomplish our goal of preserving the current benefits of 
money market funds.
---------------------------------------------------------------------------

    \479\ One commenter noted their opposition to combining 
redemption gates with a floating NAV, arguing that such a 
combination ``acknowledges that the floating NAV does not resolve 
such first mover advantage.'' See Dreyfus FSOC Comment Letter, supra 
note 174.
    \480\ See supra sections III.A.3 and III.A.4. In any 
combination, retail funds would likely be subject to fees and gates, 
although exempt from the floating NAV, and thus would not be exempt 
from both provisions as government funds likely would.
---------------------------------------------------------------------------

    Another drawback of combining the two proposals is that if a 
floating NAV significantly changes investor expectations regarding 
money market fund risk and their prospect of suffering losses, 
requiring funds with a floating NAV to also be able to impose standby 
liquidity fees and gates may be unnecessary to manage the risks of 
heavy redemptions in times of crisis. Because of the unique features of 
stable price money market funds, liquidity fees and gates may be 
necessary for a fund to ensure that all of its shareholders are treated 
the same, while also managing the risks of contagion from heavy 
redemptions. A fund with a floating NAV may not face these same risks 
and thus providing those funds with the ability to impose fees or gates 
may not be justified, particularly in light of the Investment Company 
Act's expressed preference for full redeemability of open-end fund 
shares.\481\
---------------------------------------------------------------------------

    \481\ See 15 U.S.C. 80a-2(a)(32) and 80a-22(e); see also supra 
note 395.
---------------------------------------------------------------------------

    A last potential drawback is that although some investors may be 
comfortable investing in a money market fund that has either a floating 
NAV or liquidity fees and gates, some investors may not wish to invest 
in a fund that has both features because a fund that does not have a 
stable price and also may restrict redemptions may not be suitable as a 
cash management tool for such investors. The combination of our 
proposals may result in these investors looking to other investment 
alternatives that offer principal stability or that do not also have 
potential restrictions on redemptions. We discuss the potential effects 
of such a shift in section III.E below.
    We request comment on the potential drawbacks of combining our two 
alternatives into a single proposal.
     Would combining the floating NAV alternative with the 
liquidity fees and gates alternative have the drawbacks we discuss 
above? Are there any other drawbacks that we have not discussed? If so, 
what would they be?
     Would combining the floating NAV alternative with only 
liquidity fees or only gates impose different costs?
3. Effect of Combination
    As discussed above, each of the alternatives that we are proposing 
today achieves similar goals, in different ways, but they bear distinct 
costs. Accordingly, if we were to combine the two proposals, while 
there is the likelihood that a combination may in some ways improve on 
each alternative standing alone, the combination would impose two 
separate sets of costs on funds, investors, and the markets. We request 
comment on whether the benefit of combining the two alternatives into a 
single reform would justify the drawbacks of imposing two distinct sets 
of costs and economic impacts.
     Should we combine the two alternatives as a single reform? 
What would be the advantages and drawbacks of such a combination? Would 
the benefits of combining the proposals justify requiring the two 
individual sets of costs associated with implementing the combined 
alternatives? Would the imposition of two sets of costs materially 
impact the decisions of money market fund sponsors on whether or not 
they would continue to offer the product?
4. Operational Issues
    Combining the two alternatives into a single approach could pose 
certain operational issues and raise questions about how we should 
structure such a reform. These issues are discussed below.
a. Fee Structure
    Under our liquidity fees and gates proposal, the board of directors 
of a money market fund would be required to impose a liquidity fee 
(unless they find that not doing so would be in the best interest of 
the fund) if the fund's weekly liquid assets fell below 15% of its 
total assets. The default liquidity fee would be 2% unless the board 
determined that a lesser fee would be in the best interest of fund 
shareholders.
    The liquidity fees imposed by a floating NAV fund may serve 
different purposes than those of a stable price fund. A stable price 
fund board, for example, might use liquidity fees to recoup the costs 
associated with selling assets at distressed prices in an illiquid 
market to meet redemptions, as well as to help repair the fund's NAV. 
In contrast, a floating NAV fund board might choose to impose liquidity 
fees only to recoup the costs associated with selling assets at 
distressed prices. This difference in the purpose served by liquidity 
fees raises questions about the appropriate default size of a liquidity 
fee for the combined proposal, the

[[Page 36903]]

appropriate thresholds for triggering imposition of the fee, and the 
thresholds for removing it.
    We request comment on the structure of the default liquidity fee if 
applied to a floating NAV money market fund.
     Should we alter the default liquidity fee for the combined 
proposal? Should we specify a default fee for the combined proposal or 
merely require that a fee be based on the costs incurred by the fund 
selling assets to meet redemptions? We previously noted issues that can 
arise with variable liquidity fees.\482\ Would these issues be of 
concern in the context of a floating NAV fund?
---------------------------------------------------------------------------

    \482\ See supra section III.B.2.c.
---------------------------------------------------------------------------

     Should we contemplate different percentages for funds to 
consider before applying liquidity fees or gates to a floating NAV 
money market fund than weekly liquid assets falling below 15%? If so, 
what percentages should we consider. Should we consider a different 
threshold for automatic removal of liquidity fees other than recovery 
of a fund's liquidity to 30% weekly liquid assets? If so, what should 
the threshold for removal be?
     Should a liquidity fee in a floating NAV fund be triggered 
by a different factor other than weekly liquid assets falling below 
15%, such as a change in NAV? If so, should such a trigger be based on 
a relative percentage change in NAV over some time period or on an 
absolute change since a fund's inception? For example, should a 
liquidity fee be triggered if a fund's NAV falls by more than \1/4\ of 
1% in a week? Alternatively, should a liquidity fee be triggered if a 
fund's NAV falls by more than a certain number of basis points? If 
based on an absolute number, what should the number be? A drop in NAV 
of more than 25 basis points from its initial starting price or another 
number? What types of issues do the two options present? What other 
types of thresholds should be considered? What issues would arise from 
using other thresholds?
b. Redemption gates
    Under our liquidity fees and gates alternative, a fund would have 
the option of imposing temporary redemption gates if liquidity falls 
below the same threshold that it imposes liquidity fees. These 
redemption gates are designed to act as ``circuit breakers'' to halt 
redemptions, thereby allowing funds to minimize losses to all 
shareholders and reducing any associated contagion risks. Most of the 
concerns that redemption gates are designed to address in a stable 
price money market fund also apply to a floating NAV money market fund, 
and gates should be similarly useful in addressing them. Much like a 
stable price fund, a floating NAV fund may also face difficulties 
managing heavy redemptions in times of stress, and redemption gates may 
work to mitigate these difficulties. Gates, by halting redemptions, 
would provide ``breathing room'' for investors to take better stock of 
a situation. Conversely, redemption gates may not be in the interest of 
investors who rationally wish to redeem at the time, or who want 
immediate liquidity.
     Do redemption gates on a floating NAV fund pose any 
particular issues or provide any specific benefits different than those 
associated with gates in a stable price fund? If so, what are they?
     If we were to combine the two alternatives and permit 
redemption gates on a floating NAV fund, should the thresholds be the 
same as for imposing liquidity fees? If not, what should they be? 
Should they be tied to redemption activity? Drops in NAV?
     Should the length of time permitted for redemption gates 
in a floating NAV fund be the same as that permitted under the 
standalone alternative? Should floating NAV funds be permitted to gate 
redemptions for a longer or shorter time? If so, why?
     If the proposals were combined, would a partial gate be 
appropriate?
c. Floating NAV Combined with only Liquidity Fees or only Gates
    If we were to combine the alternatives, we could also do so in a 
partial manner, requiring money markets to maintain a floating NAV and 
combining it with standby liquidity fees standing alone. Similarly, we 
could instead require that a floating NAV fund be able to impose gates, 
but not liquidity fees. Combining a floating NAV with just liquidity 
fees or gates may simplify operational implementation of the 
combination and make money market funds more attractive to investors. 
On the other hand, such a limited combination may not achieve the goals 
of the proposed reform to the same extent as a full combination. We 
request comment on whether, if we were to combine the two alternatives, 
we should require a floating NAV fund to only have standby liquidity 
fees or gates, but not both.
     What advantages and disadvantages would result from such a 
limited combination?
     If we were to pursue a limited combination, which measure 
should we combine with the floating NAV? Liquidity fees or gates? Why?
d. Choice of Floating NAV or Liquidity Fees and Gates
    Another way of combining the floating NAV and fees and gates 
alternatives discussed in this Release would be to require that money 
market funds (other than government money market funds) choose to 
either transact with a floating NAV or be able to impose liquidity fees 
and gates in times of stress--in other words, each non-government money 
market fund would have to choose to apply either the floating NAV 
alternative or the liquidity fees and gates alternative. Providing such 
a choice may allow each money market fund to choose the reform 
alternative that is most efficient, cost-effective, and preferable to 
shareholders. This could enhance the efficiency of our reforms and 
minimize costs and competitive impacts. On the other hand, allowing 
such a choice may not achieve the goals of the proposed reform to the 
same extent as a full combination or mandating one alternative versus 
another. In addition, in making such a choice, the money market fund 
industry may not necessarily be incentivized to take into consideration 
the full likely effects of their decisions on the short-term financing 
markets, and thus capital formation, or the broader systemic effects of 
their choices. Funds would need to clearly communicate their choice of 
approaches to shareholders. We request comment on whether we should 
permit non-government money market funds to choose to apply either the 
floating NAV alternative or the fees and gates alternative.
     What advantages and disadvantages would result from 
permitting such a choice?
     Would permitting such a choice achieve our reform goals to 
the same extent as either our floating NAV proposal or our fees and 
gates proposal?
     Would this cause investor confusion because of a 
fragmentation in the market?
     How should a fund elect to make such a choice? At 
inception of the fund? Should a fund be permitted to switch elections?
e. Other Issues
    The combination of the two alternatives could create other 
operational issues. For example, we have previously discussed our 
understanding that a floating NAV fund would meet the definition of a 
cash equivalent for accounting purposes, because it is unlikely to 
experience significant fluctuations in value.\483\ We

[[Page 36904]]

would expect a fund that combines liquidity fees and gates with a 
floating NAV should not experience any additional volatility compared 
to a floating NAV fund alone. That said, in some circumstances, 
liquidity fees could effectively lower share value, by requiring the 
payment of fees upon redemption. It is also important to note that 
gates would potentially compromise liquidity. Nevertheless, we expect 
the value of floating NAV funds with liquidity fees and gates would be 
substantially stable and should continue to be treated as a cash 
equivalent under GAAP.\484\ We also do not expect that a combination of 
the two approaches would result in any novel tax issues that we have 
not previously discussed in the relevant sections above. We request 
comment on the implications of combining fees and gates with a floating 
NAV on tax and accounting issues.
---------------------------------------------------------------------------

    \483\ See supra section III.A.6.
    \484\ Id.
---------------------------------------------------------------------------

     Would a money market fund that combines a floating NAV 
with liquidity fees and gates continue to be treated as a cash 
equivalent under GAAP? If not, why not?
     Would a combination of the alternatives create any 
additional accounting or any novel tax issues? If so, what would they 
be?
    Under our floating NAV proposal we are proposing that a fund would 
be required to price to the fourth decimal place if they price their 
shares at one dollar (e.g., $1.0000), or to an equivalent level of 
precision if the fund uses another price level. We would require such a 
level of pricing precision, in part, to ensure that any fluctuations in 
a fund's NAV are visible to investors.\485\ We would expect that the 
value of such transparency would be unchanged under a combined 
approach.
---------------------------------------------------------------------------

    \485\ See supra section III.A.2.
---------------------------------------------------------------------------

     Would such a level of pricing precision be appropriate for 
a fund that combines liquidity fees and gates with a floating NAV? If 
not, why not, and what level of pricing precision should be required 
instead?
    As discussed above, we are proposing exemptions under each 
alternative. Under the floating NAV alternative, we are proposing an 
exemption for government and retail money market funds. Under the 
liquidity fees and gates alternative, we are proposing an exemption for 
government money market funds, but not retail funds. We would expect 
that a combined approach would also include these exemptions, 
considering that the reasons we are proposing the exemptions to the 
floating NAV remain the same in the context of a combined approach. 
However, our liquidity fees and gates proposal treats government and 
retail funds differently, and provides an exemption to the liquidity 
fees and gates proposal for government money market funds, but not for 
retail funds. For the reasons discussed in the sections where we 
propose the exemptions, if we were to combine the proposals, we would 
expect to continue to offer the exemptions provided under each 
alternative, but would not extend them. Accordingly, a combined 
approach would likely provide an exemption to the floating NAV and to 
fees and gates for government money market funds, but would provide 
only an exemption to the floating NAV for retail funds, and not an 
exemption to fees and gates.
     If we were to combine the two alternatives, should we 
retain the proposed exemptions to the floating NAV requirement for 
government and retail money market funds? If not, why not?
     Under a combined approach, should we also exempt retail 
funds from not only the floating NAV but also from the fees and gates 
requirements? If so, why?
    We are also proposing to retain rules 17a-9 and 22e-3 under both of 
the alternatives we are proposing today, with certain amendments to 
account for operational differences to rule 22e-3's triggering 
mechanism.\486\ If we were to combine the two alternatives into a 
single approach, we would expect to make the amendments to the 
triggering mechanisms of rule 22e-3 we are proposing today (which are 
the same under each alternative) and retain rule 17a-9 unchanged. As 
discussed above, we believe that funds would continue to find the 
ability to sell securities to affiliated persons under rule 17a-9 
useful under both alternatives, as well as under a combined approach. 
We also expect that the amendments we are making to the triggering 
mechanism permitting a suspension of redemptions in preparation for a 
fund's liquidation under rule 22e-3 would continue to be appropriate 
under a combined approach as well.
---------------------------------------------------------------------------

    \486\ We are proposing to change the trigger for use of rule 
22e-3 under both alternatives to a reduction in a fund's weekly 
liquid assets below 15%. See supra section III.A.5.b.
---------------------------------------------------------------------------

     Would a combined approach have any significant effects on 
our proposed treatment of rules 17a-9 and 22e-3? Would we need to make 
any other changes to those rules to accommodate such a combination?
    Our floating NAV alternative includes a compliance period of 2 
years to allow for funds to transition to a floating NAV without 
imposing unnecessary costs.\487\ We would expect that any combined 
approach would include a similar compliance period because funds would 
likely need a significant amount of time to implement a floating NAV. 
At the same time, we do not expect that implementing both alternatives 
would add substantially to the amount of time it would take to 
implement a floating NAV alone, and accordingly would expect to provide 
the same compliance period if we were to combine the approaches.
---------------------------------------------------------------------------

    \487\ See supra section III.A.9.
---------------------------------------------------------------------------

     Should we provide the same compliance period under a 
combined approach? If not, should the compliance period be longer or 
shorter? Should we consider a grandfathering approach instead of or in 
addition to a compliance period?
    Under both of the alternatives that we are proposing today, we are 
also including a variety of proposed disclosure improvements designed 
to improve transparency of fund risks and risk management, with the 
relevant disclosure tailored to each alternative. If we were to combine 
the two approaches, we would likely merge the disclosure reforms, and 
revise the disclosure requirements to take such a merger into account. 
We would not expect that a combined approach would require significant 
additional disclosure reforms not discussed under the two alternatives.
     Would a combined approach pose any new disclosure issues 
that are not currently contemplated in the discussion of disclosure 
reforms for each of the two alternatives? If so, what would those 
issues be? Would a combined approach result in any new or changed risks 
that investors should be informed of?
    We do not expect that there would be any significant additional 
costs from combining the two approaches that are not previously 
discussed in the sections discussing the costs of the two alternatives 
above. It is likely that implementing a combined approach would likely 
save some percentage over the costs of implementing each alterative 
separately as a result of synergies and the ability to make a variety 
of changes to systems at a single time. We do not expect that combining 
the approaches would create any new costs as a result of the 
combination itself. Accordingly, we estimate that the costs of 
implementing a combined approach would at most be the sum of the costs 
of each alternative, but may likely be less.

[[Page 36905]]

    We request comment on the costs of combining the two approaches.
     Would there be any new costs associated with combining the 
two approaches that are not already discussed separately under each 
alternative? If so, what would they be?
     Would there be a reduction in costs as a result of 
implementing both alternatives at the same time? If so, how much 
savings would there be?

D. Certain Alternatives Considered

    In addition to the proposed reforms and alternatives described 
elsewhere in this Release, it is important to note that in coming to 
this proposal, we and our staff considered a number of additional 
alternative options for regulatory reform in this area. For example, we 
considered each option discussed in the PWG Report and the FSOC 
Proposed Recommendations. We currently are not pursuing certain of 
these other options because we believe, after considering the comments 
we received on the PWG Report and that FSOC received on the FSOC 
Proposed Recommendations and the economic analysis set forth in this 
Release, that they would not achieve our regulatory goals as well as 
what we propose today. We discuss below these options, and our 
principal reasons for not pursuing them further at this time.
1. Alternatives in the FSOC Proposed Recommendations
    As discussed in section II.D.3 above, in November 2012, FSOC 
proposed to recommend that we undertake structural reforms of money 
market funds. FSOC proposed three alternatives for consideration, 
which, it stated, could be implemented individually or in combination. 
The first option \488\--requiring that money market funds use a 
floating NAV--is part of our proposal. The other two options in the 
FSOC Proposed Recommendations each would require that money market 
funds maintain a NAV buffer. One option would require that most money 
market funds have a risk-based NAV buffer of up to 1% to absorb day-to-
day fluctuations in the value of the funds' portfolio securities and 
allow the funds to maintain a stable NAV and that this NAV buffer be 
combined with a ``minimum balance at risk.'' \489\ The required minimum 
size of a fund's NAV buffer would be determined based on the 
composition of the money market fund's portfolio according to the 
following formula:
---------------------------------------------------------------------------

    \488\ See FSOC Proposed Recommendations, supra note 114, at 
section V.A.
    \489\ Under the FSOC Proposed Recommendations, Treasury money 
market funds would not be subject to a NAV buffer or a minimum 
balance at risk. See FSOC Proposed Recommendations, supra note 114, 
at sections V.B and V.C for a full discussion of these two 
alternatives. This section of the Release provides a summary based 
on those sections of the FSOC Proposed Recommendation.
---------------------------------------------------------------------------

     No buffer requirement for cash, Treasury securities, and 
repos collateralized solely by cash and Treasury securities (``Treasury 
repo'');
     A 0.75% buffer requirement for other daily liquid assets 
(or weekly liquid assets, in the case of tax-exempt money market 
funds); and
     A 1% buffer requirement for all other assets.
    A fund whose NAV buffer fell below the required minimum amount 
would be required to limit its new investments to cash, Treasury 
securities, and Treasury repos until its NAV buffer was restored. A 
fund that completely exhausted its NAV buffer would be required to 
suspend redemptions and liquidate or could continue to operate with a 
floating NAV indefinitely or until it restored its NAV buffer.
    A money market fund could use any funding method or combination of 
methods to build the NAV buffer, and could vary these methods over 
time. The FSOC Proposed Recommendations identified three funding 
methods that would be possible with Commission relief from certain 
provisions of the Investment Company Act: (1) An escrow account that a 
money market fund's sponsor established and funded and that was pledged 
to support the fund's stable share price; (2) the money market fund's 
issuance of a class of subordinated, non-redeemable equity securities 
(``buffer shares'') that would absorb first losses in the funds' 
portfolios; and (3) the money market fund's retention of some earnings 
that it would otherwise distribute to shareholders (subject to certain 
tax limitations).\490\ We believe that the first funding method would 
be the most likely approach for funding the buffer given the complexity 
of a fund offering a new class of buffer shares (and the uncertainty of 
an active, liquid market for buffer shares developing) and the tax 
limitations on the third method.\491\ We note, however, that we believe 
this funding method is the most expensive of the three because of the 
opportunity costs the fund's sponsor will bear to the extent that the 
firms redirect this funding from other essential activities, as further 
discussed below.\492\
---------------------------------------------------------------------------

    \490\ See FSOC Proposed Recommendations, supra note 114, at 
section V.B.
    \491\ Under the Internal Revenue Code, each year, mutual funds, 
including money market funds, must distribute to shareholders at 
least 90% of their annual earnings or lose the ability to deduct 
dividends paid to their shareholders. See, e.g., Comment Letter of 
the Investment Company Institute (May 16, 2012) (available in File 
No. 4-619). We note that the retained earnings method is similar to 
how some money market funds paid for insurance that was provided by 
ICI Mutual Insurance Company from 1993 to 2003. This insurance 
covered losses on money market fund portfolio assets due to defaults 
and insolvencies but not from events such as a security downgrade or 
a rise in interest rates. Coverage was limited to $50 million per 
fund, with a deductible of the first 10 to 40 basis points of any 
loss. Premiums ranged from 1 to 3 basis points. See PWG Report, 
supra note 111, at n.24 and accompanying text. Because of the tax 
disadvantages of this funding method, it would take a long time for 
a NAV buffer of any size to build, particularly in the current low 
interest rate environment.
    \492\ This funding method also could have the greatest 
competitive impacts on the money market fund industry, as larger 
bank-affiliated sponsors would have less costly access to funding 
for the NAV buffer than independent asset management firm sponsors. 
See, e.g., Systemic Risk Council FSOC Comment Letter, supra note 363 
(``Capital requirements would likely encourage money market fund 
consolidation--particularly toward larger bank-affiliated sponsors 
(who traditionally have, and can access, more capital than 
traditional, independent asset managers). If so, this could further 
concentrate systemic risk from these institutions, and create 
conflicts of interest in the short-term financing markets (as fewer 
money funds would control a larger share of the short-term lending 
markets).'').
---------------------------------------------------------------------------

    The minimum balance at risk (``MBR'') would require that the last 
3% of a shareholder's highest account value in excess of $100,000 
during the previous 30 days (the shareholder's MBR or ``holdback 
shares'') be redeemable only with a 30-day delay.\493\ All shareholders 
may redeem 97% of their holdings immediately without being restricted 
by the MBR. If the money market fund suffers losses that exceed its NAV 
buffer, the losses would be borne first by the MBRs of shareholders who 
have recently redeemed (i.e., their MBRs would be ``subordinated''). 
The extent of subordination of a shareholder's MBR would be 
approximately proportionate to the shareholder's cumulative net 
redemptions during the prior 30 days--in other words, the more the 
shareholder redeems, the more their holdback shares become 
``subordinated holdback shares.''
---------------------------------------------------------------------------

    \493\ See FSOC Proposed Recommendations, supra note 114, at 
section V.C.
---------------------------------------------------------------------------

    The last option in the FSOC Proposed Recommendations would require 
money market funds to have a risk-based NAV buffer of up to 3% (which 
otherwise would have the same structure as discussed above), and this 
larger NAV buffer could be combined with other measures.\494\ The 
alternative measures discussed in the FSOC Proposed Recommendations 
include more stringent investment diversification requirements (which 
are proposed or discussed in section III.J below), increased minimum 
liquidity levels

[[Page 36906]]

(which we have not proposed), and more robust disclosure requirements 
(which are generally proposed in sections III.F and III.G below).\495\
---------------------------------------------------------------------------

    \494\ See id, at section V.C.
    \495\ The FSOC Proposed Recommendations asked the Commission to 
consider increasing minimum weekly liquidity requirements from 30% 
of total assets to 40% of total assets. The justification provided 
by FSOC was that most funds already have weekly liquidity in excess 
of this 40% minimum level. We do not consider this alternative for 
two reasons. There is no evidence that current liquidity 
requirements are inadequate. For example, the RSFI Study notes that 
the heightened redemption activity in the summer of 2011 did not 
place undue burdens on MMFs when they sold assets to meet redemption 
requests. No fund lost more than 50 basis points during this period 
nor did their shadow NAVs deviate significantly from amortized cost. 
See RSFI Study, supra note 21. Based on these considerations, we 
have preliminarily determined not to address additional minimum 
liquidity requirements.
---------------------------------------------------------------------------

    In the sections that follow, we discuss our evaluation of a NAV 
buffer requirement and an MBR requirement for money market funds. We 
also discuss comments FSOC received on these recommendations. For the 
reasons discussed below, the Commission is not pursuing these 
alternatives because we presently believe that the imposition of either 
a NAV buffer combined with a minimum balance at risk or a stand-alone 
NAV buffer, while advancing some of our goals for money market fund 
reform, might prove costly for money market fund shareholders and could 
result in a contraction in the money market fund industry that could 
harm the short-term financing markets and capital formation to a 
greater degree than the proposals under consideration.
a. NAV Buffer
    In considering a NAV buffer such as those recommended by FSOC as a 
potential reform option for money market funds, we considered the 
benefits that such a buffer could provide, as well as its costs. Our 
evaluation of what could be a reasonable size for a NAV buffer also 
factored into our analysis of the advantages and disadvantages of these 
options. A buffer can be designed to satisfy different potential 
objectives. A large buffer could protect shareholders from losses 
related to defaults, such as the one experienced by the Reserve Primary 
Fund following the Lehman Brothers bankruptcy. However, if complete 
loss absorption is the objective, a substantial buffer would be 
required, particularly given that money market funds can hold up to 5% 
of their assets in a single security.\496\
---------------------------------------------------------------------------

    \496\ Even commenters in favor of a buffer showed concern that 
FSOC's proposed buffer size of 1% or 3% may be inadequate. See, 
e.g., Federal Reserve Bank Presidents FSOC Comment Letter, supra 
note 38, at 5 (``For a poorly diversified fund with portfolio assets 
that carry relatively more credit risk, a 3% (maximum) NAV buffer 
may not be sufficient.''); Harvard Business School FSOC Comment 
Letter, supra note 24 (``For a well-diversified portfolio, we 
estimate that MMFs should hold 3 to 4% capital against unsecured 
paper issued by financial institutions, the primary asset held by 
MMFs. For more concentrated portfolios, we estimate that the amount 
of capital should be considerably higher.''); Better Markets FSOC 
Comment Letter, supra note 67 (``The primary shortcoming of [FSOC's 
proposed buffer] is its low level of 1 or 3 percent. . . . [Any 
buffer] must be set at a level that is sufficient to cover all of 
these factors: Projected and historical losses; additional costs in 
the form of liquidity damages or government backstops; and investor 
psychology in the face of possible financial shocks or crises. [. . 
. .] Historical examples alone . . . indicate that MMF losses have 
risen as high as 3.9 percent. This serves only as a floor regarding 
actual potential losses, clearly indicating that the necessary 
buffer must be substantially higher than 3.9 percent.''); Occupy the 
SEC FSOC Comment Letter, supra note 42 (arguing that FSOC's proposed 
buffer does not go far enough in accounting for potential risks in a 
fund's portfolio. Instead, the approach should be a two-layer 
buffer, with a first layer of up to 3% depending on the portfolio's 
credit rating and a second layer to be sized according to the 
concentration of the portfolio).
---------------------------------------------------------------------------

    Alternatively, if a buffer were not intended for complete loss 
absorption, but rather designed primarily to absorb day-to-day 
variations in the market-based value of money market funds' portfolio 
holdings under normal market conditions, this would allow a fund to 
hold a significantly smaller buffer. Accordingly, the relatively larger 
buffers contemplated in the FSOC Proposed Recommendations \497\ must 
have been designed to absorb daily price fluctuations as well as 
relatively large security defaults.\498\ In fact, a 3% buffer would 
accommodate all but extremely large losses, such as those experienced 
during the crisis. However, a buffer that was designed to absorb such 
large losses may be too high and too costly because the opportunity 
cost of this capital would be borne at all times even though it was 
likely to be drawn upon to any degree only rarely. Accordingly, a 
buffer of the size contemplated by either alternative in the FSOC 
Proposed Recommendations appears to be too costly to be 
practicable.\499\
---------------------------------------------------------------------------

    \497\ While the second alternative in the FSOC Proposed 
Recommendation only includes a NAV buffer of up to 1%, it was 
combined with a 3% MBR, which would effectively provide the fund 
with a 4% buffer before non-redeeming shareholders in the fund 
suffered losses.
    \498\ For example, beginning in September 2008, money market 
funds that chose to participate in the Treasury Temporary Guarantee 
Program were required to file with the Treasury their weekly shadow 
price if it was below $0.9975. Our staff has reviewed the data, and 
found that through October 17, 2008, only three funds carried losses 
larger than four percent, and only five funds carried losses larger 
than three percent. Reported shadow prices excluded the value of any 
capital support agreements in place at the time, but in some cases 
included sponsor-provided capital contributions to the fund. Not 
every money market fund that applied to participate in the program 
reported shadow price data for every day during the period between 
September 1, 2008 and October 17, 2008. See also Patrick E. McCabe 
et al., The Minimum Balance at Risk: A Proposal to Mitigate the 
Systemic Risks Posed by Money Market Funds, at 31, Table 2 Federal 
Reserve Bank of New York Staff Report No. 564, July 2012 (providing 
additional statistical analysis of shadow price information reported 
by money market funds filing under the Treasury Temporary Guarantee 
Program). During that period there were over 800 money market funds 
based on Form N-SAR data.
    \499\ There is another potential adverse effect of requiring 
large NAV buffers for money market funds to address risk from 
systemic events. According to the FSOC Proposed Recommendations, 
outflows from institutional prime money market funds following the 
Lehman Brothers bankruptcy tended to be larger among money market 
funds with sponsors that were themselves under stress, indicating 
that investors redeemed shares when concerned about sponsors' 
potential inability to support ailing funds. But these sponsors were 
the ones most likely to need funding dedicated to the buffer for 
other purposes. As a result, larger buffers may negatively affect 
other important activities of money market fund sponsors and cause 
them to fail faster.
---------------------------------------------------------------------------

i. Benefits of a NAV Buffer
    The FSOC Proposed Recommendations discusses a number of potential 
benefits that a NAV buffer could provide to money market funds and 
their investors, many of which we discuss below.\500\ It would preserve 
money market funds' stable share price and potentially increase the 
stability of the funds, but would likely reduce the yields (and in the 
option that combines a 1% NAV buffer with an MBR, the liquidity) that 
money market funds currently offer to investors. Like our proposed 
reforms, the NAV buffer presents trade-offs between stability, yield, 
and liquidity.
---------------------------------------------------------------------------

    \500\ See FSOC Proposed Recommendations, supra note 114, at 
section V.B.
---------------------------------------------------------------------------

    In effect, depending on the size of the buffer, a buffer could 
provide various levels of coverage of losses due to both the 
illiquidity and credit deterioration of portfolio securities. Money 
market funds that are supported by a NAV buffer would be more resilient 
to redemptions and credit or liquidity changes in their portfolios than 
stable value money market funds without a buffer (the current 
baseline).\501\ As long as the NAV buffer is funded at necessary 
levels, each $1.00 in money market fund shares is backed by $1.00 in 
fund assets, eliminating the incentive of shareholders to redeem at 
$1.00 when the market-based value of their shares is worth less. This 
reduces shareholders' incentive to redeem shares quickly in response to 
small losses or concerns about the quality and liquidity of the money 
market fund portfolio, discussed in section II.B above, particularly 
during

[[Page 36907]]

periods when the underlying portfolio has significant unrealized 
capital losses and the fund has not broken the buck. As long as the 
expected effect on the portfolio from potential losses is smaller than 
the NAV buffer, investors would be protected--they would continue to 
receive a stable value for their shares.
---------------------------------------------------------------------------

    \501\ See, e.g., Occupy the SEC FSOC Comment Letter, supra note 
42.
---------------------------------------------------------------------------

    A second benefit is that a NAV buffer would force money market 
funds to provide explicit capital support rather than the implicit and 
uncertain support that is permitted under the current regulatory 
baseline. This would require funds to internalize some of the cost of 
the discretionary capital support sometimes provided to money market 
funds, and to define in advance how losses will be allocated. In 
addition, a NAV buffer could reduce fund managers' incentives to take 
risk beyond what is desired by fund shareholders because investing in 
less risky securities reduces the probability of buffer depletion.\502\
---------------------------------------------------------------------------

    \502\ See, e.g., Harvard Business School FSOC Comment Letter, 
supra note 24 (``Capital buffers also mean that there is an investor 
class that explicitly bears losses and has incentives to curb ex 
ante risk taking.'').
---------------------------------------------------------------------------

    Another potential benefit is that a NAV buffer might provide 
counter-cyclical capital to the money market fund industry. This is 
because once a buffer is funded it remains in place regardless of 
redemption activity. With a buffer, redemptions increase the relative 
size of the buffer because the same dollar buffer now supports fewer 
assets.\503\ As an example, consider a fund with a 1% NAV buffer that 
experiences a 25 basis point portfolio loss, which then triggers 
redemptions of 20% of its assets. The NAV buffer, as a proportion of 
fund assets and prior to any replenishment, will increase from 75 basis 
points after the loss to 93.75 basis points after the redemptions. This 
illustrates how the NAV buffer strengthens the ability of the fund to 
absorb further losses, reducing investors' incentive to redeem shares. 
This result contrasts to the current regulatory baseline under rule 2a-
7 where redemptions amplify the impact of losses by distributing them 
over a smaller investor base. For example, suppose a fund with a shadow 
price of $1.00 (i.e., no embedded losses) experiences a 25 basis point 
loss, which causes its shadow price to fall to $0.9975. If 20% of the 
fund's shares are then redeemed at $1.00, its shadow price will fall to 
$0.9969, reflecting a loss which is 24% greater than the loss 
precipitating the redemptions.
---------------------------------------------------------------------------

    \503\ See, e.g., J.P. Morgan FSOC Comment Letter, supra note 342 
([W]here capital support is utilized as a first loss position upon 
liquidation, the level of capital can be tied to a MMF's highest 
asset levels. This can result in a structure whereby, as redemptions 
accelerate and cause the unrealized loss per share to increase 
further, the amount of capital support available per share increases 
accordingly, providing further capital support to the remaining 
shareholders that do not redeem their shares.'').
---------------------------------------------------------------------------

    Finally, by allowing money market funds to absorb small losses in 
portfolio securities without affecting their ability to transact at a 
stable price per share, a NAV buffer may facilitate and protect capital 
formation in short-term financing markets during periods of modest 
stress. Currently, money market fund portfolio managers are limited in 
their ability to sell portfolio securities when markets are under 
stress because they have little ability to absorb losses without 
causing a fund's shadow NAV to drop below $1.00 (or embed losses in the 
fund's market-based NAV per share). As a result, managers tend to avoid 
trading when markets are strained, contributing to further illiquidity 
in the short-term financing markets in such circumstances. A NAV buffer 
should enable funds to absorb small losses and thus could reduce this 
tendency. Thus, by adding resiliency to money market funds and 
enhancing their ability to absorb losses, a NAV buffer may benefit 
capital formation in the long term. A more stable money market fund 
industry may produce more stable short-term financing markets, which 
would provide more reliability as to the demand for short-term credit 
to the economy.
ii. Costs of a NAV Buffer
    There are significant ongoing costs associated with a NAV buffer. 
They can be divided into direct costs that affect money market fund 
sponsors or investors and indirect costs that impact capital formation. 
In addition, a NAV buffer does not protect shareholders completely from 
the possibility of heightened rapid redemption activity during periods 
of market stress, particularly in periods where the buffer is at risk 
of depletion. As the buffer becomes impaired (or if shareholders 
believe the fund may suffer a loss that exceeds the size of its NAV 
buffer), shareholders have an incentive to redeem shares quickly 
because, once the buffer fails, the fund will no longer be able to 
maintain a stable value and shareholders will suddenly lose money on 
their investment.\504\ Such rapid severe redemptions could impair the 
fund's business model and viability.
---------------------------------------------------------------------------

    \504\ See, e.g., Systemic Risk Council FSOC Comment Letter, 
supra note 363 (stating that capital is difficult to set and is 
imperfect, that ``[g]iven the lack of data and impossibility of 
modeling future events, even [a 3% NAV buffer] runs the risk of 
being too high, or too low to protect the system in the future'' and 
that ``too little capital could provide a false sense of security in 
a crisis''). See also infra note 512 and accompanying discussion.
---------------------------------------------------------------------------

    Another possible implication of this facet of NAV buffers is that 
money market funds with buffers may avoid holding riskier short-term 
debt securities (like commercial paper) and instead hold a higher 
amount of low yielding investments like cash, Treasury securities, or 
Treasury repos. This could lead money market funds to hold more 
conservative portfolios than investors may prefer, given tradeoffs 
between principal stability, liquidity, and yield.\505\
---------------------------------------------------------------------------

    \505\ But see, e.g., U.S. Chamber Jan. 23, 2013 FSOC Comment 
Letter, supra note 248 (arguing that ``a NAV buffer is likely to 
incentivize sponsors to reach for yield.''); Vanguard FSOC Comment 
Letter, supra note 172 (``Capital buffers are also likely to carry 
unintended consequences, as some funds may purchase riskier, higher-
yielding securities to compensate for the reduction in yield. As a 
result, capital buffers are likely to provide investors with a false 
sense of security.''); Comment Letter of Federated Investors, Inc. 
(Re: Alternative 3) (Jan. 25. 2013) (available in File No. FSOC-
2012-0003) (``If anything, creating a junior class of equity puts 
earnings pressure on an MMF to alter its balance sheet to decrease 
near-term liquid assets to generate investment returns available 
from longer-term, higher risk investments in order to either build 
capital through retained earnings or to compensate investors who 
have invested in the new class of subordinated equity capital of the 
MMF.'').
---------------------------------------------------------------------------

    The most significant direct cost of a NAV buffer is the opportunity 
cost associated with maintaining a NAV buffer. Those contributing to 
the buffer essentially deploy valuable scarce resources to maintain a 
NAV buffer rather than being able to use the funds elsewhere. The cost 
of diverting funds for this purpose represents a significant 
incremental cost of doing business for those providing the buffer 
funding. We cannot provide estimates of these opportunity costs because 
the relevant data is not currently available to the Commission.\506\
---------------------------------------------------------------------------

    \506\ The opportunity costs would represent the net present 
value of these forgone opportunities, an amount that cannot be 
estimated without relevant data about each firm's productive 
opportunities.
     However, a number of FSOC commenters have already cautioned 
that a NAV buffer could make money market funds unprofitable. See, 
e.g., Angel FSOC Comment Letter, supra note 60 (stating that ``in 
today's low yield environment, even five basis points [of cost 
associated with a NAV buffer] would push most money market funds 
into negative yield territory.''); BlackRock FSOC Comment Letter, 
supra note 204 (``[A]ny capital over 0.75% will make the MMF product 
uneconomical for sponsors to offer.''); Federated Investors Feb. 15 
FSOC Comment Letter, supra note 192 (calculating that ``prime MMFs 
would no longer be economically viable products'' based on cost 
estimates provided by the ICI.).
---------------------------------------------------------------------------

    The second direct cost of a NAV buffer is the equilibrium rate of 
return that a provider of funding for a NAV buffer would demand. An 
entity that

[[Page 36908]]

provides such funding, possibly the fund sponsor, would expect to be 
paid a return that sets the market value of the buffer equal to the 
amount of the capital contribution. Since a NAV buffer is designed to 
absorb the same amount of risk regardless of its size, the promised 
yield increases with the relative amount of risk it is expected to 
absorb. This is a well-known leverage effect.\507\
---------------------------------------------------------------------------

    \507\ The leverage effect reflects the concept that higher 
leverage levels induce an equity holder to demand higher returns to 
compensate for the higher risk levels.
---------------------------------------------------------------------------

    One could analogize a NAV buffer to bank capital by considering the 
similarities between money market funds with a NAV buffer and banks 
with capital. A traditional bank generally finances long-term assets 
(customer loans) with short-term liabilities (demand deposits). The 
Federal Reserve Board, as part of its prudential regulation, requires 
banks to adhere to certain minimum capital requirements.\508\ Bank 
capital, among other functions, provides a buffer that allows banks to 
withstand a certain amount of sudden demands for liquidity and losses 
without becoming insolvent and thus needing to draw upon federal 
deposit insurance or other aspects of the regulatory safety net for 
banks.\509\ The fact that the bank assets have a long maturity and are 
illiquid compared to the bank's liabilities results in a maturity and 
liquidity mismatch problem that creates the possibility of a depositor 
run during periods of stress.\510\ Capital is one part of a prudential 
regulatory framework employed to deter runs in banks and generally 
protect the safety and soundness of the banking system. A money market 
fund with a NAV buffer has been described as essentially a ``special 
purpose bank'' where fund shareholders' equity is equivalent to demand 
deposits and a NAV buffer is analogous to the bank's capital.\511\ 
Since a NAV buffer is effectively a leveraged position in the 
underlying assets of the fund that is designed to absorb interest rate 
risk and mitigate default risk, a provider of buffer funding should 
demand a return that reflects the fund's aggregate cost of capital plus 
compensation for the fraction of default risk it is capable of 
absorbing.
---------------------------------------------------------------------------

    \508\ See the Federal Reserve Board's Web site on Capital 
Guidelines and Adequacy, available at http://www.federalreserve.gov/bankinforeg/topics/capital.htm, for an overview of minimum capital 
requirements.
    \509\ See, e.g., Allen N. Berger et al., The Role of Capital in 
Financial Institutions, 19 J. of Banking and Fin. 393 (1995) 
(``Berger'') (``Regulators require capital for almost all the same 
reasons that other uninsured creditors of banks `require' capital--
to protect themselves against the costs of financial distress, 
agency problems, and the reduction in market discipline caused by 
the safety net.'').
    \510\ More generally, banks are structured to satisfy 
depositors' preference for access to their money on demand with 
businesses' preference for a source of longer-term capital. However, 
the maturity and liquidity transformation provided by banks can also 
lead to runs. Deposit insurance, access to a lender of last resort, 
and other bank regulatory tools are designed to lessen the incentive 
of depositors to run. See, e.g., Douglas W. Diamond & Philip H. 
Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91 J. Pol. Econ 
401 (June 1983) (``Diamond & Dybvig''); Mark J. Flannery, Financial 
Crises, Payment System Problems, and Discount Window Lending, 28 
Journal of Money, Credit and Banking 804 (1996); Jeffrey A. Miron, 
Financial Panics, the Seasonality of the Nominal Interest Rate, and 
the Founding of the Fed, 76 American Economic Review 125 (1986); S. 
Bhattacharya & D. Gale, Preference Shocks, Liquidity, and Central 
Bank Policy, in New Approaches to Monetary Economics (eds., W. 
Barnnett and K. Singleton, 1987).
    \511\ See, e.g., Gary Gorton & George Pennacchi, Money Market 
Funds and Finance Companies: Are They the Banks of the Future?, in 
Structural Change in Banking (Michael Klausner & Lawrence J. White, 
eds. 1993), at 173-214.
---------------------------------------------------------------------------

    The effectiveness of a NAV buffer to protect against large-scale 
redemptions during periods of stress is predicated upon whether 
shareholders expect the decline in the value of the fund's portfolio to 
be less than the value of the NAV buffer. Once investors anticipate 
that the buffer will be depleted, they have an incentive to redeem 
before it is completely depleted.\512\ In this sense, a NAV buffer that 
is not sufficiently large is incapable of fully mitigating the 
possibility of a liquidity run. The drawback with increasing buffer 
size to address this risk, however, is that the opportunity costs of 
operating a buffer increase as the size of the buffer increases. Due to 
the correlated nature of portfolio holdings across money market funds, 
this could amplify market-wide run risk if NAV buffer impairment also 
is highly correlated across money market funds. The incentive to redeem 
could be further amplified if, as contemplated in the FSOC Proposed 
Recommendations, a NAV buffer failure would require a money market fund 
to either liquidate or convert to a floating NAV. If investors 
anticipate this occurring, some investors that value principal 
stability and liquidity may no longer view money market funds as viable 
investments.
---------------------------------------------------------------------------

    \512\ See, e.g., Federal Reserve Bank Presidents FSOC Comment 
Letter, supra note 38 (``The [FSOC] Proposal notes that a fund 
depleting its NAV buffer would be required to suspend redemptions 
and liquidate under rule 22e-3 or continue operating as a floating 
NAV fund. However, this sequence of events could be destabilizing. 
Investors in 3% NAV buffer funds may be quite risk averse, even more 
so than floating NAV MMF investors might be, given their revealed 
preference for stable NAV shares. If they foresee a possible 
conversion to floating NAV once the buffer is depleted, these risk-
averse investors would have an incentive to redeem prior to 
conversion. If, on the other hand, investors foresee a suspension of 
redemptions, they would presumably have an even stronger incentive 
to redeem before facing a liquidity freeze when the NAV buffer is 
completely depleted.'').
---------------------------------------------------------------------------

    As noted above, substantial NAV buffers may be able to absorb much, 
if not all, of the default risk in the underlying portfolio of a money 
market fund. This implies that any compensation for bearing default 
risk will be transferred from current money market fund shareholders to 
those financing the NAV buffer, effectively converting a prime money 
market fund into a fund that mimics the return of a Treasury fund for 
current money market fund shareholders. If fund managers are unable to 
pass through the yield associated with holding risky securities, like 
commercial paper, to money market fund shareholders, it is likely that 
they will reduce their investment in risky securities, such as 
commercial paper or short-term municipal securities.\513\ While lower 
yields would reduce, but not necessarily eliminate, the utility of the 
product to investors, it could have a negative impact on capital 
formation. Since the probability of breaking the buck is higher for a 
money market fund with riskier securities (e.g., a fund with a WAM of 
90 days rather than one with a WAM of 60 days) \514\ and fund managers 
cannot pass through the higher associated yields, it is likely that 
managers will reduce investments in commercial paper because they 
cannot differentiate their funds on the basis of yield.
---------------------------------------------------------------------------

    \513\ But see supra note 505.
    \514\ See RSFI Study, supra note 21, at 28-31.
---------------------------------------------------------------------------

    In addition, many investors are attracted to money market funds 
because they provide a stable value but have higher rates of return 
than Treasury securities. These higher rates of return are intended to 
compensate for exposure to greater credit risk and potential volatility 
than Treasury securities. As a result of funding the buffer, the 
returns to money market fund shareholders are likely to decline, 
potentially reducing demand from investors who are attracted to money 
market funds for their higher yield than alternative stable value 
investments.\515\
---------------------------------------------------------------------------

    \515\ See, e.g., Invesco FSOC Comment Letter, supra note 192 
(``As a result of the ongoing ultra-low interest rate environment, 
MMF yields remain at historic lows. . . . A requirement to divert a 
portion of a MMF's earnings in order to build a NAV buffer would 
result in prime MMF yields essentially equaling those of Treasury 
MMFs (which would not be required to maintain a buffer under the 
Proposal). Faced with the choice of equivalent yields but 
asymmetrical risks, logical investors would abandon prime funds for 
Treasury funds, potentially triggering the very instability that 
reforms are intended to prevent and vastly reducing corporate 
borrowers' access to short-term financing.'').

---------------------------------------------------------------------------

[[Page 36909]]

    Taken together, the demand by investors for some yield and the 
incentives for fund managers to reduce portfolio risk may impact 
competition and capital formation in two ways. First, investors seeking 
higher yield may move their funds to other alternative investment 
vehicles resulting in a contraction in the money market fund industry. 
In addition, fund managers may have an incentive to reduce the funds' 
investment in commercial paper or short-term municipal securities in 
order to reduce the volatility of cash flows and increase the 
resilience of the NAV buffer. In both of these cases, there may be an 
effect on the short-term financing markets if the decrease in demand 
for short-term securities from money market funds results in an 
increase in the cost of capital for issuers of commercial paper and 
other securities.
b. Minimum Balance at Risk
    As discussed above, under the second alternative in the FSOC 
Proposed Recommendations, a 1% capital buffer is paired with an MBR or 
a holdback of a certain portion of a shareholder's money market fund 
shares.\516\ In the event of fund losses, this alternative effectively 
would create a ``waterfall'' with the NAV buffer bearing first losses, 
subordinated holdback shares bearing second losses, followed by non-
subordinated holdback shares, and finally by the remaining shares in 
the fund (and then only if the loss exceeded the aggregate value of the 
holdback shares). This allocation of losses, in effect, would impose a 
``liquidity fee'' on redeeming shareholders if the fund experiences a 
loss that exceeds the NAV buffer. The value of the holdback shares 
effectively provides the non-redeeming shareholders with an additional 
buffer cushion when the NAV buffer is exhausted.
---------------------------------------------------------------------------

    \516\ See FSOC Proposed Recommendations, supra note 114, at 
section V.B.
---------------------------------------------------------------------------

i. Benefits of a Minimum Balance at Risk
    An MBR requirement could provide some benefits to money market 
funds. First, it would force redeeming shareholders to pay for the cost 
of their liquidity during periods of severe market stress when 
liquidity is particularly costly. Such a requirement could create an 
incentive against shareholders participating in a run on a fund facing 
potential losses of certain sizes because shareholders will incur 
greater losses if they redeem.\517\ It thus may reduce the amount of 
less liquid securities that funds would need to sell in the secondary 
markets at unfavorable prices to satisfy redemptions and therefore may 
increase stability in the short-term financing markets.
---------------------------------------------------------------------------

    \517\ See, e.g., Gordon FSOC Comment Letter, supra note 159 
(``[T]he Minimum Balance at Risk feature is a novel way to reduce 
MMF run risk by imposing some of the run costs on the users of 
MMFs.'').
---------------------------------------------------------------------------

    Second, it would allocate liquidity costs to investors demanding 
liquidity when the fund itself is under severe stress. This would be 
accomplished primarily by making redeeming shareholders bear first 
losses when the fund first depletes its buffer and then the fund's 
value falls below its stable share price within 30 days after their 
redemption. Redeeming shareholders subject to the holdback are the ones 
whose redemptions may have contributed to fund losses if securities are 
sold at fire sale prices to satisfy those redemptions. If the fund 
sells assets to meet redemptions, the costs of doing so would be 
incurred while the redeeming investor is still in the fund because of 
the delay in redeeming his or her holdback shares. Essentially, 
investors would face a choice between redeeming to preserve liquidity 
and remaining invested in the fund to protect their principal.
    Third, an MBR would provide the fund with 30 days to obtain cash to 
satisfy the holdback portion of a shareholder's redemption. This may 
give the fund time for distressed securities to recover when, for 
example, the market has acquired additional information about the 
ability of the issuer to make payment upon maturity. As of February 28, 
2013, 43% of prime money market fund assets had a maturity of 30 days 
or less.\518\ Thus, an MBR would provide time for potential losses in 
fund portfolios to be avoided since distressed securities could trade 
at a heavy discount in the market but may ultimately pay in full at 
maturity. This added resiliency could not only benefit the fund and its 
investors, but it also could reduce the contagion risk that a run on a 
single fund can cause when assets are correlated across the money 
market fund industry.
---------------------------------------------------------------------------

    \518\ Based on Form N-MFP data, with maturity determined in the 
same manner as it is for purposes of computing the fund's weighted 
average life.
---------------------------------------------------------------------------

ii. Costs of a Minimum Balance at Risk
    There are a number of drawbacks to an MBR requirement. It forces 
shareholders that redeem more than 97% of their assets to pay for any 
losses, if incurred, on the entire portfolio on a ratable basis. Rather 
than simply delaying redemption requests, the contingent nature of the 
way losses are distributed among shareholders forces early redeeming 
investors to bear the losses they are trying to avoid.
    As discussed in section II.B.2 above, there is a tendency for a 
money market fund to meet redemptions by selling assets that are the 
most liquid and have the smallest capital losses. Liquid assets are 
sold first because managers can trade at close to their non-distressed 
valuations--they do not reflect large liquidity discounts. Managers 
also tend to sell assets whose market-based values are close to or 
exceed amortized cost because realized capital gains and losses will be 
reflected in a fund's shadow price. Assets that are highly liquid will 
not be sold at significant discounts to fair value. Since the liquidity 
discount associated with the sale of liquid assets is smaller than that 
for illiquid assets, shareholders can continue to immediately redeem 
shares at $1.00 per share under an MBR provided the fund is capable of 
selling liquid assets. Once a fund exhausts its supply of liquid 
assets, it will sell less liquid assets to meet redemption requests, 
possibly at a loss. If in fact, assets are sold at a loss, the stable 
value of the fund's shares could be impaired, motivating shareholders 
to be the first to leave. Therefore, even with a NAV buffer and an MBR 
there continues to be an incentive to redeem in times of fund and 
market stress.\519\
---------------------------------------------------------------------------

    \519\ See, e.g., Comment Letter of Federated Investors, Inc. 
(Dec. 17, 2012) (available in File No. FSOC-2012-0003) (``The data, 
analyses, surveys and other commentary in the SEC's docket show 
convincingly that the MBR/capital proposal's impact in reducing runs 
is speculative and unproven and in fact could and likely would 
precipitate runs under certain circumstances.''); Schwab FSOC 
Comment Letter, supra note 171 (``[I]t is not clear to us that 
holding back a certain percentage of a client's funds would reduce 
run risk.'')
---------------------------------------------------------------------------

    The MBR, which applies to all redemptions without regard to the 
fund's circumstances at the time of redemption, constantly restricts 
some portion of an investor's holdings. Under the resulting continuous 
impairment of full liquidity, many current investors who value 
liquidity in money market funds may shift their investment to other 
short-term investments that offer higher yields or fewer restrictions 
on redemptions. A reduction in the number of money market funds and/or 
the amount of money market fund assets under management as a result of 
any further money market fund reforms would have a greater negative 
impact on money market fund sponsors whose fund groups consist 
primarily of money market funds, as opposed to sponsors that offer a 
more diversified range of mutual funds or engage in other financial 
activities (e.g., brokerage).

[[Page 36910]]

Given that money market funds' largest commercial paper exposure is to 
issuances by financial institutions,\520\ a reduction in the demand of 
money market instruments may have an impact on the ability of financial 
institutions to issue commercial paper.\521\
---------------------------------------------------------------------------

    \520\ See supra Panel A in section III.E.
    \521\ See, e.g., Wells Fargo FSOC Comment Letter, supra note 342 
(``the MBR requirement would have the anticipated impact of driving 
investors and sponsors out of money market funds. We expect that the 
resulting contraction of assets in the money market fund industry 
would, in turn, have disruptive effects on the short-term money 
markets, decrease the supply of capital and/or raise the cost of 
borrowing for businesses, states, municipalities and other local 
governments that rely on money market funds, and jeopardize the 
fragile state of the economy and its long-term growth prospects.'').
---------------------------------------------------------------------------

    The MBR will introduce additional complexity to what to-date has 
been a relatively simple product for investors to understand. For 
example, requiring shareholders that redeem more than 97% of their 
balances to bear the first loss creates a cash flow waterfall that is 
complex and that may be difficult for retail investors to understand 
fully.\522\
---------------------------------------------------------------------------

    \522\ Several commenters have noted that the MBR would be 
confusing to retail investors. See, e.g., Fidelity FSOC Comment 
Letter, supra note 295; T. Rowe Price FSOC Comment Letter, supra 
note 290.
---------------------------------------------------------------------------

    Implementing an MBR could involve significant operational costs. 
These would include costs to convert existing shares or issue new 
holdback and subordinated holdback shares and changes to systems that 
would allow recordkeepers to account for and track the MBR and 
allocation of unrestricted, holdback or subordinated holdback shares in 
shareholder accounts. We expect that these costs would vary 
significantly among funds depending on a variety of factors. In 
addition, funds subject to an MBR may have to amend or adopt new 
governing documents to issue different classes of shares with quite 
different rights: Unrestricted shares, holdback shares, and 
subordinated holdback shares.\523\ The costs to amend governing 
documents would vary based on the jurisdiction in which the fund is 
organized and the amendment processes enumerated in the fund's 
governing documents, including whether board or shareholder approval is 
necessary.\524\ The costs of obtaining shareholder approval, amending 
governing documents or changing domicile would depend on a number of 
factors, including the size and the number of shareholders of the 
fund.\525\
---------------------------------------------------------------------------

    \523\ One commenter on the PWG Report suggested that the MBR 
framework may be achieved by issuing different classes of shares 
with conversion features triggered by shareholder activity. See 
Comment Letter of Federated Investors, Inc. (Mar. 16, 2012) 
(available in File No. 4-619) (``Federated March 2012 PWG Comment 
Letter''). Multiple class structures are common among funds offering 
different arrangements for the payment of distribution costs and 
related shareholder services. Funds have also developed the 
operational capacity to track and convert certain share classes to 
others based on the redemption activity of the shareholder. See 
Mutual Fund Distribution Fees; Confirmations, Investment Company Act 
Release No. 29367 (July 21, 2010) [75 FR 47064 (Aug. 4, 2010)], at 
section III.D.1.b.
    \524\ See Federated Alternative 2 FSOC Comment Letter, supra 
note 254 and Federated March 2012 PWG Comment Letter, supra note 523 
(discussing certain applicable state law requirements).
    \525\ Other factors may include the concentration of fund shares 
among certain shareholders, the number of objecting beneficial 
owners and non-objecting beneficial owners of street name 
shareholders, whether certain costs can be shared among funds in the 
same family, whether the fund employs a proxy solicitor and the 
services the proxy solicitor may provide, and whether the fund, in 
connection with sending a proxy statement to shareholders, uses the 
opportunity to have shareholders vote on other matters. Other 
matters that may be set forth in the proxy materials include the 
election of directors, a change in investment objectives or 
fundamental investment restrictions, and fund reorganization or re-
domicile.
---------------------------------------------------------------------------

    Overall, the complexity of an MBR may be more costly for 
unsophisticated investors because they may not fully appreciate the 
implications. In addition, money market funds and their intermediaries 
(and money market fund shareholders that have in place cash management 
systems) could incur potentially significant operational costs to 
modify their systems to reflect a MBR requirement. We believe that an 
MBR coupled with a NAV buffer would turn money market funds into a more 
complex instrument whose valuation may become more difficult for 
investors to understand.
2. Alternatives in the PWG Report
a. Private Emergency Liquidity Facility
    One option outlined in the PWG Report is a private emergency 
liquidity facility (``LF'') for money market funds.\526\ One comment 
letter on the PWG Report proposed a structure for such a facility in 
some detail.\527\ Under this proposal, the LF would be organized as a 
state-chartered bank or trust company. Sponsors of prime money market 
funds would be required to provide initial capital to the LF in an 
amount based on their assets under management up to 4.9% of the LF's 
total initial equity, but with a minimum investment amount. The LF also 
would charge participating funds commitment fees of 3 basis points per 
year on fund assets under management. Finally, at the end of its third 
year, the LF would issue to third parties time deposits paying a rate 
approximately equal to the 3-month bank CD rate. The LF would be 
designed to provide initially $7 billion in backup redemption liquidity 
to prime money market funds, $12.3 billion at the end of the first 
year, $30 billion at the end of five years, and $50-55 billion at the 
end of year 10 (these figures take into account the LF's ability to 
expand its capacity by borrowing through the Federal Reserve's discount 
window). The LF would be leveraged at inception, but would seek to 
achieve and maintain a minimum leverage ratio of 5%. Each fund would be 
able to obtain a maximum amount of cash from the LF. The LF would not 
provide credit support. It would not provide liquidity to a fund that 
had broken the buck or would ``break the buck'' after using the LF. 
There also would be eligibility requirements for money market fund 
access to the LF.
---------------------------------------------------------------------------

    \526\ See PWG Report, supra note 111, at 23-25.
    \527\ See ICI Jan 2011 PWG Comment Letter, supra note 473.
---------------------------------------------------------------------------

    Participating funds would elect a board of directors that would 
oversee the LF, with representation from large, medium, and smaller 
money market fund complexes. The LF would have restrictions on the 
securities that it could purchase from funds seeking liquidity and on 
the LF's investment portfolio. The LF would be able to pledge approved 
securities (less a haircut) to the Federal Reserve discount window. We 
note that the interaction with the Federal Reserve discount window (as 
well as the bank structure of the LF) means that the Commission does 
not have regulatory authority to create the LF.
    An LF could lessen and internalize some of the liquidity risk of 
money market funds that contributes to their vulnerability to runs by 
acting as a purchaser of last resort if a liquidity event is triggered. 
It also could create efficiency gains by pooling this liquidity risk 
within the money market fund industry.\528\
---------------------------------------------------------------------------

    \528\ The liquidity facility would function in a fashion similar 
to private deposit insurance for banks. For the economics of using a 
liquidity facility to stop runs, see Diamond & Dybvig, supra note 
510.
---------------------------------------------------------------------------

    Commenters on the PWG Report addressing this option generally 
supported the concept of the LF, stating that it would facilitate money 
market funds internalizing the costs of liquidity and other risks 
associated with their operations through the cost of participation. In 
addition, such a facility could reduce contagion effects by limiting 
the need for fire sales of money market fund assets to satisfy 
redemption pressures.\529\
---------------------------------------------------------------------------

    \529\ See, e.g., ICI Jan 2011 PWG Comment Letter, supra note 
473; Dreyfus PWG Comment Letter, supra note 473; Federated Jan 2011 
PWG Comment Letter, supra note 472.

---------------------------------------------------------------------------

[[Page 36911]]

    However, several commenters expressed reservations regarding this 
reform option. For example, one commenter supported ``the idea'' of 
such a facility ``in that it could provide an incremental liquidity 
cushion for the industry,'' but noted that ``it is difficult to ensure 
that [a liquidity facility] with finite purchasing capacity is fairly 
administered in a crisis. . . . [which] could lead to [money market 
funds] attempting to optimize the outcome for themselves, rather than 
working cooperatively to solve a systemic crisis.'' \530\ This 
commenter also stated that shared capital ``poses the danger of 
increased risk-taking by industry participants who believe that they 
have access to a large collective pool of capital.'' \531\ Another 
commenter, while ``receptive to a private liquidity facility,'' 
expressed concern that the facility itself might be vulnerable to runs 
if the facility raises funding through the short-term financing 
markets.\532\ This commenter also noted other challenges in designing 
such a facility, including governance issues and ``the fact that 
because of its size, the liquidity facility would only be able to 
address the liquidity needs of a very limited number of funds and would 
not be able to meet the needs of the entire industry in the event of a 
run.'' \533\ Another commenter expressed concerns that ``the costs, 
infrastructure and complications associated with private liquidity 
facilities are not worth the minimal liquidity that would be 
provided.'' \534\ Finally, another commenter echoed this concern, 
stating:
---------------------------------------------------------------------------

    \530\ BlackRock PWG Comment Letter, supra note 473.
    \531\ Id. In the case of deposit insurance, bank capital is used 
to overcome the moral hazard problem of excessive risk taking. See, 
e.g., Berger, supra note 509; Michael C. Keeley & Frederick T. 
Furlong, A Reexamination of Mean-Variance Analysis of Bank Capital 
Regulation, 14 J. of Banking and Fin. 69 (1990).
    \532\ Wells Fargo PWG Comment Letter, supra note 475.
    \533\ Id.
    \534\ Fidelity Jan 2011 PWG Comment Letter, supra note 473.

    [a private liquidity facility] cannot possibly eliminate 
completely the risk of breaking the buck without in effect 
eliminating maturity transformation, for instance through the 
imposition of capital and liquidity standards on the private 
facilities. Thus, in the case of a pervasive financial shock to 
asset values, [money market fund] shareholders will almost certainly 
view the presence of private facilities as a weak reed and 
widespread runs are likely to develop. In turn, government aid is 
likely to flow. Because shareholders will expect government aid in a 
pervasive financial crisis, shareholder and [money market fund] 
investment decisions will be distorted. Therefore, we view emergency 
facilities as perhaps a valuable enhancement, but not a reliable 
overall solution either to the problem of runs or to the broader 
problem of distorted investment decisions.\535\
---------------------------------------------------------------------------

    \535\ Richmond Fed PWG Comment Letter, supra note 139.

    A private liquidity facility was also discussed at the 2011 
Roundtable, where many participants made points and expressed concerns 
similar to those discussed above.\536\
---------------------------------------------------------------------------

    \536\ See, e.g., Roundtable Transcript, supra note 43 (Brian 
Reid, Investment Company Institute) (discussing the basic concept 
for a private liquidity facility as proposed by the Investment 
Company Institute and its potential advantages providing additional 
liquidity to money market funds when market makers were unwilling or 
unable to do so); (Paul Tucker, Bank of England) (discussing the 
potential policy issues involved in the Federal Reserve extending 
discount window access to such a facility); (Daniel K. Tarullo, 
Federal Reserve Board) (discussing the potential policy issues 
involved in the Federal Reserve extending discount window access to 
such a facility); (Jeffrey A. Goldstein, Department of Treasury) 
(questioning whether there were potential capacity issues with such 
a facility); (Sheila C. Bair, Federal Deposit Insurance Corporation) 
(stating her belief that ``the better approach would be to try to 
reduce or eliminate the systemic risk, as opposed to just kind of 
acknowledge it'' and institutionalize a ``bailout facility'' in a 
way that would exacerbate moral hazard).
---------------------------------------------------------------------------

    We have considered these comments, and our staff has spent 
considerable time evaluating whether an LF would successfully mitigate 
the risk of runs in money market funds and change the economic 
incentives of market participants. We have determined not to pursue 
this option further for a number of reasons, foremost because we are 
concerned that a private liquidity facility would not have sufficient 
purchasing capacity in the event of a widespread run without access to 
the Federal Reserve's discount window and we do not have legal 
authority to grant discount window access to an LF. Access to the 
discount window would raise complicated policy considerations and 
likely would require legislation.\537\ In addition, such a facility 
would not protect money market funds from capital losses triggered by 
credit events as the facility would purchase securities at the 
prevailing market price. Thus, we are concerned that such a facility 
without additional loss protection would not sufficiently prevent 
widespread runs on money market funds.
---------------------------------------------------------------------------

    \537\ See, e.g., id. (Paul Tucker, Bank of England) (``As I 
understand it, this is a bank whose sole purpose is to stand between 
the Federal Reserve and the money market mutual fund industry. If I 
think about that as a central banker, I think `So, I'm lending to 
the money market mutual fund industry.' What do I think about the 
regulation of the money market mutual fund industry? . . . And the 
other thought I think I would have is . . . `If the money market 
mutual fund industry can do this, what's to stop other parts of our 
economy doing this and tapping into the special ability of the 
central bank to create liquidity' . . . It's almost to bring out the 
enormity of the idea that you have floated . . . it's posing very 
big questions indeed, about who should have direct access and to the 
nature of the monetary economy.'')
---------------------------------------------------------------------------

    We also are concerned about the conflicts of interest inherent in 
any such facility given that it would be managed by a diverse money 
market fund industry, not all of whom may have the same interests at 
all times. Participating money market funds would be of different sizes 
and the governance arrangements would represent some fund complexes and 
not others. There may be conflicts relating to money market funds whose 
nature or portfolio makes them more or less likely to ever need to 
access the LF. The LF may face conflicts allocating limited liquidity 
resources during a crisis, and choosing which funds gain access and 
which do not. To be successful, an LF would need to be managed such 
that it sustains its credibility, particularly in a crisis, and does 
not distort incentives in the market to favor certain business models 
or types of funds.
    These potential issues collectively created a concern that such a 
facility may not prove effective in a crisis and thus we would not be 
able to achieve our regulatory goals of reducing money market funds' 
susceptibility to runs and the corresponding impacts on investor 
protection and capital formation. Combined with our lack of authority 
to create an LF bank with access to the Federal Reserve's discount 
window, these concerns ultimately have led us to not pursue this 
alternative.
b. Insurance
    We also considered whether money market funds should be required to 
carry some form of public or private insurance, similar to bank 
accounts that carry Federal Deposit Insurance Corporation deposit 
insurance, which has played a central role in mitigating the risk of 
runs on banks.\538\ The Treasury's Temporary Guarantee Program helped 
slow the run on money market funds in September 2008, and thus we 
naturally considered whether some form of insurance for money market 
fund shareholders might mitigate the risk of runs in money market funds 
and their detrimental impacts on investors and capital formation.\539\ 
Insurance might replace

[[Page 36912]]

money market funds' historical reliance on discretionary sponsor 
support, which has covered capital losses in money market funds in the 
past but, as discussed above, also contributes to these funds' 
vulnerability to runs.
---------------------------------------------------------------------------

    \538\ See generally Charles W. Calomiris, Is Deposit Insurance 
Necessary? A Historical Perspective, 50 J. Econ. Hist. 283 (1990); 
Rita Carisano, Deposit Insurance: Theory, Policy and Evidence 
(1992); Diamond & Dybvig, supra note 510.
    \539\ Authority for a guarantee program like the Temporary 
Guarantee Program for Money Market Funds has since been removed. See 
Emergency Economic Stabilization Act of 2008 Sec.  131(b), 12 U.S.C. 
Sec.  5236 (2008) (prohibiting the Secretary of Treasury from using 
the Exchange Stabilization Fund for the establishment of any future 
guaranty programs for the U.S. money market fund industry).
---------------------------------------------------------------------------

    While a few commenters expressed some support for a system of 
insurance for money market funds,\540\ most commenters opposed this 
potential reform option.\541\ Commenters expressed concern that 
government insurance would create moral hazard and encourage excessive 
risk taking by funds.\542\ They also asserted that such insurance could 
distort capital flows from bank deposits or government money market 
funds into prime money market funds, and that this disintermediation 
could and likely would cause significant disruption to the banking 
system and the money market.\543\ For example, one commenter stated 
that:
---------------------------------------------------------------------------

    \540\ See, e.g., Richmond Fed PWG Comment Letter, supra note 139 
(stating that insurance would be a second best solution for 
mitigating the risk of runs in money market funds after a floating 
net asset value because insurance premiums and regulation are 
difficult to calibrate correctly, so distortions would likely 
remain); Comment Letter of Paul A. Volcker (Feb. 11, 2011) 
(available in File No. 4-619) (``Volcker PWG Comment Letter'') 
(stating that money market funds wishing to retain a stable net 
asset value should reorganize as special purpose banks or ``submit 
themselves to capital and supervisory requirements and FDIC-type 
insurance on the funds under deposit'').
    \541\ See, e.g., Comment Letter of the American Bankers 
Association (Jan. 10, 2011) (available in File No. 4-619) 
(``American Bankers PWG Comment Letter''); BlackRock PWG Comment 
Letter, supra note 473; Dreyfus PWG Comment Letter, supra note 473; 
Fidelity Jan 2011 PWG Comment Letter, supra note 473; Wells Fargo 
PWG Comment Letter, supra note 475; ''); Comment Letter of John M. 
Winters (Jan. 5, 2011) (available in File No. 4-619) (``Winters PWG 
Comment Letter'').
    \542\ See, e.g., American Bankers PWG Comment Letter, supra note 
541; BlackRock PWG Comment Letter, supra note 473; ICI Jan 2011 PWG 
Comment Letter, supra note 473; Wells Fargo PWG Comment Letter, 
supra note 475.
    \543\ See, e.g., ICI Jan 2011 PWG Comment Letter, supra note 
473; Wells Fargo PWG Comment Letter, supra note 475.

    ``If the insurance program were partial (for example, capped at 
$250,000 per account), many institutional investors likely would 
invest in this partially insured product rather than directly in the 
market or in other cash pools because the insured funds would offer 
liquidity, portfolios that were somewhat less risky than other 
pools, and yields only slightly lower than alternative cash pools. 
Without insurance covering the full value of investors' account 
balances, however, there would still be an incentive for these 
investors to withdraw the uninsured portion of their assets from 
these funds during periods of severe market stress.'' \544\
---------------------------------------------------------------------------

    \544\ ICI Jan 2011 PWG Comment Letter, supra note 473.

    Commenters stated that with respect to private insurance, it has 
been made available in the past but the product proved unsuccessful due 
to its cost and in the future would be too costly.\545\ They also 
stated that they did not believe any private insurance coverage would 
have sufficient capacity.\546\
---------------------------------------------------------------------------

    \545\ See, e.g., BlackRock PWG Comment Letter, supra note 473; 
Fidelity Jan 2011 PWG Comment Letter, supra note 473; Dreyfus PWG 
Comment Letter, supra note 473; Wells Fargo PWG Comment Letter, 
supra note 475; Winters PWG Comment Letter, supra note 541.
    \546\ See, e.g., BlackRock PWG Comment Letter, supra note 473; 
Fidelity Jan 2011 PWG Comment Letter, supra note 473; Wells Fargo 
PWG Comment Letter, supra note 475; Winters PWG Comment Letter, 
supra note 541.
---------------------------------------------------------------------------

    Given these comments, combined with our staff's analysis of this 
option, and considering that we do not have regulatory authority to 
create a public insurance scheme for money market funds, we are not 
pursuing this option as it does not appear that it would achieve our 
goal, among others, of materially reducing the contagion effects from 
heavy redemptions at money market funds without undue costs. We have 
made this determination based on money market fund insurance's 
potential for creating moral hazard and encouraging excessive risk-
taking by money market funds, given the difficulties and costs involved 
in creating effective risk-based pricing for insurance and additional 
regulatory structure to offset this incentive.\547\ If insurance 
actually increases moral hazard and decreases corresponding market 
discipline, it may in fact increase rather than decrease money market 
funds' susceptibility to runs. If the only way to counter these 
incentives was by imposing a very costly regulatory structure and risk-
based pricing system our proposed alternatives potentially offer a 
better ratio of benefits to associated costs. Finally, we were 
concerned with the difficulty of creating private insurance at an 
appropriate cost and of sufficient capacity for a several trillion-
dollar industry that tends to have highly correlated tail risk. All of 
these considerations have led us to not pursue this option further.
---------------------------------------------------------------------------

    \547\ See, e.g., Yuk-Shee Chan et al., Is Fairly Priced Deposit 
Insurance Possible?, 47 J. Fin. 227 (1992).
---------------------------------------------------------------------------

c. Special Purpose Bank
    We also evaluated whether money market funds should be regulated as 
special purpose banks. Stable net asset value money market fund shares 
can bear some similarity to bank deposits.\548\ Some aspects of bank 
regulation could be used to mitigate some of the risks described in 
section II above.\549\ Money market funds could benefit from access to 
the special purpose bank's capital, government deposit insurance and 
emergency liquidity facilities from the Federal Reserve on terms 
codified and well understood in advance, and thus with a clearer 
allocation of risks among market participants.
---------------------------------------------------------------------------

    \548\ See supra note 511 and accompanying text.
    \549\ Id.
---------------------------------------------------------------------------

    As the PWG Report noted, and as commenters reinforced, there are a 
number of drawbacks to regulating money market funds as special purpose 
banks. While a few commenters expressed some support for this 
option,\550\ almost all commenters on the PWG Report addressing this 
possible reform option opposed it.\551\ Some commenters stated that the 
costs of converting money market funds to special purpose banks would 
likely be large relative to the costs of simply allowing more of this 
type of cash management activity to be absorbed into the existing 
banking sector.\552\ Others expressed concern that regulating money 
market funds as special purpose banks would radically change the 
product, make it less attractive to investors and thereby have 
unintended consequences potentially worse than the mitigated risk, such 
as leading sophisticated investors to move their funds to unregulated 
or offshore money market fund substitutes and thereby limiting the 
applicability of the current money market fund regulatory regime and 
creating additional systemic risk.\553\ For example, one of these 
commenters

[[Page 36913]]

stated that transforming money market funds into special purpose banks 
would create homogeneity in the financial regulatory scheme by relying 
on the bank business model for all short-term cash investments and that 
``[g]iven the unprecedented difficulties the banking industry has 
experienced recently, it seems bizarre to propose that [money market 
funds] operate more like banks, which have absorbed hundreds of 
billions of dollars in government loans and handouts.'' \554\ Some 
pointed to the differences between banks and money market funds as 
justifying different regulatory treatment, and expressed concern that 
concentrating investors' cash management activity in the banking sector 
could increase systemic risk.\555\
---------------------------------------------------------------------------

    \550\ See Volcker PWG Comment Letter, supra note 540 (``MMMFs 
that desire to offer their clients bank-like transaction services . 
. . and promises of maintaining a constant or stable net asset value 
(NAV), should either be required to organize themselves as special 
purpose banks or submit themselves to capital and supervisory 
requirements and FDIC-type insurance on funds under deposit.''); 
Winters PWG Comment Letter, supra note 541 (supporting it as the 
third best option, stating that ``[a]s long as the federal 
government continues to be the only viable source of large scale 
back-up liquidity for MMFs, it is intellectually dishonest to 
pretend that MMFs are not the functional equivalent of deposit-
taking banks. Thus, inclusion in the federal banking system is 
warranted.'').
    \551\ See, e.g., BlackRock PWG Comment Letter, supra note 473; 
Fidelity Jan. 2011 PWG Comment Letter, supra note 473; ICI Jan. 2011 
PWG Comment Letter, supra note 473; Comment Letter of the 
Institutional Money Market Funds Association (Jan. 10, 2011) 
(available in File No. 4-619).
    \552\ See, e.g., Richmond Fed PWG Comment Letter, supra note 
139; ICI Jan. 2011 PWG Comment Letter, supra note 473.
    \553\ See, e.g., Comment Letter of the Mutual Fund Directors 
Forum (Jan. 10, 2011) (available in File No. 4-619); Fidelity Jan. 
2011 PWG Comment Letter, supra note 473; ICI Jan. 2011 PWG Comment 
Letter, supra note 473.
    \554\ Fidelity Jan. 2011 PWG Comment Letter, supra note 473.
    \555\ See, e.g., Fidelity Jan. 2011 PWG Comment Letter, supra 
note 473; ICI Jan. 2011 PWG Comment Letter, supra note 473.
---------------------------------------------------------------------------

    The potential costs involved in creating a new special purpose bank 
regulatory framework to govern money market funds do not seem 
justified. In addition, given our view that money market funds have 
some features similar to banks but other aspects quite different from 
banks, applying substantial parts of the bank regulatory regime to 
money market funds does not seem as well tailored to the structure of 
and risks involved in money market funds compared to the reforms we are 
proposing in this Release. After considering our lack of regulatory 
authority to transform money market funds into special purpose banks as 
well as the views expressed in these comment letters and our staff's 
analysis of these matters and for the reasons set forth above, we are 
not pursuing a reform option of transforming money market funds into 
special purpose banks.
d. Dual Systems of Money Market Funds
    We evaluated options that would institute a dual system of money 
market funds, where either institutional money market funds or money 
market funds using a stable share price would be subject to more 
stringent regulation than others. As discussed in the PWG Report,\556\ 
money market fund reforms could focus on providing enhanced regulation 
solely for money market funds that seek to maintain a stable net asset 
value, rather than a floating NAV. Enhanced regulations could include 
any of the regulatory reform options discussed above such as mandatory 
insurance, a private liquidity facility, or special purpose bank 
regulation. Money market funds that did not comply with these enhanced 
constraints would have a floating NAV (though they would still be 
subject to the other risk limiting conditions contained in rule 2a-7).
---------------------------------------------------------------------------

    \556\ See PWG Report, supra note 111, at 29-32.
---------------------------------------------------------------------------

    There also may be other enhanced forms of regulation or other types 
of dual systems. For example, an alternative formulation of this 
regulatory regime would apply the enhanced regulatory constraints 
discussed above (e.g., a private liquidity facility or insurance) only 
to ``institutional'' money market funds, and ``retail'' money market 
funds would continue to be subject to rule 2a-7 as it exists today. We 
note that our proposals to exempt retail and government money market 
funds from any floating NAV requirement and to exempt government money 
market funds from any fees and gates requirement in effect creates a 
dual system.
    These dual system regulatory regimes for money market funds could 
provide several important benefits. They attempt to apply the enhanced 
regulatory constraints on those aspects of money market funds that most 
contribute to their susceptibility to runs--whether it is institutional 
investors that have shown a tendency to run or a stable net asset value 
created through the use of amortized cost valuation that can create a 
first mover advantage for those investors that redeem at the first 
signs of potential stress. A dual system that imposes enhanced 
constraints on stable net asset value money market funds would allow 
investors to choose their preferred mixture of stability, risk, and 
return.
    Because insurance, special purpose banks, and the private liquidity 
facility generally are beyond our regulatory authority to create, these 
particular dual options, which would impose one of these regulatory 
constraints on a subset of money market funds, could not be created 
under our current regulatory authority. Other options, such as 
requiring a floating NAV or liquidity fees and gates only for some 
types of money market funds, however, could be imposed under our 
current authority and are indeed proposed.
    Each of these dual systems generally has the same advantages and 
disadvantages as the potential enhanced regulatory constraints that 
would be applied, described above. In addition, for any two-tier system 
of money market fund regulation to be effective in reducing the risk of 
contagion effects from heavy redemptions, investors would need to fully 
understand the difference between the two types of funds and their 
associated risks. If they did not, they may indiscriminately flee both 
types of money market funds even if only one type experiences 
difficulty.\557\
---------------------------------------------------------------------------

    \557\ For example, when The Reserve Primary Fund broke the buck 
in September 2008, all money market funds managed by Reserve 
Management Company, Inc. experienced runs, even the Reserve U.S. 
Government Fund, despite the fact that the Reserve U.S. Government 
Fund had a quite different risk profile. See Press Release, A 
Statement Regarding The Reserve Primary and U.S. Government Funds 
(Sept. 19, 2008) available at http://www.primary-yieldplus-inliquidation.com/pdf/PressReleasePrimGovt2008_0919.pdf (``The U.S. 
Government Fund, which had approximately $10 billion in assets under 
management at the opening of business on September 15, 2008, has 
received redemption requests this week of approximately $6 
billion.'').
---------------------------------------------------------------------------

    A dual system approach also would allow the Commission to tailor 
its reforms to the particular areas of the money market fund industry 
that are of most concern (e.g., funds operating with a stable NAV or 
institutional funds or accounts). Given the difficulties, drawbacks, 
and limitations on our regulatory authority associated with dual 
systems involving a special purpose bank, private liquidity facility 
and insurance, we are not pursuing creating a dual system of money 
market fund regulation involving these enhanced regulatory constraints 
at this time. However, as noted above, our current proposal would to 
some extent create a dual system of money market funds, and we request 
comment on other potential dual systems that are within our regulatory 
authority.

E. Macroeconomic Effects of the Proposals

    In this section, we analyze the macro-economic consequences of our 
floating NAV and liquidity fees and gates proposals, as well as some of 
their effects on efficiency, competition, and capital formation. We 
also examine the potential implications of these proposals on current 
investments in money market funds and on the short-term financing 
markets.\558\ The baseline for these analyses (and all of our economic 
analysis in this Release) is money market fund investment and the 
short-term financing markets, as they exist today.\559\
---------------------------------------------------------------------------

    \558\ In supra sections III.A and III.B we discuss the specific 
benefits and costs associated with the two alternative reform 
proposals, and we discuss later in this Release the specific 
economic analysis of other aspects of our proposals. The specific 
operational costs of implementing the reform proposals are discussed 
in each respective section.
    \559\ See Panels A, B and C later in this section for certain 
recent data regarding money market fund investment and the short-
term financing markets.
---------------------------------------------------------------------------

    Our proposals should provide a number of benefits and positive 
effects on competition, efficiency, and capital formation. As discussed 
in detail earlier in this Release, we have designed both

[[Page 36914]]

of our proposals to improve the transparency of money market funds' 
risks and lessen the incentives for investors to redeem shares in times 
of fund or market stress. The floating NAV proposal is designed to 
address the incentive created today by money market funds' stable 
values for shareholders to redeem fund shares when the funds' market-
based NAVs are below their intended stable price. That proposal is also 
designed to reduce the likelihood that funds would experience heavy 
redemptions in times of stress, by acclimatizing investors to expect 
small fluctuations in the fund's share price over time, which could 
reduce the chances that investors will redeem in the face of market 
stress or stress on the money market fund. However, for those funds 
that do not qualify for the proposed retail or government exemptions to 
the floating NAV, this alternative would come at the cost of removing 
many of the benefits to investors that are the result of a fund being 
able to maintain a stable share price through the rounding conventions 
of rule 2a-7. A floating NAV also may not deter heavy redemptions from 
certain types of money market funds (e.g., prime money market funds) in 
times of stress if shareholders engage in a flight to quality, 
liquidity or transparency.
    The liquidity fees and gates alternative would preserve the 
benefits of the stable price per share that shareholders currently 
enjoy, but it would do so at the cost of potentially reducing (or 
making more costly) shareholder liquidity in certain circumstances. The 
liquidity fees and gates proposal is designed to protect fund 
shareholders that remain invested in a fund from bearing the liquidity 
costs of shareholders that exit a fund when the funds' liquidity is 
under stress. Redeeming fund shareholders receive the benefits of a 
fund's liquidity, which in times of stress may have the effect of 
imposing costs on the shareholders remaining in the fund. The liquidity 
fees and gates proposal would address this risk. The proposal also is 
designed to better position a money market fund to withstand heavy 
redemptions. A fund's board would be permitted to impose a gate when 
the fund is under stress, which would provide time for a panic to 
subside; for the fund's portfolio securities to mature and provide 
internal liquidity to meet redemptions; and for fund managers to assess 
the appropriate strategy to meet redemptions. Liquidity fees also could 
lessen investors' incentives to redeem and require investors to 
evaluate and price their liquidity needs. The fees and gates proposal, 
however, would not fully eliminate the incentive to quickly redeem in 
times of stress, because redeeming shareholders would retain an 
economic advantage over shareholders that remain in a fund if they 
redeem when the costs of liquidity are high, but the fund has not yet 
imposed a fee or gate. Also, by their nature, liquidity fees and 
redemption gates, if imposed, increase costs on shareholders who seek 
to redeem fund shares.
    Both of these proposals are intended, in different ways, to 
stabilize funds in times of stress. Thus, the proposals are designed to 
reduce the likelihood and associated costs of any contagion effects 
from heavy redemptions in money market funds to other money market 
funds, the short-term financing markets, and other parts of the 
economy. Nevertheless, we recognize that the expected benefits of the 
proposals may be accompanied by some adverse effects on the short-term 
financing markets for issuers, and may affect the level of investment 
in money market funds that would be subject to the proposals. The 
magnitude of these effects, including any effects on competition, 
efficiency, and capital formation, would depend on the extent to which 
investors reallocate their investments within the money market fund 
industry and on the extent to which investors reallocate their 
investments between money market funds and alternatives outside the 
money market fund industry. We anticipate that the adverse effects on 
investment in money market funds and the short-term financing markets 
for debt issuers would be small if either relatively little money is 
reallocated, or if the alternatives to which investors reallocate their 
cash invest in securities similar to those previously held by the money 
market funds. Conversely, the effects on investment in money market 
funds and the short-term financing markets would be larger if a 
substantial amount of money is reallocated to alternatives and those 
alternatives invest in securities of a different type from those 
previously held by money market funds.
1. Effect on Current Investment in Money Market Funds
    The popularity of money market funds today indicates they compete 
favorably with other investment alternatives. As of February 28, 2013, 
all money market funds had approximately $2.9 trillion in assets under 
management while government money market funds had approximately $929 
billion under management.\560\ Money market funds that self-report as 
retail prime money market funds held approximately $497 billion in 
assets under management and tax-exempt money market funds held 
approximately $277 billion in assets under management. We do not know 
how many of these funds would qualify for our proposed retail exemption 
from the floating NAV requirement.\561\
---------------------------------------------------------------------------

    \560\ Based on Form N-MFP data.
    \561\ Based on iMoneyNet data as of April 16, 2013.
---------------------------------------------------------------------------

    If we were to adopt either of the alternatives we are proposing 
today, current money market fund investors would likely consider the 
tradeoffs involved of investing in a money market fund subject to our 
proposals. Investors may decide to remain invested in money market 
funds subject to either a floating NAV or liquidity fees and gates, or 
they may choose to invest in a money market fund that is exempt from 
our proposed reforms (such as a government money market fund, or for 
the floating NAV proposal, a retail fund), invest directly in short-
term debt instruments, hold cash in a bank deposit account, invest in 
one of the few alternative diversified investments products that 
maintains a stable value (such as certain unregistered private funds), 
or invest in other products that fluctuate in value, such as ultra-
short bond funds.
    Money market funds under either of our proposals, like money market 
funds today, would compete against many investment alternatives for 
investors' assets. Our proposals, by increasing transparency and 
reducing the incentive for investors to redeem shares ahead of other 
investors in times of stress, could increase the attractiveness of 
money market funds in the long term for investors who value this aspect 
of our reforms, potentially offsetting the loss of some money market 
fund investors that may occur in the short term if we were to adopt 
either proposal, and enhancing competition. The proposals could also 
increase competition as investors become more aware of certain aspects 
of the industry and funds respond to meet investors' preferences. Our 
proposals also could increase allocative efficiency \562\ by not only 
increasing transparency of the underlying risks of money market fund 
investing, but also by making it harder for one group of investors to 
impose disproportionate costs on another group.\563\ In particular,

[[Page 36915]]

the floating NAV proposal requires investors to bear day-to-day losses 
and gains, and the liquidity fees and gates proposal requires investors 
to bear their liquidity costs when liquidity is particularly costly. 
Today, money market funds' day-to-day market-based losses and gains and 
any liquidity costs generally are not borne by redeeming investors 
because investors buy and sell money market fund shares at their stable 
$1.00 share price absent a break-the-buck event. In addition, as 
discussed in section III.F below, our proposal would require that money 
market fund sponsors disclose their support of funds, which also would 
advance investor understanding of the risk of loss in money market 
funds and thus may advance allocative efficiency if investors make 
better investment decisions as a result.
---------------------------------------------------------------------------

    \562\ Allocative efficiency refers to investors allocating their 
funds to the most suitable investments on efficient terms, taking 
all relevant factors into account.
    \563\ Some commenters have noted the potential for inequitable 
treatment of shareholders under the stable NAV model. See, e.g., 
Better Markets FSOC Comment Letter, supra note 67 (stating that ``an 
investor that succeeds in redeeming early in a downward spiral may 
receive more than they deserve in the sense that they liquidate at 
$1.00 per share even though the underlying assets are actually worth 
less. Without a sponsor contribution or other rescue, that 
differential in share value is paid by the shareholders remaining in 
the fund, who receive less not only due to declining asset values 
but also because early redeemers received more than their fair share 
of asset value.''); Comment Letter of Wisconsin Bankers Association 
(Feb. 15. 2013) (available in File No. FSOC-2012-0003) (stating that 
``[a] floating NAV has the benefits of . . . reducing the 
possibilities for transaction activity that results in non-equitable 
treatment across all shareholders''). See also supra section II.B.1.
---------------------------------------------------------------------------

    If we were to adopt reforms to money market funds, investors may 
withdraw some of their assets from affected money market funds. We 
believe that investors may withdraw more assets under the floating NAV 
proposal than they would under the liquidity fees and gates alternative 
because the floating NAV proposal may have a more significant effect on 
investors' day-to-day experience with and use of money market funds 
than the liquidity fees and gates alternative and because many 
investors place great value on principal stability in a money market 
fund.\564\ It is important to note, however, that investors that hold 
shares of money market funds not subject to our proposed reform 
alternatives (such as government money market funds, or under our 
floating NAV proposal, retail money market funds) may not experience 
outflows if we were to adopt the proposed reforms to money market funds 
because those funds would continue to be able to maintain a stable 
price under our floating NAV proposal. These exempt funds may even 
experience inflows of assets if investors reallocate their investments 
to such stable price funds.
---------------------------------------------------------------------------

    \564\ See, e.g., infra note 565 and accompanying discussion.
---------------------------------------------------------------------------

    We understand that many money market fund investors value both 
price stability and share liquidity.\565\ Because of the exemptions to 
the alternatives that we are proposing, under either the floating NAV 
or liquidity fees and gates proposal, investors will still be able to 
invest in certain money market funds that can continue to offer both 
price stability and unrestricted liquidity. Investors that value yield 
over these two features will be able to invest in prime money market 
funds, or if they are able to accept the daily redemption limits, 
retail money market funds. The key change under this proposal is that 
investors will have to prioritize their preference for these 
characteristics as they make their investment decisions because under 
our proposal, money market funds not subject to an exemption will, 
depending on the alternative adopted, suffer some diminution in 
principal stability, liquidity, or yield.
---------------------------------------------------------------------------

    \565\ Many of the comments received by FSOC stressed the 
importance of price stability and liquidity to many investors. See, 
e.g., Steve Morgan FSOC Comment Letter, supra note 290 (``The stable 
share price and liquid access to investors' money are key features 
of MMFs.''); Comment Letter of James White (Jan. 11, 2013) 
(available in File No. FSOC-2012-0003) (``Stability, convenience, 
and liquidity--including the stable share price and ability to 
access 100 percent of their money--are what draw investors to 
MMFs.''); Comment Letter of The SPARK Institute (Jan. 18, 2013) 
(available in File No. FSOC-2012-0003) (``Money market funds with a 
stable [NAV] serve important functions in the operation and 
administration of defined contribution retirement plans (e.g., 
401(k) plans) as convenient, cost-effective, simple, stable and 
liquid cash management tools.''); Comment Letter of Association for 
Financial Professionals (Jan. 22, 2013) (available in File No. FSOC-
2012-0003) (``For a large number of institutional investors, the 
potential of principal loss would preclude investing in floating NAV 
MMFs''); Comment Letter of Independent Directors Council (Jan. 23, 
2013) (available in File No. FSOC-2012-0003); Invesco FSOC Comment 
Letter, supra note 192.
---------------------------------------------------------------------------

    For those money market funds that would be required to use floating 
NAVs or to consider imposing liquidity fees and gates, there may be 
shifts in asset allocations not only among funds in the money market 
fund industry but also into alternative investment vehicles. We 
currently do not have a basis for estimating under either reform 
alternative the number of investors that might reallocate assets, the 
magnitude of the assets that might shift, or the likely investment 
alternatives because we do not know how investors will weigh the 
tradeoffs involved in reallocating their investments to alternatives. 
We request comment on these issues below.
    As discussed in sections III.A and III.B above, we anticipate some 
institutional investors would not or could not invest in a money market 
fund that does not offer principal stability or that has restrictions 
on redemptions. We do expect that more institutional investors would be 
unwilling to invest in a floating NAV money market fund than a money 
market fund that might impose a fee or gate because a floating NAV 
would have a persistent effect on investors' experience in a money 
market fund. These investors also may be unwilling to incur the 
operational and other costs and burdens discussed above that would be 
necessary to use floating NAV money market funds. One survey concluded, 
among other things, that if the Commission were to require money market 
funds to use floating NAVs, 79% of the 203 corporate, government, and 
institutional investors that responded to the survey would decrease 
their money market fund investments or stop using the funds.\566\ 
Similarly, a 2012 liquidity survey found that up to 77% of the 391 
organizations that responded to the survey would be less willing to 
invest in floating NAV money market funds, and/or would reduce or 
eliminate their money market fund holdings if the Commission were to 
require the funds to use floating NAVs.\567\ We also

[[Page 36916]]

understand that some institutional investors currently are prohibited 
by board-approved guidelines or internal policies from investing 
certain assets in money market funds that do not have a stable value 
per share.\568\ Other investors, including state and local governments, 
may be subject to statutory or regulatory requirements that permit them 
to invest certain assets only in funds that seek to maintain a stable 
value per share.\569\ In these instances, we anticipate monies would 
flow out of prime money market funds and into government money market 
funds or alternate investment vehicles. This would result in a 
contraction in the prime money market fund industry, thereby reducing 
the type and amount of money market fund investments available to 
investors and potentially harming the ability of money market funds to 
compete in several respects affected by our proposal. The net effect of 
this contraction would depend upon the ability of investors to 
replicate the pre-reform characteristics of money market funds in 
alternative investments.
---------------------------------------------------------------------------

    \566\ See ICI Apr 2012 PWG Comment Letter, supra note 62. 
According to this survey, if the Commission were to require money 
market funds to use floating NAVs: (i) 21% of the surveyed 
respondents would continue using funds at the same level; and (ii) 
79% would either decrease use or discontinue altogether. Treasury 
Strategies, which conducted the survey, estimates that ``money 
market fund assets held by corporate, government and institutional 
investors would see a net decrease of 61%'' based on its assessment 
of the survey responses.
    \567\ See 2012 AFP Liquidity Survey, supra note 73, at 3 (201 
corporate practitioner members of the Association for Financial 
Professionals and 190 corporate practitioners who are not members 
responded to the survey). See also, e.g., ICI Feb 2012 PWG Comment 
Letter, supra note 259 (describing a survey conducted by Treasury 
Strategies Inc., a survey conducted by Harris Interactive 
(commissioned by T. Rowe Price), and a survey conducted by 
Fidelity); Dreyfus 2009 Comment Letter, supra note 350 (opposing a 
floating NAV and stating that, after surveying 37 of its largest 
institutional money market fund shareholders (representing over $60 
billion in assets) regarding a floating NAV, 67% responded that 
their business could not continue to invest in a floating NAV 
product and that they would have to seek an alternative investment 
option); Comment Letter of National Association of State Treasurers 
(Dec. 21, 2010) (available in File No. 4-619) (``Nat. Assoc. of 
State Treasurers PWG Comment Letter'') (opposing a floating NAV 
because, among other reasons, ``a floating NAV would push investors 
to less regulated or non-regulated markets''); Comment Letter of the 
Association for Financial Professionals (Jan. 10, 2011) (available 
in File No. 4-619) (``AFP Jan. 2011 PWG Comment Letter'') (reporting 
results of a survey of its members reflecting that four out of five 
organizations would likely move at least some of their assets out of 
money market funds if the funds were required to use floating NAVs 
and providing details as to the likely destinations); Comment Letter 
of Federated Investors, Inc. (Feb. 24, 2012) (available in File No. 
4-619) (stating that many state laws would preclude trust 
investments in money market funds with a floating NAV); Roundtable 
Transcript, supra note 43 (Carol A DeNale, (CVS Caremark) (``I will 
not invest in a floating NAV product. [. . . .] We will pull out of 
money market funds, and I think that is the consensus of the 
treasurers that I have talked to in different meetings that I've 
been in, in group panels.'').
    \568\ See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; 
Wells Fargo FSOC Comment Letter, supra note 342; Comment Letter of 
County Commissioners Assoc. of Ohio (Dec. 21, 2012) (available in 
File No. FSOC-2012-0003); Comment Letter of the American Bankers 
Association (Sept. 8, 2009) (available in File No. S7-11-09); 
Fidelity 2009 Comment Letter, supra note 208; Comment Letter of 
Goldman Sachs Asset Management, L.P. (Sept. 8, 2009) (available in 
File No. S7-11-09); Comment Letter of Treasury Strategies, Inc. 
(Sept. 8, 2009) (available in File No. S7-11-09).
    \569\ Id.
---------------------------------------------------------------------------

    As of February 28, 2013, institutional prime money market funds 
manage approximately $974 billion in assets.\570\ As with government 
and retail funds, however, we do not have a basis for estimating the 
number of institutions that might reallocate assets, the amount of 
assets that might shift, or the likely alternatives under either of our 
proposals, because we do not know how many of these investors face 
statutory or other requirements that mandate investment in a stable 
value product or a product that will not restrict redemptions or how 
these investors would weigh the tradeoffs involved in switching their 
investment to various alternative products. We request comment on these 
issues below.
---------------------------------------------------------------------------

    \570\ Based on iMoneyNet data.
---------------------------------------------------------------------------

    Investors that are unable or unwilling to invest in a money market 
fund subject to our proposed reforms would have a range of investment 
options, each offering a different combination of price stability, risk 
exposure, return, investor protections, and disclosure. For example, 
some current money market fund investors may manage their cash 
themselves and, based on our understanding of institutional investor 
cash management practices, many of these investors would invest 
directly in securities similar to those held by money market funds 
today. If so, our proposal would not have a large negative effect on 
capital formation. Any desire to self-manage cash, however, would 
likely be tempered by the expertise required to invest in a diversified 
portfolio of money market securities directly and the costs of 
investing in those securities given the economies of scale that would 
be lost when each investor has to conduct credit analysis itself for 
each investment (in contrast to money market funds which could spread 
their credit analysis costs for each security across their entire 
shareholder base).\571\ Additionally, these investors might find it 
difficult to find appropriate investments that match their specific 
cash flows available for investment.
---------------------------------------------------------------------------

    \571\ See, e.g., U.S. Chamber Jan. 23, 2013 FSOC Comment Letter, 
supra note 248 (``Quite simply, it is more efficient and economical 
to pay the management fee for a MMMF than to hire the internal staff 
to manage the investment of cash.'').
---------------------------------------------------------------------------

    Shifts from reformed money market funds to other investment 
alternatives that could result from our proposals likely would transfer 
certain risks from money market funds to other markets and 
institutions. Commenters have cited to the fact that a shift of assets 
from money market funds to bank deposits, for example, would increase 
investors' reliance on FDIC deposit insurance and increase the size of 
the banking sector, possibly increasing the concentration of risk in 
banks.\572\ As discussed in the RSFI Study, individual and business 
holdings in checking deposits and currency are large and have 
significantly increased in recent years relative to their holdings of 
money market fund shares.\573\ The 2012 AFP Liquidity Survey of 
corporate treasurers indicates that bank deposits accounted for 51% of 
the surveyed organizations' short-term investments in 2012, which is up 
from 25% in 2008.\574\ Money market funds accounted for 19% of these 
organizations' short-term investments in 2012, down from 30% just a 
year earlier, and down from almost 40% in 2008.\575\ This shift was 
likely motivated by the availability of unlimited FDIC insurance on 
non-interest bearing accounts between the end of 2010 and January 
2013.\576\ A further shift in assets from money market funds to bank 
deposits would increase this concentration.
---------------------------------------------------------------------------

    \572\ See, e.g., Angel FSOC Comment Letter, supra note 60 
(stating that ``[m]any of the proposed reforms would seriously 
reduce the attractiveness of MMMFs,'' which ``could increase, not 
decrease, systemic risk as assets move to too-big-to-fail banks.''); 
Comment Letter of Jonathan Macey (Nov. 27, 2012) (available in File 
No. FSOC-2012-0003) (stating that a ``reduced MMF industry may lead 
to the flow of large amounts of cash into [the banking system], 
especially through the largest banks, and increase pressure on the 
FDIC.''); Federated Investors Alternative 1 FSOC Comment Letter, 
supra note 161 (``A floating NAV would accelerate the flow of assets 
to ``Too Big to Fail'' banks, further concentrating risk in that 
sector.'').
    \573\ See RSFI Study, supra note 21, at figure 18.
    \574\ See 2012 AFP Liquidity Survey, supra note 73.
    \575\ See id., 2008 AFP Liquidity Survey, supra note 73.
    \576\ As of December 31, 2012, the amount in domestic 
noninterest-bearing transaction accounts over the normal $250,000 
limit was $1.5 trillion. See Federal Deposit Insurance Corporation 
Quarterly Banking Profile, Fourth Quarter 2012, at 16, available at 
http://www2.fdic.gov/qbp/2012dec/qbp.pdf. At December 31, 2008, the 
amount in domestic noninterest-bearing transaction accounts over the 
normal $250,000 limit was $814 billion. See Federal Deposit 
Insurance Corporation Quarterly Banking Profile, Fourth Quarter 
2008, at 20, available at http://www2.fdic.gov/qbp/2008dec/qbp.pdf.
---------------------------------------------------------------------------

    As discussed in the RSFI Study, there are a range of investment 
alternatives that currently compete with money market funds. If we 
adopt either of our proposals, investors could choose from among at 
least the following alternatives: Money market funds that are exempt 
from the proposed reforms; under the liquidity fees and gates proposal, 
money market funds that invest only in weekly liquid assets; bank 
deposit accounts; bank certificates of deposit; bank collective trust 
funds; local government investment pools (``LGIPs''); U.S. private 
funds; offshore money market funds; short-term investment funds 
(``STIFs''); separately managed accounts; ultra-short bond funds; 
short-duration exchange-traded funds; and direct investments in money 
market instruments.\577\ Each of these choices involves different 
tradeoffs, and money market fund investors that are unwilling or unable 
to invest in a money market fund under either of our proposals would 
need to analyze the various tradeoffs associated with each alternative.
---------------------------------------------------------------------------

    \577\ See, e.g., ICI Feb 2012 PWG Comment Letter, supra note 
259; Comment Letter of the Association for Financial Professionals 
et al. (Apr. 4, 2012) (available in File No. 4-619).
---------------------------------------------------------------------------

    The following table, taken from the RSFI Study, outlines the 
principal

[[Page 36917]]

features of various cash alternatives to money market funds that exist 
today.

                                                          Table 2--Cash Investment Alternatives
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Investment risks       Redemption                                                Restrictions on
             Product                   Valuation              \a\            restrictions          Yield \b\           Regulated         investor base
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bank demand deposits............  Stable............  Below benchmark up  No................  Below benchmark...  Yes...............  No.
                                                       to depository
                                                       insurance
                                                       (``DI'') limit;
                                                       above benchmark
                                                       above DI limit
                                                       \c\.
Time deposits (CDs).............  Stable............  Bank counterparty   Yes \d\...........  Below benchmark...  Yes...............  No.
                                                       risk above DI
                                                       limit.
Offshore money funds (European    Stable or Floating  Comparable to       Some \f\..........  Comparable to       Yes...............  Yes.\g\
 short-term MMFs) \e\.             NAV.                benchmark.                              benchmark.
Offshore money funds (European    Floating NAV......  Above benchmark...  Some..............  Above benchmark...  Yes...............  Yes.
 MMFs) \h\.
Enhanced cash funds (private      Stable NAV          Above benchmark...  By contract.......  Above benchmark...  No \i\............  Yes.\j\
 funds).                           (generally).
Ultra-short bond funds..........  Floating NAV......  Above benchmark...  Some..............  Above benchmark...  Yes...............  No.
Collective investment funds \k\.  Not stable........  Above benchmark...  No................  Above benchmark...  Yes...............  Tax-exempt bank
                                                                                                                                       clients.\l\
Short-term investment funds       Stable............  Above benchmark...  No................  Above benchmark...  Yes \m\...........  Tax-exempt bank
 (``STIFs'').                                                                                                                          clients.
Local government investment       Stable (generally)  Benchmark.........  No................  Benchmark.........  Yes...............  Local government
 pools (``LGIPs'').                \n\.                                                                                                and public
                                                                                                                                       entities.
Short-duration ETFs.............  Floating NAV;       Above benchmark...  No................  Above benchmark...  Yes...............  No.
                                   Market price \o\.
Separately managed accounts       Not stable........  Above benchmark...  No................  Above benchmark...  No................  Investment
 (including wrap accounts).                                                                                                            minimum.\p\
Direct investment in MMF          Not stable........  Comparable to       No................  Comparable to       No................  Some.\r\
 instruments.                                          benchmark but may                       benchmark but may
                                                       vary depending on                       vary depending on
                                                       investment mix                          investment mix.
                                                       \q\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ For purposes of this table, investment risks include exposure to interest rate and credit risks. The column also indicates the general level of
  investment risk for the product compared with the baseline of prime money market funds and is generally a premium above the risk-free or Treasury
  rate.
\b\ The table entries reflect average yields in a normal interest rate environment. Certain cash management products, such as certificates of deposits
  (``CDs'') and demand deposits, may be able to offer rates above the baseline in a low interest rate environment.
\c\ The current DI limit is $250,000 per owner for interest-bearing accounts. See Deposit Insurance Summary, Federal Deposit Insurance Corporation
  (``FDIC''), available at http://www.fdic.gov/deposit/deposits/dis/.
\d\ Time deposits, or CDs, are subject to minimum early withdrawal penalties if funds are withdrawn within six days of the date of deposit or within six
  days of the immediately preceding partial withdrawal. See 12 CFR 204.2(c)(1)(i). Many CDs are also subject to early withdrawal penalties if withdrawn
  before maturity, although market forces, rather than federal regulation, impose such penalties. CDs generally have specific fixed terms (e.g., one-,
  three-, or six-month terms), although some banks offer customized CDs (e.g., with terms of seven days).
\e\ The vast majority of money market fund assets are held in U.S. and European money market funds. See Consultation Report of the IOSCO Standing
  Committee 5 (Apr. 27, 2012) (``IOSCO SC5 Report''), at App. B, Sec.  Sec.   2.1-2.36 (in 2011, of the assets invested in money market funds in IOSCO
  countries, approximately 61% were invested in U.S. money market funds and 32% were invested in European money market funds). Consequently, dollar-
  denominated European money market funds may provide a limited offshore money market fund alternative to U.S. money market funds. Most European stable
  value money market funds are a member of the Institutional Money Market Funds Association (``IMMFA''). According to IMMFA, as of March 1, 2013, there
  were approximately $286 billion U.S. dollar-denominated IMMFA money market funds. See www.immfa.org (this figure excludes accumulating NAV U.S. dollar-
  denominated money market funds). Like U.S. money market funds, European short-term money market funds must have a dollar-weighted average maturity of
  no more than 60 days and a dollar-weighted average life maturity of no more than 120 days, and their portfolio securities must hold one of the two
  highest short-term credit ratings and have a maturity of no more than 397 days. However, unlike U.S. money market funds, European short-term money
  market funds may either have a floating or fixed NAV. Compare Common Definition of European Money Market Funds (Ref. CESR/10-049) with rule 2a-7.
\f\ Most European money market funds are subject to legislation governing Undertakings for Collective Investment in Transferable Securities (``UCITS''),
  which also covers other collective investments. See, e.g., UCITS IV Directive, Article 84 (permitting a UCITS to, in accordance with applicable
  national law and its instruments of incorporation, temporarily suspend redemption of its units); Articles L. 214-19 and L. 214-30 of the French
  Monetary and Financial Code (providing that under exceptional circumstances and if the interests of the UCITS units holders so demand, UCITs may
  temporarily suspend redemptions).
\g\ Section 7(d) of the Investment Company Act requires that any non-U.S. investment company that wishes to register as an investment company in order
  to publicly offer its securities in the U.S. must first obtain an order from the SEC. To issue such an order, the SEC must find that ``by reason of
  special circumstances or arrangements, it is both legally and practically feasible to enforce the provisions of [the Act against the non-U.S. fund,]
  and that the issuance of [the] order is otherwise consistent with the public interest and the protection of investors.'' No European money market fund
  has received such an order. European money market funds could be offered to U.S. investors privately on a very limited basis subject to certain
  exclusions from investment company regulation under the Investment Company Act and certain exemptions from registration under the Securities Act. U.S.
  investors purchasing non-U.S. funds in private offerings, however, may be subject to potentially significant adverse tax implications. See, e.g.,
  Internal Revenue Code of 1986 Sec.  Sec.   1291 through 1297. Moreover, as a practical matter, and in view of the severe consequences of violating the
  Securities Act registration and offering requirements, most European money market funds currently prohibit investment by U.S. Persons.

[[Page 36918]]

 
\h\ European money market funds may have a dollar-weighted average portfolio maturity of up to six months and a dollar-weighted average life maturity of
  up to 12 months that are significantly greater than are permitted for U.S. money market funds. Compare Common Definition of European Money Market
  Funds (Ref. CESR/10-049) with rule 2a-7.
\i\ Private funds generally rely on one of two exclusions from investment company regulation by the Commission. Section 3(c)(1) of the Investment
  Company Act, in general, excludes from the definition of ``investment company'' funds whose shares are beneficially owned by not more than 100 persons
  where the issuer does not make or propose to make a public offering. Section 3(c)(7) of the Act places no limit on the number of holders of
  securities, as long as each is a ``qualified purchaser'' (as that term is defined in section 2(a)(51) of the Act) when the securities are acquired and
  the issuer does not make or propose to make a public offering. Most retail investors would not fall within the definition of ``qualified purchaser.''
  Moreover, such private funds also generally rely on the private offering exemption in section 4(2) of the Securities Act or Securities Act rule 506 to
  avoid the registration and prospectus delivery requirements of Section 5 of the Securities Act. Rule 506 establishes ``safe harbor'' criteria to meet
  the private offering exemption. The provision most often relied upon by private funds under rule 506 exempts offerings made exclusively to
  ``accredited investors'' (as that term is defined in rule 501(a) under the Securities Act). Most retail investors would not fall within the definition
  of ``accredited investor.'' Offshore private funds also generally rely on one of the two non-exclusive safe harbors of Regulation S, an issuer safe
  harbor and an offshore resale safe harbor. If one of the two is satisfied, an offshore private fund will not have to register the offer and sale of
  its securities under the Securities Act. Specifically, rules 903(a) and 904(a) of Regulation S provide that offers and sales must be made in
  ``offshore transactions'' and rule 902(h) provides that an offer or sale is made in an ``offshore transaction'' if, among other conditions, the offer
  is not made to a person in the United States. Regulation S is not available to offers and sales of securities issued by investment companies required
  to be registered, but not registered, under the Investment Company Act. See Regulation S Preliminary Notes 3 and 4.
\j\ See id.
\k\ Collective investment funds include collective trust funds and common trust funds managed by banks or their trust departments, both of which are a
  subset of short-term investment funds. For purposes of this table, short-term investment funds are separately addressed.
\l\ Collective trust funds are generally limited to tax-qualified plans and government plans, while common trust funds are generally limited to tax-
  qualified personal trusts and estates and trusts established by institutions.
\m\ STIFs are generally regulated by 12 CFR 9.18. The Office of the Comptroller of the Currency recently reformed the rules governing STIFs subject to
  their jurisdiction to impose similar requirements to those governing money market funds. See Office of the Comptroller of Currency, Treasury, Short-
  Term Investment Funds [77 FR 61229 (Oct. 9, 2012)].
\n\ Regarding all items in this row of the table, LGIPs generally are structured to meet a particular investment objective. In most cases, they are
  designed to serve as short-term investments for funds that may be needed by participants on a day-to-day or near-term basis. These local government
  investment pools tend to emulate typical money market mutual funds in many respects, particularly by maintaining a stable net asset value of $1.00
  through investments in short-term securities. A few local government investment pools are designed to provide the potential for greater returns
  through investment in longer-term securities for participants' funds that may not be needed on a near-term basis. The value of shares in these local
  government investment pools fluctuates depending upon the value of the underlying investments. Local government investment pools limit the nature of
  underlying investments to those in which its participants are permitted to invest under applicable state law. See http://www.msrb.org/Municipal-Bond-Market/About-Municipal-Securities/Local-Government-Investment-Pools.aspx. Investors in local government investment pools may include counties, cities,
  public schools, and similar public entities. See, e.g., The South Carolina Local Government Investment Pool Participant Procedures Manual, available
  at http://www.treasurer.sc.gov/Investments/The%20South%20Carolina%20Local%20Government%20Investment%20Pool%20Participant%20Procedures%20Manual.pdf.
\o\ Although the performance of an exchange traded fund (``ETF'') is measured by its NAV, the price of an ETF for most shareholders is not determined
  solely by its NAV, but by buyers and sellers on the open market, who may take into account the ETF's NAV as well as other factors.
\p\ Many separately managed accounts have investment minimums of $100,000 or more.
\q\ Depending on the nature and scope of their investments, these investors may also face risks stemming from a lack of portfolio diversification.
\r\ Some money market fund instruments are only sold in large denominations or are only available to qualified institutional buyers. See generally rule
  144A under the Securities Act (17 CFR 230.144A(7)(a)(1)).

    If we adopt the floating NAV proposal, investors that value 
principal stability would likely consider shifting investments to 
government money market funds (or retail money market funds), which 
would be permitted to continue to maintain stable prices under that 
proposal. Similarly, if we adopt the alternative fees and gates 
proposal, investors that are unwilling to invest in a money market fund 
that might impose a liquidity fee or gate when liquidity is 
particularly costly might shift their investments to government money 
market funds. Investors that shifted their assets from prime money 
market funds to government money market funds would likely sacrifice 
yield under both proposals, but they would maintain the principal 
stability and liquidity of their assets. Investors in exempt retail 
money market funds would not have to face the same tradeoff. 
Alternatively, money market fund investors could reallocate assets to 
various bank products such as demand deposits or short-maturity 
certificates of deposit. FDIC insurance would provide principal 
stability and liquidity irrespective of market conditions for bank 
accounts whose deposits are within the insurance limits.
    Today, interest-bearing accounts and non-interest-bearing 
transaction accounts at depository institutions are insured up to 
$250,000. Accordingly, institutions would be deterred from moving their 
investments from money market funds to banks because their assets would 
probably be above the current depository insurance limits which would 
expose them to substantial counterparty risk.\578\ Nevertheless, these 
investors could gain full insurance coverage if they are willing and 
able to break their cash holdings into sufficiently small pieces and 
spread them across enough banks.\579\
---------------------------------------------------------------------------

    \578\ See, e.g., Comment Letter of Crawford and Company (Jan. 
14, 2013) (available in File No. FSOC-2012-0003) (``Bank demand 
deposits . . . lack the diversification of MMFs and carry inherent 
counterparty risk.''); ICI Jan 2011 PWG Comment Letter, supra note 
473 (``The Report suggests that requiring money market funds to 
float their NAVs could encourage investors to shift their liquid 
balances to bank deposits. We believe that this effect is 
overstated, particularly for institutional investors. Corporate cash 
managers and other institutional investors would not view an 
undiversified holding in an uninsured (or underinsured) bank account 
as having the same risk profile as an investment in a diversified 
short-term money market fund. Such investors would continue to seek 
out diversified investment pools, which may or may not include bank 
time deposits.'').
    \579\ Certain third party service providers offer such services. 
See, e.g., Nathaniel Popper and Jessica Silver-Greenberg, Big 
Depositors Seek New Safety Net, N.Y. Times (Dec. 30, 2012).
---------------------------------------------------------------------------

    Investors in reformed money market funds that value principal 
stability would find most other investment alternatives unattractive, 
including floating value enhanced cash funds, ultra-short bond funds, 
short-duration ETFs, and collective investment funds. These 
alternatives typically do not offer principal stability. These 
investments, however, might be attractive to investors that value yield 
over principal stability and the lowest investment risk. To our 
knowledge, none of these alternative investment products (except 
potentially enhanced cash funds) may restrict redemptions in times of 
stress without obtaining relief from regulatory restrictions.
    One practical constraint for many money market fund investors is 
that they may be precluded from investing in certain alternatives, such 
as STIFs, offshore money market funds, LGIPs, separately managed 
accounts, and direct investments in money market instruments, due to 
significant

[[Page 36919]]

restrictions on participation. For example, STIFs are only available to 
accounts for personal trusts, estates, and employee benefit plans that 
are exempt from taxation under the U.S. Internal Revenue Code.\580\ 
STIFs subject to regulation by the Office of the Comptroller of the 
Currency also are subject to less stringent regulatory restrictions 
than rule 2a-7 imposes, and STIFs under the jurisdiction of other 
banking regulators may be subject to no restrictions at all equivalent 
to rule 2a-7.\581\ Accordingly, these funds pose greater risk than 
money market funds and thus may not be attractive alternatives to 
investors that highly value principal stability. Offshore money market 
funds, which are investment pools domiciled and authorized outside the 
United States, can only sell shares to U.S. investors in private 
offerings. Few offshore money market funds offer their shares to U.S. 
investors in part because doing so could create adverse tax 
consequences.\582\ In addition, European money market funds can take on 
more risk than U.S. money market funds as they are not currently 
subject to regulatory restrictions on their credit quality, liquidity, 
maturity, and diversification as stringent as those imposed under rule 
2a-7, among other differences in regulation.\583\
---------------------------------------------------------------------------

    \580\ See Testimony of Paul Schott Stevens, President and CEO of 
the Investment Company Institute, before the Committee on Banking, 
Housing, and Urban Affairs, United States Senate, on ``Perspectives 
on Money Market Mutual Fund Reforms,'' June 21, 2012.
    \581\ For a discussion of the regulation of STIFs by the Office 
of the Comptroller of the Currency (OCC), see supra Table 2, note M. 
The OCC's rule 9.18 governs STIFs managed by national banks and 
federal savings associations. Other types of banks may or may not 
follow the requirements of OCC rule 9.18, depending, for example, on 
state law requirements and federal tax laws. See Office of the 
Comptroller of Currency, Treasury, Short-Term Investment Funds, at 
n.6 and accompanying text [77 FR 61229 (Oct. 9, 2012)].
    \582\ See supra this section, Table 2, explanatory notes G and 
I.
    \583\ For a discussion of the regulation of European money 
market funds, see supra Table 2, notes E and H; Common Definition of 
European Money Market Funds (Ref. CESR/10-049).
---------------------------------------------------------------------------

    Some current money market fund investors may have self-imposed 
restrictions or fiduciary duties that limit the risks they can assume 
or that preclude them from investing in certain alternatives. They 
might be prohibited from investing in, for example, enhanced cash funds 
that are privately offered to institutions, wealthy clients, and 
certain types of trusts due to greater investment risk, limitations on 
investor base, or the lack of disclosure and legal protections of the 
type afforded them by U.S. securities regulations.\584\ Likewise, money 
market fund investors that can only invest in SEC-registered investment 
vehicles could not invest in LGIPs, which are not registered with the 
SEC (as states and local state agencies are excluded from regulation 
under the Investment Company Act). Many unregistered and offshore 
alternatives to money market funds--unlike registered money market 
funds in the United States today--are not prohibited from imposing 
gates or suspending redemptions.\585\ Other investment alternatives, 
such as bank CDs, also impose redemption restrictions. Investors 
placing a high value on liquidity would likely find the potential 
imposition of these restrictions unacceptable and thus not invest in 
them.
---------------------------------------------------------------------------

    \584\ According to the 2012 AFP Liquidity Survey, supra note 73, 
only 21% of respondents stated that enhanced cash funds were 
permissible investment vehicles under the organization's short-term 
investment policy. In contrast, 44% stated that prime money market 
funds were a permissible investment and 56% stated that Treasury 
money market funds were a permissible investment.
    \585\ See, e.g., supra this section, Table 2, explanatory note 
F.
---------------------------------------------------------------------------

    Both retail and institutional investors' assessments of money 
market funds as reformed under our proposals and their attractiveness 
relative to alternatives may be influenced by investors' views on the 
degree to which funds' NAVs will change from day to day under our 
floating NAV proposal or the frequency with which fees and gates will 
be imposed under our liquidity fees and gates proposal. For example, 
managers of floating NAV funds could invest a large percentage of their 
holdings in very short-term or Treasury securities to minimize 
fluctuations in the funds' NAVs. Additionally, under our liquidity fees 
and gates proposal, we expect that funds would attempt to manage their 
liquidity levels in order to avoid crossing the threshold for applying 
liquidity fees or gates. One possible effect of each of these actions 
may be to lower the expected yield of the fund. Thus, we believe that, 
under our proposals, fund managers would be incentivized to mitigate 
the potential direct costs of the proposals for investors, and we 
further believe that they would be successful in so doing in all but 
the most extreme circumstances, but that this mitigation may come at a 
cost to fund yield and profitability as managers shift to shorter dated 
or more liquid securities.
    Investors' demand for stability in the value of the money market 
fund investment could provide an incentive for sponsors to support 
their money market funds in the event a particular portfolio security 
would negatively affect the NAV of the fund (i.e., to prevent a fund's 
NAV from declining below a value the fund seeks to maintain under 
either our floating NAV proposal or our liquidity fees and gates 
proposal). Under our floating NAV proposal, sponsor support could 
permit prime money market funds (or other non-exempt money market 
funds) to continue to maintain a stable price. Under our liquidity fees 
and gates proposal, a sponsor could prevent the money market fund's 
weekly liquid assets from falling below the 15% threshold for applying 
liquidity fees and gates by giving the fund cash (for example, the 
sponsor could lift out some of the fund's non-weekly liquid assets or 
the sponsor could directly purchase fund shares) to invest in weekly 
liquid assets. We are proposing a number of new disclosure requirements 
regarding sponsor support to help shareholders understand whether a 
fund's stable price or liquidity was the result of careful portfolio 
management or sponsor support. Among other things, money market funds 
would be required to provide real-time notifications to both investors 
and the Commission of new instances of sponsor support, a description 
of the nature of support, and the date and amount of support 
provided.\586\
---------------------------------------------------------------------------

    \586\ See infra section III.G; proposed (FNAV and Fees & Gates) 
Form N-CR, Part C (Provision of Financial Support to Fund).
---------------------------------------------------------------------------

    As this analysis reflects, the economic implications of our 
floating NAV and liquidity fees and gates proposals depend on 
investors' preferences, and the attractiveness of investment 
alternatives.\587\ For these and the other reasons discussed below, we 
believe that the survey data submitted by commenters reflecting that 
certain investors expect to reduce or eliminate their money market fund 
investments under the floating NAV alternative may

[[Page 36920]]

not definitively indicate how investors might actually behave.\588\
---------------------------------------------------------------------------

    \587\ See, e.g., Better Markets FSOC Comment Letter, supra note 
67 (in response to industry survey data reflecting intolerance for 
the floating NAV, stating that ``it is difficult to predict the 
level of contraction that would actually result from instituting a 
floating NAV. [. . . .] The move to a floating NAV does not alter 
the fundamental attributes of MMFs with respect to the type, 
quality, and liquidity of the investments in the fund. [. . . .] It 
is therefore unrealistic to think that MMFs . . . will become 
extinct solely as a result of a move to a more accurate and 
transparent valuation methodology.''); Winters FSOC Comment Letter, 
supra note 190 (``[T]he feared migration to unregulated funds has 
not been quantified and is probably overstated.''); U.S. Chamber 
Jan. 23, 2013 FSOC Comment Letter, supra note 248 (``No alternatives 
with the same multiple benefits are available to replace money 
market mutual funds.'').
    \588\ See supra notes 566 and 567, and infra note 803 and 
accompanying text.
---------------------------------------------------------------------------

    None of the surveys discussed above considered the exemptions we 
are proposing that would permit both government money market funds 
(under both proposals) and retail money market funds (under the 
floating NAV proposal) to continue to maintain a stable price without 
restrictions. In addition, none of the surveys addressed how investors 
would respond to our specific liquidity fees and gates proposal. 
Finally, the surveys did not consider how available alternatives to 
floating NAV money market funds might satisfy money market fund 
investors' expressed desires for stable, liquid, and safe investments. 
Indeed, some commenters have suggested that the mass exodus from money 
market funds as a result of further reforms is unlikely and that money 
market fund investors may not necessarily seek out investment 
alternatives.\589\ Some alternatives to money market funds, commenters 
explain, would carry greater risks than the effect of our proposals on 
money market funds, would not be able to accommodate a sizeable portion 
of money market fund assets, or both.\590\ We also understand that at 
least one money market fund sponsor converted its non-U.S. stable value 
money market funds to funds with floating NAVs and found that its 
concern in advance of the conversion that the funds' mostly retail 
investors would redeem and reject the floating NAV funds proved to be 
unjustified.\591\
---------------------------------------------------------------------------

    \589\ See, e.g., Winters FSOC Comment Letter, supra note 190 
(stating that, with respect to the feared migration to unregulated 
funds, ``the capacity for existing unregulated funds to take inflows 
is relatively small and the operators of such funds may not welcome 
a flood of hot money with riskless expectations.''); ICI Jan 2011 
PWG Comment Letter, supra note 473 (``The Report suggests that 
requiring money market funds to float their NAVs could encourage 
investors to shift their liquid balances to bank deposits. We 
believe that this effect is overstated, particularly for 
institutional investors. Corporate cash managers and other 
institutional investors would not view an undiversified holding in 
an uninsured (or underinsured) bank account as having the same risk 
profile as an investment in a diversified short-term money market 
fund. Such investors would continue to seek out diversified 
investment pools, which may or may not include bank time 
deposits.'').
    \590\ See, e.g., Thrivent FSOC Comment Letter, supra note 396 
(``Arguments for massive movements into vehicles such as cash 
enhanced funds, offshore money market funds and the like seem to 
assume that investors will behave irrationally. There would be no 
logical reason to move from highly regulated money market funds with 
a history of maintaining a close proximity to $1.00 per share net 
asset value to cash enhanced funds, which are much less regulated 
and likely to have a much more widely fluctuating NAV, nor to 
offshore money funds which have materially different guidelines, nor 
to stable value vehicles, the growth of which is limited by 
available supply of insured product with commensurate credit 
ratings.'').
    \591\ UBS IOSCO Comment Letter, supra note 357.
---------------------------------------------------------------------------

    We request comment on what effects our floating NAV or liquidity 
fees and gates proposals would have on current money market fund 
investments.
     Do commenters believe that the likely effect of either our 
floating NAV proposal or our liquidity fees and gates proposal would be 
to cause some investors to shift their money market fund investments to 
alternative products and thus reduce the amount of money market fund 
assets under management? If so, to what extent and why? To what extent 
would these shifts vary depending on whether the investor was retail or 
institutional and why?
     Would either of our proposals result in any reduction in 
the number of money market funds and/or consolidation of the money 
market industry? How many funds and what types of money market funds 
would leave the industry? What would be the effect on assets under 
management of different types of money market funds if we adopt either 
our floating NAV or liquidity fees and gates proposal?
     To what extent under each alternative would retail and 
institutional money market fund investors shift to investment 
alternatives, including managing their cash themselves?
     Would certain investment alternatives that have 
significant restrictions on their investor base be unavailable for 
current money market fund investors? If so, which alternatives and to 
what extent?
     Do commenters agree with our analysis of the likelihood 
that certain shareholders would seek out particular investment 
alternatives in the event we adopted either of our floating NAV or 
liquidity fees and gates proposals? For example, would institutional 
investors be unlikely to shift assets to bank deposits (because of 
depository insurance limits) or local government investment pools, 
short-term investment funds, or offshore money market funds (because of 
the significant investment restrictions)? Do commenters agree with our 
analysis with respect to some or all of these alternatives? Why or why 
not?
     Are there aspects of any investment alternatives other 
than operational costs discussed in sections III.A.7 and III.B.6 above 
or the factors we have identified in this section that would affect 
whether money market fund investors would be likely to use other 
investment alternatives in lieu of money market funds under either of 
our proposals? We request that commenters differentiate between short-
term effects that would occur as the industry transitions to one in 
which money market funds use floating NAVs or liquidity fees and gates 
and the long-term effects that would persist thereafter.
     Under each of the two proposals, what fraction of prime 
money market fund assets might be moved to government money market 
funds, retail funds, or to other alternatives (and to which 
alternatives)? How would these answers differ for retail investors and 
institutional investors?
     What would be the net effect of our proposal on 
competition in the money market fund industry?
    As noted above, we understand that some institutional investors may 
be prohibited by board-approved guidelines or internal policies from 
investing certain assets in money market funds unless they have a 
stable value per share or do not have redemption restrictions, and we 
understand that other investors, including state and local governments, 
may be subject to statutory or regulatory requirements that permit them 
to invest certain assets only in funds that seek to maintain a stable 
value per share or that do not have any redemption restrictions.
     How would these guidelines and other constraints affect 
investors' use of floating NAV money market funds or those that could 
impose fees or gates?
     Could institutional investors change their guidelines or 
policies to invest in either floating NAV money market funds or funds 
that could impose fees or gates, if appropriate? If not, why not? If 
so, what costs might institutional investors incur to change these 
guidelines and policies?
     Do the guidelines or statutory or regulatory constraints 
precluding investment in floating NAV money market funds permit 
investments in investment products that can fluctuate in value, such as 
direct investments in money market instruments or Treasury securities?
2. Effect on Current Issuers and the Short-Term Financing Markets
    Although we currently do not have estimates of the amount of assets 
money market fund investors might migrate to investment alternatives, 
we recognize that shifts from money market funds into other choices 
could affect issuers of short-term debt securities and the short-term 
financing markets. The effects of these shifts, including any effect on 
efficiency, competition, and capital formation, would depend on the 
size of reallocations to investment alternatives and the nature of the 
alternatives,

[[Page 36921]]

including whether the alternatives invest in the short-term financing 
markets or otherwise provide similar credit. We discuss these effects 
in detail and seek comment on them, including the effects of the 
proposal on the commercial paper markets and municipal financing.
    The extent to which money market fund investors might choose to 
reallocate their assets to investment alternatives as a result of money 
market fund reforms would likely drive the effect on issuers and the 
short-term financing markets. As discussed in the RSFI Study, prime 
money market funds managed approximately $1.7 trillion as of March 31, 
2012, holding approximately 57% of the total assets of all registered 
money market funds. The chart below provides information about prime 
(and other) money market funds as of December 31, 2012. Even a modest 
shift could represent a sizeable increase in other investments.

                                                                                 Holdings of Money Market Funds
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Govmt       Govmt                   Other                               Non-
                                                               Treasury    Treasury     agency      agency       VRDNs     municipal   Financial     ABCP      financial      CDs        Other
                                                                 debt        repo        debt        repo                    debt        Co CP                   Co CP
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Panel A. MMF Holdings in $B, December 31, 2012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Prime.......................................................      143.39       53.46      155.90      143.92       55.33        4.30      221.64      121.98       77.13      524.14      250.95
Treasury....................................................      303.54      118.56        0.01        1.38        0.00        0.00        0.00        0.00        0.00        0.00        0.02
Other.......................................................       63.38       41.81      251.26      149.06      220.43       60.50        0.65        2.94        6.63        0.72       10.37
                                                             -----------------------------------------------------------------------------------------------------------------------------------
    All MMF.................................................      510.31      213.83      407.17      294.36      275.77       64.80      222.29      124.92       83.76      524.86      261.33
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Govmt       Govmt                   Other                               Non-
                                                               Treasury    Treasury     agency      agency       VRDNs     municipal   Financial     ABCP      financial      CDs        Other
                                                                 debt        repo        debt        repo                    debt        Co CP                   Co CP
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Panel B. MMF Holdings as Percentage of Total Amortized Cost of MMFs by Type of Fund, December 31, 2012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Prime.......................................................        8.18        3.05        8.90        8.21        3.16        0.25       12.65        6.96        4.40       29.91       14.32
Treasury....................................................       71.67       27.99        0.00        0.33        0.00        0.00        0.00        0.00        0.00        0.00        0.00
Other.......................................................        7.85        5.18       31.11       18.45       27.29        7.49        0.08        0.36        0.82        0.09        1.28
                                                             -----------------------------------------------------------------------------------------------------------------------------------
    All MMF.................................................       17.11        7.17       13.65        9.87        9.24        2.17        7.45        4.19        2.81       17.59        8.76
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    (Govmt
                                                                            (Treas       Govmt      agency                  (VRDN+                             Non-Fncl    CDs as %    CDs as %
                                                              Treas debt    debt +      agency      debt +     VRDN as %     other    Fncl Co CP   ABCP as %  Co CP as %  of savings   of large
                                                              as % treas   repos) as   debt as %   repos) as    of muni   muni) as %    as % of     of ABCP     of non-    and time     savings
                                                                 bills      % treas    of govmt   % of govmt     secs       of muni   Fncl Co CP    outstnd   Fncl Co CP    deposit    and time
                                                                outstnd      bills    agency sec  agency sec    outstnd      secs       outstnd                 outstnd     outstnd     deposit
                                                                            outstnd     outstnd     outstnd                 outstnd                                                     outstnd
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Panel C. MMF Holdings as Percentage of Amounts Outstanding, December 31, 2012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Prime.......................................................        8.82       12.10        2.07        3.97        1.49        1.61       46.43       40.17       45.16        5.63       34.74
Treasury....................................................       18.66       25.95        0.00        0.02        0.00        0.00        0.00        0.00        0.00        0.00        0.00
Other.......................................................        3.90        6.47        3.33        5.31        5.93        7.56        0.14        0.97        3.88        0.01        0.05
                                                             -----------------------------------------------------------------------------------------------------------------------------------
    All MMF.................................................       31.37       44.52        5.40        9.30        7.42        9.17       46.56       41.13       49.04        5.64       34.78
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Data on money market fund holdings is derived from Form N-MFP as of December 31, 2012. Data on outstanding Treasury debt, government agency debt, certificates of deposit and municipal
  debt comes from the Federal Reserve Board's Flow of Funds Accounts of the U.S. for Q4, 2012. Data on commercial paper (not seasonally adjusted) is derived from the Federal Reserve Board's
  Commercial Paper release for December 2012. VRDNs are Variable Rate Demand Notes; Fncl Co CP is Financial Company Commercial Paper; and ABCP is Asset-Backed Commercial Paper.

    Because prime money market funds' holdings are large and their 
investment strategies differ from some investment alternatives, a shift 
by investors from prime money market funds to investment alternatives 
could affect the markets for short-term securities. The magnitude of 
the effect will depend on not only the size of the shift but also the 
extent to which there are portfolio investment differences between 
prime money market funds and the chosen investment alternatives. If, 
for example, investors in prime money market funds were to choose to 
manage their cash directly rather than invest in alternative cash 
management products, they might invest in securities that are similar 
to those currently held by prime funds. In this case, the effects on 
issuers and the short-term financing markets would likely be 
minimal.\592\
---------------------------------------------------------------------------

    \592\ The preference for this alternative, however, may be 
tempered by the cost to investors of managing cash on their own. 
See, e.g., supra note 571 and accompanying text.
---------------------------------------------------------------------------

    If, however, capital flowed from money market funds, which 
traditionally have been large suppliers of short-term capital, to bank 
deposits, which tend to fund longer-term lending and capital 
investments, issuers and the short-term financing markets may be 
affected to a greater extent. Similarly, if capital flowed from prime 
money market funds to government money market funds because government 
money market funds are exempt from further reforms, issuers that 
primarily issue to prime funds (and thus the short-term financing 
markets) would be affected. To put these potential shifts in context, 
on December 31, 2012, prime money market funds held approximately 46% 
of financial-company commercial paper outstanding and approximately 9% 
of Treasury bills outstanding, whereas Treasury money market funds held 
approximately 19% of Treasury bills outstanding but no financial 
company commercial paper.\593\ A shift, therefore, from prime money 
market funds to Treasury money market funds could decrease demand for 
commercial paper and adversely

[[Page 36922]]

affect financial commercial-paper issuers (in terms of the rate they 
must offer on their short-term debt securities), and could increase 
demand (thus lowering borrowing costs) in the market for government 
securities.
---------------------------------------------------------------------------

    \593\ See supra Panel C.
---------------------------------------------------------------------------

    Historically, money market funds have been a significant source of 
financing for issuers of commercial paper, especially financial 
commercial paper, and for issuers of short-term municipal debt.\594\ A 
shift by investors from prime money market funds to investment 
alternatives could cause a decline in demand for financial commercial 
paper and municipal debt, reducing these firms' and municipalities' 
access to capital from money market funds and potentially creating 
shortages of short-term financing for such firms and 
municipalities.\595\ If, however, money market fund investors shift 
capital to investment alternatives that demand the same assets as prime 
money market funds, the net effect on the short-term financing markets 
would be small.
---------------------------------------------------------------------------

    \594\ Based on Form N-MFP data, non-financial company commercial 
paper, which includes corporate and non-financial business 
commercial paper, is a small fraction of overall money market 
holdings. In addition, commercial paper financing by non-financial 
businesses is a small portion (one percent) of their overall credit 
market instruments. According to Federal Reserve Board flow of funds 
data, as of December 31, 2012 non-financial company commercial paper 
totaled $130.5 billion compared with $12,694.2 billion of total 
credit market instruments outstanding for these entities. As such, 
we do not anticipate a significant effect on the market for non-
financial corporate fund raising. Federal Reserve Board flow of 
funds data is available at http://www.federalreserve.gov/releases/z1/Current/z1.pdf.
    \595\ See, e.g., Comment Letter of Associated Oregon Industries 
(Jan. 18, 2013) (available in File No. FSOC-2012-0003) (stating that 
if the proposed reforms ``drive investors out of money market funds, 
the flow of short-term capital to businesses will be significantly 
disrupted.''); U.S. Chamber Jan. 23, 2013 FSOC Comment Letter, supra 
note 248 (stating that ``any changes [that make MMFs] a less 
attractive investment will impact the overall costs for issuers in 
the commercial paper market resulting from a reduced demand in 
commercial paper.''); Comment Letter of N.J. Municipal League (Jan. 
23, 2013) (available in File No. FSOC-2012-0003) (stating that 
``money market funds hold more than half of the short-term debt that 
finances state and municipal governments for public projects,'' 
which could force local governments to ``limit projects and 
staffing, spend more on financing . . . or increase taxes'' if such 
financing was no longer available.); Comment Letter of Government 
Finance Officers Association, et al. (Feb. 13, 2013) (available in 
File No. FSOC-2012-0003) (stating that with respect to FSOC's 
floating NAV proposal, ``changing the fundamental feature of MMMFs . 
. . would dampen investor demand for municipal securities and 
therefore could deprive state and local governments and other 
borrowers of much-needed capital.'').
---------------------------------------------------------------------------

    As discussed in the RSFI Study, the 2008-2012 increase in bank 
deposits coupled with the contraction of the money market funds 
presents an opportunity to examine how capital formation can be 
affected by a reallocation of capital among different funding sources. 
According to Federal Reserve Board flow of funds data, money market 
funds' investments in commercial paper declined by 45% or $277.7 
billion from the end of 2008 to the end of 2012. Contemporaneously, 
funding corporations reduced their holdings of commercial paper by 99% 
or $357.7 billion.\596\ The end result was a contraction of more than 
40% or $647.5 billion in the amount of commercial paper outstanding. 
Analysis of Form N-MFP data from November 2010 through March 2013 
indicates that financial company commercial paper and asset-backed 
commercial paper comprise most of money market funds' commercial paper 
holdings.\597\
---------------------------------------------------------------------------

    \596\ The Federal Reserve flow of funds data defines funding 
corporations as ``funding subsidiaries, custodial accounts for 
reinvested collateral of securities lending operations, Federal 
Reserve lending facilities, and funds associated with the Public-
Private Investment Program (PPIP).''
    \597\ In addition, according to the RSFI Study, supra note 21, 
``as of March 31, 2012, money market funds held $1.4 trillion in 
Treasury debt, Treasury repo, Government agency debt, and Government 
agency repo as its largest sector exposure, followed by $659 billion 
in financial company commercial paper and CDs, its next largest 
sector exposure.''
---------------------------------------------------------------------------

    Although the decline in funds' commercial paper holdings was large, 
it is important to place commercial paper borrowing by financial 
institutions into perspective by considering its size compared with 
other funding sources. As with non-financial businesses, financial 
company commercial paper is a small fraction (3.2%) of all credit 
market instruments.\598\ We have also witnessed the ability of issuers, 
especially financial institutions, to adjust to changes in markets. 
Financial institutions, for example, dramatically reduced their use of 
commercial paper from $1,125.8 billion at the end of 2008 to $449.2 
billion at the end of 2012 after regulators encouraged them to curtail 
their reliance on short-term wholesale financing.\599\ As such, we 
believe that financial institutions, as well as other firms, would be 
able to identify over time alternate short-term financing sources if 
the amount of capital available for financial commercial paper declined 
in response to money market fund rule changes. Alternatively, 
commercial paper issuers may have to offer higher yields in order to 
attract alternate investors, potentially hampering capital formation 
for issuers. The increase in yield, however, may increase demand for 
these investments which may mitigate, to some extent, the potential 
adverse capital formation effects on the commercial paper market.
---------------------------------------------------------------------------

    \598\ According to the Federal Reserve Flow of Funds data as of 
December 31, 2012, commercial paper outstanding was $449.2 billion 
compared with $13,852.2 billion of total credit market instruments 
outstanding for financial institutions.
    \599\ The statistics in this paragraph are based on the Federal 
Reserve Board's Flow of Funds data. See also 2012 FSOC Annual 
Report, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf, at 55-56, 66 (showing 
substantial declines in domestic banking firm's reliance on short-
term wholesale funding compared with deposit funding). The Basel III 
liquidity framework also proposes requirements aimed at limiting 
banks' reliance on short-term wholesale funding. See 2011 FSOC 
Annual Report, available at http://www.treasury.gov/initiatives/fsoc/Documents/FSOCAR2011.pdf, at 90 (describing Basel III's 
proposed liquidity coverage ratio and the net stable funding ratio); 
Basel Committee on Banking Supervision: Basel III: The Liquidity 
Coverage Ratio and liquidity risk monitoring tools (Jan. 2013), 
available at http://www.bis.org/publ/bcbs238.pdf (describing 
revisions to the liquidity coverage ratio).
---------------------------------------------------------------------------

    Municipalities also could be affected if our proposals caused the 
money market fund industry to contract. As shown in Panel C of the 
table immediately above, money market funds held approximately 9% of 
outstanding municipal debt securities as of December 31, 2012. Between 
the end of 2008 and the end of 2012, money market funds decreased their 
holdings of municipal debt by 34% or $172.8 billion.\600\ Despite this 
reduction in holdings by money market funds, municipal issuers 
increased aggregate borrowings by over 4% between the end of 2008 and 
the end of 2012. Municipalities were able to fill the gap by attracting 
other investor types. Other types of mutual funds, for example, 
increased their municipal securities holdings by 61% or $238.6 billion. 
Depository institutions have also increased their funding of municipal 
issuers during this time period by $141.2 billion as investors have 
shifted their assets away from money market funds into bank deposit 
accounts. Life insurance companies almost tripled their municipal 
securities holdings from $47.1 billion at the end of 2008 to $121 
billion at the end of 2012. It would have been difficult to model in 
2008 which investors would step into the municipal debt market to take 
the place of withdrawing money market funds and, for the same reasons, 
it is difficult now to predict what may happen to the municipal debt 
markets as a result of our proposal.
---------------------------------------------------------------------------

    \600\ The statistics in this paragraph are based on the Federal 
Reserve Board's Flow of Funds data.
---------------------------------------------------------------------------

    To make their issues attractive to alternative lenders, 
municipalities lengthened the terms of some of their debt securities. 
Most municipal debt securities held by money market funds are variable 
rate demand notes (``VRDNs''), in which long-term

[[Page 36923]]

municipal bonds are transformed into short-term instruments through the 
use of third-party credit and/or liquidity enhancements, such as 
letters of credit and standby bond purchase agreements from financial 
institutions. Declines in the creditworthiness of these credit and 
liquidity enhancement providers have reduced the amount of VRDNs 
outstanding from approximately $371 billion in December 2010 to 
approximately $264 billion in December 2012.\601\ We believe that this 
downward trend is likely to continue irrespective of changes in the 
money market fund industry because of potential downgrades to the 
financial institutions providing these services and potential bank 
regulatory changes, which may increase the cost of providing such 
guarantees.\602\
---------------------------------------------------------------------------

    \601\ See Securities Industry and Financial Markets Association 
U.S. Municipal VRDO Update (Dec. 2012), available at http://www.sifma.org/research/item.aspx?id=8589941389. This data has some 
limitations as its estimate for outstanding VRDNs in December 2012 
is lower than our estimate of money market fund holdings of VRDNs 
from Form N-MFP as of December 31, 2012.
    \602\ See, e.g., Moody's Downgrades U.S. Muni Obligations Backed 
by Banks and Securities Firms with Global Capital Markets Operations 
(June 22, 2012), available at http://www.moodys.com/research/Moodys-downgrades-US-muni-obligations-backed-by-banks-and-securities-PR_248937; Chris Reese, Money Market Funds' Investments Declining, 
Reuters (Oct. 24, 2011) (stating that supplies of VRDNs have been 
constrained and that the ``decline in issuance can be attributed to 
low interest rates, challenges of budget shortfalls at state and 
local governments and knock-on effects from European banking 
concerns''); Dan Seymour, Liquidity Fears May Be Overblown, Bond 
Buyer (Jan. 31, 2011).
---------------------------------------------------------------------------

    Additionally, our floating NAV proposal has an explicit exemption 
for retail funds that will permit sponsors to offer retail funds that 
seek to maintain a stable price and invest in municipal securities. We 
expect that the net investment in municipal money market funds will not 
change in response to the floating NAV proposal because we understand 
that few institutional investors invest in retail funds today and 
believe that most retail investors would not object to the daily 
$1,000,000 redemption limit. Investment in retail money market funds 
may in fact increase, if investors see stable price retail funds as an 
attractive cash management tool compared to other alternatives.
    Both the floating NAV proposal and the requirement of increased 
disclosure under each alternative regarding the fund's market-based 
value and liquidity as well as any sponsor support or defaults in 
portfolio securities, among other matters, should improve informational 
efficiency. The floating NAV alterative as well as the proposed shadow 
NAV disclosure requirement under the liquidity fees and gates 
alternative provide greater transparency to shareholders regarding the 
daily market-based value of the fund. This should improve investors' 
ability to allocate capital efficiently across the economy. Under the 
liquidity fees and gates proposal, if a fund imposes a liquidity fee or 
redemption gate, this may hamper allocative efficiency and hence 
capital formation to the extent that investors are unable to reallocate 
their assets to their preferred use while the fee or gate is in place.
    Our proposals may or may not affect competition within the short-
term financing markets. On the one hand, the competitive effects are 
likely to be small or negligible if shareholders either remain in money 
market funds or move to alternatives that, in turn, invest in similar 
underlying assets. On the other hand, the effects may be large if 
investors reallocate (whether directly or through intermediaries) their 
investments into substantively different assets. In that case, issuers 
are likely to offer higher yields to attract capital, whether from the 
smaller money market fund industry or from other investors. Either way, 
issuers that are unable to offer the required higher yield may have 
difficulties raising their required capital, at least in the short-term 
financing markets.
    We request comment on what effects our proposals would have on 
issuers and the short-term financing markets for issuers. In 
particular, we request that commenters discuss whether the effects 
would be different between the floating NAV alterative and the 
liquidity fees and gates alternative and to provide analysis of the 
magnitude of the difference.
     How would either reform proposal affect issuers in the 
short-term financing markets, whether through a smaller money market 
fund industry or through fewer highly risk-averse investors holding 
money market funds shares?
     Would either reform proposal result in increased stability 
in money market funds and hence enhance stability in the short-term 
financing markets and the willingness of issuers to rely on short-term 
financing because the issuers would be less exposed to volatility in 
the availability of short-term financing from money market funds?
     What effect would either proposal have on the issuers of 
commercial paper and short-term municipal debt? How would either 
proposal affect the market for short-term government securities?
     What would be the long-term effect from either alternative 
on the economy? Please include empirical data to support any 
conclusions.
    We expect that yields in prime money market funds under the 
floating NAV alternative could be higher than yields under our fees and 
gates alternative. Under the fees and gates proposal, prime money 
market funds would have an incentive to closely manage their weekly 
liquid assets, which they could do by holding larger amounts of such 
assets, which tend to have comparatively low yields. If so, this would 
provide a competitive advantage for issuers that are able and willing 
to issue assets that qualify as weekly liquid assets, and it might 
result in the overall short-term financing markets being tilted toward 
shorter-term issuances. We believe that prime money market funds under 
this proposal would not meet the increased demand for weekly liquid 
assets solely by increasing their investments in Treasury securities 
because investors that want the risk-return profile that comes from 
Treasury securities would probably prefer to invest in Treasury funds, 
which would be exempt from key aspects of either of our provisions of 
the proposal. Under the floating NAV proposal, prime money market funds 
might not have an incentive to reduce portfolio risk if the relatively 
more risk-averse investors avoid prime money market funds and invest in 
government money market funds or retail funds, which would continue to 
maintain a stable price. If so, this would provide a competitive 
advantage for issuers of higher-yielding 2a-7-eligible assets. The 
potential differing portfolio composition of money market funds under 
our two reform proposals, therefore, could have an effect on issuers 
and the short-term financing markets through differing levels of money 
market fund demand for certain types of portfolio securities.
    We request comment on this aspect of our proposal and how the 
effect on money market fund yields, short-term debt security issuers, 
and the short-term financing markets would differ depending on which 
alternative we adopted.
    We request comment on our assumptions, expectations, and estimates 
described in this section.
     Are they correct?
     Do commenters agree with our analyses of certain effects 
on efficiency, competition, and capital formation that may arise from 
our floating NAV and liquidity fees and gates proposals? Do commenters 
agree with our analysis of potential additional implications of these 
proposals on current investments in money market funds and on the 
short-term financing markets?
     Are there alternative assumptions, expectations, or 
estimates that we have

[[Page 36924]]

not discussed? If so, what are they and how would they affect our 
analyses?
     Are there any other economic effects associated with our 
proposed alternatives that we have not discussed? Please quantify and 
explain any assumptions used in response to these questions (and any 
others) to the extent possible.
     What would have been the effect on money market funds, 
investors, the short-term financing markets, and capital formation if 
our floating NAV proposal or our liquidity fees and gates proposal had 
been in place in 2007 and 2008?

F. Amendments to Disclosure Requirements

    We are proposing amendments to rule 2a-7 and Form N-1A that would 
require money market funds to provide additional disclosure in certain 
areas to provide greater transparency regarding money market funds, so 
that investors have an opportunity to better evaluate the risks of 
investing in a particular fund and that the Commission and other 
financial regulators obtain important information needed to administer 
their regulatory programs. As discussed in more detail below, these 
amendments would require enhanced registration statement and Web site 
disclosure \603\ about: (i) Any type of financial support provided to a 
money market fund by the fund's sponsor or an affiliated person of the 
fund; (ii) the fund's daily and weekly liquidity levels; and (iii) the 
fund's daily current NAV per share, rounded to the fourth decimal place 
in the case of funds with a $1.0000 share price or an equivalent level 
of accuracy for funds with a different share price (e.g., $10.000 or 
$100.00 per share). In addition, we are considering whether to require 
more frequent disclosure of money market funds' portfolio holdings. We 
are also proposing amendments to rule 2a-7 that would require stable 
price money market funds to calculate their current NAV per share 
(rounded to the fourth decimal place in the case of funds with a 
$1.0000 share price or an equivalent level of accuracy for funds with a 
different share price) daily, as a corollary to the proposed 
requirement for money market funds to disclose their daily current NAV 
per share.
---------------------------------------------------------------------------

    \603\ See supra note 448.
---------------------------------------------------------------------------

    In addition, we are proposing a new rule \604\ that would require 
money market funds to file new Form N-CR with the Commission when 
certain events (such as instances of portfolio security default, 
sponsor support of funds, and other similar significant events) occur. 
The proposed Form N-CR filing requirements are discussed below at 
section III.G.
---------------------------------------------------------------------------

    \604\ Proposed rule 30b1-8.
---------------------------------------------------------------------------

1. Financial Support Provided to Money Market Funds
a. Proposed Disclosure Requirements
    Throughout the history of money market funds, and in particular 
during the 2007-2008 financial crisis, money market fund sponsors and 
other fund affiliates have, on occasion, provided financial support to 
money market funds.\605\ Indeed, one study estimates that during the 
period from 2007 to 2011, direct sponsor support to money market funds 
totaled at least $4.4 billion, for 78 of the 314 funds the study 
reviewed.\606\ We continue to believe that sponsor support will provide 
fund sponsors with the flexibility to protect shareholder interests. 
Additionally, if we ultimately adopt the liquidity fees and gates 
alternative, sponsor support would allow sponsors the flexibility to 
prevent a money market fund from breaching the 15% weekly liquid asset 
threshold that would otherwise require the board to impose a liquidity 
fee (absent a board finding that doing so would not be in the fund's 
best interest) and permit the board to impose a gate. However, we 
believe that if money market fund investors do not understand the 
nature and extent that the fund's sponsor has discretionarily supported 
the fund, they may not fully appreciate the risks of investing in the 
fund.\607\
---------------------------------------------------------------------------

    \605\ See, e.g., supra section II.B.3; see also RSFI Study, 
supra note 21, at notes 20-21 and accompanying text.
    \606\ See Federal Reserve Bank of Boston Staff Risk and Policy 
Analysis Working Paper No. 12-3 (Aug. 13, 2012).
    \607\ See FSOC Proposed Recommendations, supra note 114 (noting, 
for example, that ``[w]hile MMF prospectuses must warn investors 
that their shares may lose value, the extensive record of sponsor 
intervention and its critical role historically in maintaining MMF 
price stability may have obscured some investors' appreciation of 
MMF risks and caused some investors to assume that MMF sponsors will 
absorb any losses, even though sponsors are under no obligation to 
do so'') (internal citations omitted). But see ICI Jan. 24 FSOC 
Comment Letter, supra note 25, and Federated Investors Feb. 15 FSOC 
Comment Letter, supra note 192.
---------------------------------------------------------------------------

    For these reasons, we propose requiring money market funds to 
disclose current and historical instances of sponsor support. We 
believe that these disclosure requirements would clarify, to current 
and prospective money market fund investors as well as to the 
Commission, the frequency, nature, and amount of financial support 
provided by money market fund sponsors. We believe that the disclosure 
of historical instances of sponsor support would allow investors, 
regulators, and the fund industry to understand better whether a fund 
has required financial support in the past. Currently, when sponsor 
support is provided during circumstances in which a money market fund 
experiences stress but does not ``break the buck,'' and sponsor support 
is not immediately disclosed, investors may be unaware that their money 
market fund has come under stress.\608\ The proposed historical 
disclosure would permit investors to understand whether, for instance, 
a fund's sponsor or affiliate has provided financial support to help 
mitigate liquidity stress experienced by the fund, or has repurchased 
fund portfolio securities that have fallen in value. While we recognize 
that historical occurrences are not necessarily indicative of future 
events, the proposed disclosure also would permit investors to assess 
the sponsor's past ability and willingness to provide financial support 
to the fund, which could reflect the sponsor's financial position or 
management style.\609\ Finally, the proposed disclosure would provide 
greater information to regulators and the fund industry regarding the 
extent of financial support that money market funds receive from their 
sponsors and other affiliates, which could assist regulators in 
overseeing money market funds and administering their regulatory 
programs.
---------------------------------------------------------------------------

    \608\ See RSFI Study, supra note 21, at text following note 25.
    \609\ But see Moody's Investors Service, ``Sponsor Support Key 
to Money Market Funds'' (Aug. 9, 2010), at 5-6 available at http://www.alston.com/files/docs/Moody's--report.pdf (suggesting that fund 
sponsors may be unwilling to provide sponsor support in future 
years).
---------------------------------------------------------------------------

    Accordingly, we are proposing amendments to Form N-1A that would 
require money market funds to provide SAI disclosure \610\ regarding 
historical instances in which the fund has received financial support 
from a sponsor or fund affiliate.\611\ Specifically, the proposed 
amendments would require each money market fund to disclose any 
occasion during the last ten years on which an affiliated person, 
promoter, or principal underwriter of the fund, or an affiliated person 
of such

[[Page 36925]]

person,\612\ provided any form of financial support to the fund.\613\ 
With respect to each such occasion, the proposed amendments would 
require the fund to describe the nature of support, the amount of 
support, the date the support was provided, the security supported and 
its value on the date the support was initiated (if applicable), the 
reason for the support, the term of support (if applicable), and any 
contractual restrictions relating to the support.\614\ We believe that 
the proposed 10-year look-back period would provide shareholders and 
the Commission with a historical perspective that would be long enough 
to provide a useful understanding of past events, and to analyze 
patterns with respect to financial support received by the fund, but 
not so long as to include circumstances that may no longer be a 
relevant reflection of the fund's management or operations. We believe 
that disclosing historical information about the financial support that 
a fund has received from a sponsor or fund affiliate in the fund's SAI 
is the clearest and least expensive means to disseminate this 
disclosure. We believe that other possible methods, such as requiring 
public disclosure of a sponsor's financial statements (such that non-
shareholders could evaluate the sponsor's capacity to provide support) 
would provide less straightforward information to investors, and would 
be costlier for funds to implement than the proposed SAI disclosure 
requirement.
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    \610\ See supra note 440 (discussing guiding principles that are 
used to determine whether to include disclosure items in a fund's 
prospectus or SAI).
    \611\ See proposed (FNAV) Item 16(g) of Form N-1A; proposed 
(Fees & Gates) Item 16(g)(2) of Form N-1A. Requiring this disclosure 
to appear in the fund's SAI, rather than the prospectus, reflects 
the principle that funds should limit disclosure in prospectuses 
generally to information that is necessary for an average or typical 
investor to make an investment decision. See Registration Statement 
Adopting Release, supra note 310, at section I.
    \612\ Rule 2a-7 currently requires a money market fund to report 
to the Commission the purchase of money market fund portfolio 
securities by an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, 
pursuant to rule 17a-9. See rule 2a-7(c)(7)(iii)(B). Because the 
proposed definition of ``financial support'' includes the purchase 
of a security pursuant to rule 17a-9 (as well as similar actions), 
we believe that the scope of the persons covered by the proposed 
definition should reflect the scope of persons covered by rule 2a-
7(c)(7)(iii)(B).
    \613\ See proposed (FNAV) Item 16(g) of Form N-1A; proposed 
(Fees & Gates) Item 16(g)(2) of Form N-1A.
    \614\ See infra notes 616 and 617 and accompanying text for a 
discussion of actions that would be deemed to constitute ``financial 
support.''
---------------------------------------------------------------------------

    Because past analyses of financial support provided to money market 
funds have differed in their assessment of what actions constitute such 
support,\615\ we are also proposing instructions to the proposed 
amendments that would clarify the meaning of the term ``financial 
support'' for purposes of the required disclosure.\616\ These proposed 
instructions would specify that the term ``financial support'' would 
include, but not be limited to (i) any capital contribution, (ii) 
purchase of a security from the fund in reliance on rule 17a-9, (iii) 
purchase of any defaulted or devalued security at par, (iv) purchase of 
fund shares, (v) execution of a letter of credit or letter of 
indemnity, (vi) capital support agreement (whether or not the fund 
ultimately received support), (vii) performance guarantee, or (viii) 
any other similar action to increase the value of the fund's portfolio 
or otherwise support the fund during times of stress.\617\ The 
Commission believes that all of these actions should be included in the 
term ``financial support'' because they each represent means by which a 
fund's sponsor or affiliate could provide financial or monetary 
assistance to a fund by directly increasing the value of a fund's 
portfolio, or (for funds that maintain a stable share price) by 
otherwise permitting a fund to maintain its current intended stable 
price per share. We are also proposing instructions to the proposed 
amendments to clarify that funds must disclose any financial support 
provided to a predecessor fund (in the case of a merger or other 
reorganization) within the proposed look-back period, in order to allow 
investors to understand the full extent of historical support, provided 
to a fund or its predecessor. Specifically, these proposed instructions 
would state that if the fund has participated in a merger with another 
investment company during the last ten years,\618\ the fund must 
additionally provide the required disclosure with respect to the other 
investment company.\619\
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    \615\ See, e.g., study accompanying Comment Letter of Linus 
Wilson (Jan. 1, 2013) (available in File No. FSOC-2012-0003) 
(discussing various definitions of ``support'' used in analyzing 
historical instances of support provided to money market funds by 
their sponsors or other affiliated persons).
    \616\ See Instruction 1 to proposed (FNAV) Item 16(g) of Form N-
1A; Instruction 1 to proposed (Fees & Gates) Item 16(g)(2) of Form 
N-1A.
    \617\ Id.
    \618\ For purposes of this instruction, the term ``merger'' 
means a merger, consolidation, or purchase or sale of substantially 
all of the assets between the fund and another investment company. 
See Instruction 2 to proposed (FNAV) Item 16(g) of Form N-1A; 
Instruction 2 to proposed (Fees & Gates) Item 16(g)(2) of Form N-1A.
    \619\ See Instruction 2 to proposed (FNAV) Item 16(g) of Form N-
1A; Instruction 2 to proposed (Fees & Gates) Item 16(g)(2) of Form 
N-1A. Additionally, if a fund's name has changed (but the corporate 
or trust entity remains the same), we would expect the fund to 
provide the required disclosure with respect to the entity or 
entities identified by the fund's former name.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to Form N-1A that 
would require money market funds to provide disclosure regarding 
historical instances in which the fund has received financial support 
from a sponsor or other fund affiliate.
     Would the proposed disclosure regarding historical 
instances of financial support provided to money market funds assist 
investors in appreciating the risks of investing in money market funds 
generally, and/or in particular money market funds? Do investors 
already appreciate the extent of financial support that money market 
funds sponsors and other affiliates have historically provided, and 
that such support has been provided on a discretionary basis?
     We request comment on the specific disclosure items 
contemplated by the proposed SAI disclosure requirement. Is there any 
additional information, with respect to the historical instances in 
which a money market fund has received financial support from a sponsor 
or other fund affiliate, that funds should be required to disclose? 
Would all of the items included in the proposed SAI disclosure assist 
shareholders' understanding of the historical financial support 
provided to a fund? If not, which items should we not include, and why?
     Instead of, or in addition to, requiring funds to disclose 
historical information about financial support received from a sponsor 
or fund affiliate on the fund's SAI, should we require fund sponsors to 
publicly disclose their financial statements, in order to permit non-
shareholders to evaluate the sponsor's capacity to provide support? Why 
or why not?
     We request comment on the proposed instruction clarifying 
the meaning of the term ``financial support'' by providing a non-
exclusive list of examples of actions that would be deemed to be 
``financial support'' for purposes of the proposed disclosure 
requirement. Should the proposed instruction be expanded or limited, 
and if so, how and why?
     We request comment on the 10-year look-back period 
contemplated by the proposed SAI disclosure requirement. Should the 
proposed disclosure requirement include a longer or shorter look-back 
period, and if so, why?
     We request comment on the list of persons whose financial 
support of a fund would necessitate disclosure under the proposed SAI 
disclosure requirement. Should this list of persons be expanded or 
limited, and if so, why?
     We request comment on the proposed instruction requiring 
disclosure of any financial support provided to a predecessor fund. Are 
there other situations, besides those identified in this instruction, 
in which disclosure of financial support provided

[[Page 36926]]

to a fund or other entity besides the fund named on the registration 
statement would assist shareholders in understanding attendant 
investment risks? Are there any situations in which the merger-related 
disclosure that we propose to require would not assist shareholders in 
understanding the risks of investing in the fund named on the 
registration statement (for instance, if the fund's sponsor has changed 
as a result of the merger)? Would the proposed merger-related 
disclosure make it more difficult for a fund with a history of support 
to merge with another fund?
     Would it be useful for shareholders for the Commission to 
require prospective prospectus and/or SAI disclosure regarding the 
circumstances under which a money market fund's sponsor, or an 
affiliated person of the fund, may offer any form of financial support 
to the fund, as well as any limits to this support? If so, what kind of 
disclosure should be required?
    We believe it is important for money market funds to inform 
existing and prospective shareholders of any present occasion on which 
the fund receives financial support from a sponsor or other fund 
affiliate. We believe that this disclosure could influence prospective 
shareholders' decision to purchase shares of the fund, and could inform 
shareholders' assessment of the ongoing risks associated with an 
investment in the fund. We believe that it is possible that 
shareholders would interpret prior support as a sign of fund strength, 
as it demonstrates the sponsor's willingness to backstop the fund. 
However, we also recognize that this disclosure could potentially make 
shareholders quicker to redeem shares if they believe the provision of 
financial support to be a sign of weakness, or an indication that the 
fund may not continue in business in the future (for instance, if 
providing financial support to a fund were to weaken the sponsor's own 
financial condition, possibly affecting its ability to manage the 
fund).
    We are proposing an amendment to rule 2a-7 that would require a 
fund to post prominently on its Web site substantially the same 
information that the fund is required to report to the Commission on 
Form N-CR regarding the provision of financial support to the 
fund.\620\ The fund would be required to include this Web site 
disclosure on the same business day as it files a report to the 
Commission in response to an event specified in Part C of Form N-CR, 
and the disclosure would be required to be posted for a period of not 
less than one year following the date on which the fund filed Form N-CR 
concerning the event.\621\ We believe that requiring Web site 
disclosure, along with Form N-CR disclosure, is an important step 
towards increased transparency because we believe that significant 
information about a money market fund is already made available at that 
fund's Web site.\622\ As discussed in more detail below, we believe 
that this time frame for reporting balances the exigency of the report 
with the time it will reasonably take a fund to compile the required 
information (which is the same information a fund would be required to 
file on Form N-CR).\623\ We believe that the one-year minimum time 
frame for Web site disclosure is appropriate because this time frame 
would effectively oblige a fund to post the required information in the 
interim period until the fund files an annual post-effective amendment 
updating its registration statement, which update would incorporate the 
same information.\624\
---------------------------------------------------------------------------

    \620\ See proposed (FNAV) rule 2a-7(h)(10)(v); proposed (Fees & 
Gates) rule 2a-7(h)(10)(v); proposed (FNAV) Form N-CR Part C; 
proposed (Fees & Gates) Form N-CR Part C; see also infra section 
III.G (discussing the proposed Form N-CR requirements).
    \621\ See proposed (FNAV) rule 2a-7(h)(10)(v); proposed (Fees & 
Gates) rule 2a-7(h)(10)(v). A fund would also be required to file 
Form N-CR no later than the first business day following the 
occurrence of any event specified in Part C of Form N-CR.
    \622\ See supra note 448.
    \623\ See infra text following note 710.
    \624\ See supra notes 611--619 and accompanying text. Of course, 
in the likely event that the fund files a post-effective amendment 
within one year following the provision of financial support to the 
fund, information about the financial support would appear both in 
the fund's registration statement and on the fund's Web site for the 
remainder of the year following the provision of support.
---------------------------------------------------------------------------

    We request comment on the proposed amendment to rule 2a-7 that 
would require money market funds to inform current and prospective 
shareholders, via Web site, of any present occasion on which the fund 
receives financial support from a sponsor or other fund affiliate.
     Should any more, any less, or any other information be 
required to be posted on the fund's Web site than that disclosed on 
Form N-CR? Is the fund's Web site the best place for us to require such 
disclosure?
     As proposed, should we require this information to be 
posted ``prominently'' on the fund's Web site? Should we provide any 
other instruction as to the presentation of this information, in order 
to highlight the information and/or lead investors efficiently to the 
information, for example, should we require that the information be 
posted on the fund's home page or be accessible in no more than two 
clicks from the fund's home page?
     Should this information be posted on the fund's Web site 
for a longer or shorter period than one year following the occurrence 
of any event specified in Part C of Form N-CR?
     How would the requirement for money market funds to 
disclose current instances of financial support affect the behavior of 
fund shareholders and/or the market as a whole? For instance, could 
this disclosure make shareholders quicker to redeem shares if they 
believe the provision of financial support to be a sign of portfolio 
weakness? \625\ Alternatively, would shareholders prefer funds with 
histories of support because of the sponsors' demonstrated willingness 
to backstop the funds?
---------------------------------------------------------------------------

    \625\ See Federated Investors Feb. 15 FSOC Comment Letter, supra 
note 192 (noting that enhanced disclosure requirements may have 
unintended consequences).
---------------------------------------------------------------------------

b. Economic Analysis
    The qualitative benefits and costs of the proposed requirements 
regarding the disclosure of financial support received by a fund from 
its sponsor or a fund affiliate are discussed above. The Commission 
staff has not measured the quantitative benefits of these proposed 
requirements at this time because of uncertainty regarding how the 
proposed disclosure may affect different investors' behavior.\626\ 
Because the required registration statement and Web site disclosure 
overlap with the information that a fund must disclose on Form N-CR 
when the fund receives financial support from a sponsor or fund 
affiliate, we anticipate that the costs a fund will incur to draft and 
finalize the disclosure that will appear in its registration statement 
and on its Web site will largely be incurred when the fund files Form 
N-CR, as discussed below in section III.G.3.\627\ In addition, we

[[Page 36927]]

estimate that a fund would incur costs of $148 \628\ to review and 
update the historical disclosure in its registration statement (plus 
printing costs), and costs of $207 \629\ each time that it updates its 
Web site to include the required disclosure.
---------------------------------------------------------------------------

    \626\ Likewise, the SEC staff has not presently quantified the 
benefits of the proposed requirements on account of uncertainty 
regarding the effects that the requirements may have on, for 
example, investors' understanding of the risks associated with money 
market funds, investors' ability to compare the relative risks of 
investing in different funds, the potential imposition of market 
discipline on portfolio managers, or the Commission's ability to 
execute its oversight role.
    \627\ Although the proposed registration statement disclosure 
would include historical information about the financial support 
that a fund has received from its sponsor or other fund 
affiliate(s), and the proposed Form N-CR and Web site disclosure 
would include information about current instances of financial 
support, the required disclosure elements for the proposed Form N-CR 
disclosure, Web site disclosure, and registration statement 
disclosure are identical. Therefore, we anticipate that a fund would 
largely be able to use the disclosure it drafted for purposes of the 
Form N-CR and Web site disclosure requirements for purposes of the 
registration statement disclosure requirement.
    \628\ The costs associated with updating the fund's registration 
statement are paperwork-related costs and are discussed in more 
detail in infra section IV.A.7 and IV.B.7.
    \629\ The costs associated with updating the fund's Web site are 
paperwork-related costs and are discussed in more detail in infra 
section IV.A.1.f and IV.B.1.f.
---------------------------------------------------------------------------

    We believe that the proposed requirements could increase 
informational efficiency by providing additional information to 
investors and the Commission about the frequency, nature, and amount of 
financial support provided by money market fund sponsors. This in turn 
could assist investors in analyzing the risks associated with 
particular funds, which could increase allocative efficiency \630\ and 
could positively affect competition by permitting investors to choose 
whether to invest in certain funds based on this information. However, 
the proposed requirements could advantage larger funds and fund groups, 
if a fund sponsor's ability to provide financial support to a fund is 
perceived to be a competitive benefit. Also, if investors move their 
assets among money market funds or decide to invest in investment 
products other than money market funds as a result of the proposed 
disclosure requirements, this could adversely affect the competitive 
stance of certain money market funds, or the money market fund industry 
generally.
---------------------------------------------------------------------------

    \630\ See supra note 562 and accompanying text.
---------------------------------------------------------------------------

    The proposed disclosure requirements also could have additional 
effects on capital formation, depending on if investors interpret 
financial support as a sign of money market fund strength or weakness. 
If sponsor support (or the lack of need for sponsor support) were 
understood to be a sign of fund strength, the proposed requirements 
could enhance capital formation by promoting stability within the money 
market fund industry. On the other hand, the proposed disclosure 
requirements could detract from capital formation if sponsor support 
were understood to indicate fund weakness and made money market funds 
more susceptible to heavy redemptions during times of stress, or if 
money market fund investors decide to move their money out of money 
market funds entirely as a result of the proposed disclosure. 
Accordingly, because we do not have the information necessary to 
provide a reasonable estimate, we are unable to determine the effects 
of this proposal on capital formation. Finally, the required disclosure 
could assist the Commission in overseeing money market funds and 
developing regulatory policy affecting the money market fund industry, 
which might affect capital formation positively if the resulting more 
efficient or more effective regulatory framework encouraged investors 
to invest in money market funds.
    We request comment on this economic analysis:
     Are any of the proposed disclosure requirements unduly 
burdensome, or would they impose any unnecessary costs?
     We request comment on the staff's estimates of the 
operational costs associated with the proposed disclosure requirements.
     We request comment on our analysis of potential effects of 
these proposed disclosure requirements on efficiency, competition, and 
capital formation. In particular, would the proposed disclosure 
increase informational efficiency by increasing awareness of sponsor 
support? If so, would the disclosure requirements for sponsor support 
make money market funds more or less susceptible to heavy redemptions 
in times of fund and market stress?
2. Daily Disclosure of Daily Liquid Assets and Weekly Liquid Assets
a. Proposed Disclosure Requirements
    We are proposing amendments to rule 2a-7 that would require money 
market funds to disclose prominently on their Web sites the percentage 
of the fund's total assets that are invested in daily and weekly liquid 
assets, as well as the fund's net inflows or outflows, as of the end of 
the previous business day.\631\ The proposed amendments would require a 
fund to maintain a schedule, chart, graph, or other depiction on its 
Web site showing historical information about its investments in daily 
liquid assets and weekly liquid assets, as well as the fund's net 
inflows or outflows, for the previous 6 months, and would require the 
fund to update this historical information each business day, as of the 
end of the preceding business day.\632\ These amendments would 
complement the proposed requirement, as discussed elsewhere in this 
Release, for money market funds to provide on their monthly reports on 
Form N-MFP the percentage of total assets invested in daily liquid 
assets and weekly liquid assets broken out on a weekly basis.\633\
---------------------------------------------------------------------------

    \631\ See proposed (FNAV) rule 2a-7(h)(10)(ii); proposed (Fees & 
Gates) rule 2a-7(h)(10)(ii). A ``business day,'' defined in rule 2a-
7 as ``any day, other than Saturday, Sunday, or any customary 
business holiday,'' would end after 11:59 p.m. on that day.
    \632\ Id.
    \633\ See infra note 769 and accompanying text.
---------------------------------------------------------------------------

    We believe that daily disclosure of money market funds' daily 
liquid assets and weekly liquid assets would promote transparency 
regarding how money market funds are managed, and thus may permit 
investors to make more efficient and informed investment decisions. 
Additionally, we believe that this enhanced disclosure may impose 
external market discipline on portfolio managers, in that it may 
encourage fund managers to carefully manage their daily and weekly 
liquid assets, which may decrease portfolio risk and promote stability 
in the short-term financing markets.\634\ We also believe that it could 
encourage funds to ensure that the fund's liquidity level is at least 
as large as its shareholders' demand for liquidity. The proposed daily 
disclosure requirement would provide an additional level of detail to 
the proposed requirement for money market funds to break out their 
daily liquid assets and weekly liquid assets on a weekly basis on their 
monthly reports on Form N-MFP, which in turn would further enhance 
investors' and the Commission's ability to monitor fund risks. For 
example, daily Web site disclosure of liquid asset levels would help 
investors estimate, in near-real time, the likelihood that a fund may 
be able to satisfy redemptions by using internal cash sources (rather 
than by selling portfolio securities) in times of market turbulence, 
or, if our liquidity fees and gates proposal is adopted, whether a fund 
may approach or exceed a trigger for the potential imposition of a 
liquidity fee or gate. Requiring daily Web site disclosure of liquid 
assets across the money market fund industry also would permit 
investors more readily to determine whether liquidity-related stresses 
are idiosyncratic to particular funds, thus minimizing the prospect of 
redemption pressures on funds that are not similarly affected.\635\ 
This disclosure also could make information about fund liquidity more 
accessible to a broad range of investors. This daily Web site 
disclosure should also assist the Commission in its

[[Page 36928]]

oversight role and promote certain efficiencies, in that it would 
permit the Commission to access detailed portfolio liquidity 
information as necessary to its oversight of money market funds, 
without the need to contact fund management or service providers to 
obtain it. However, the proposed disclosure could also change behavior, 
in that it could make shareholders quicker to redeem shares if they 
believe a decrease in portfolio liquidity could affect the fund's 
ability to satisfy redemptions.\636\ The proposed disclosure also could 
increase the volatility of a fund's flows, even during times when the 
fund is not under stress, if shareholders are sensitive to changes in 
the fund's liquidity levels.\637\
---------------------------------------------------------------------------

    \634\ See ICI Jan. 24 FSOC Comment Letter, supra note 25 
(stating that prime money market funds should be required to make 
frequent public disclosure (via their Web sites) of their weekly 
liquid asset levels to ``enhance transparency and encourage a highly 
conservative approach to portfolio management'').
    \635\ See ICI Jan. 24 FSOC Comment Letter, supra note 25.
    \636\ See FSOC Proposed Recommendations, supra note 114 (``There 
is a risk that more frequent reporting of portfolio information may 
make investors quicker to redeem when these indicators show signs of 
deterioration. In addition, more frequent reporting of portfolio 
information such as daily mark-to-market per share values or 
liquidity levels could increase the volatility of MMFs' flows, even 
when the funds are not under stress, if investors are highly 
sensitive to changes in those levels.'').
    \637\ See id.
---------------------------------------------------------------------------

    While investors will be able to access historical information about 
money market funds' daily liquid assets and weekly liquid assets if the 
proposed amendments to Form N-MFP are adopted,\638\ we believe that 
daily Web site disclosure of money market funds' daily liquid assets 
and weekly liquid assets, as well as the fund's net inflows or 
outflows, would permit shareholders to access more detailed information 
in a more convenient and detailed manner than comparing monthly Form N-
MFP filings. We believe that investors would be able to compare current 
liquidity information with previous information from which they (or 
others) may discern trends. Public daily disclosure of money market 
funds' daily liquid assets and weekly liquid assets also could decrease 
funds' susceptibility to runs, as shareholders might be less likely to 
redeem fund shares during the occurrence of negative market events if 
they could ascertain, in near real time, that the fund had enough 
liquidity such that remaining shareholders would not bear the costs of 
liquidity incurred by redeeming shareholders. Because money market 
funds are currently required to maintain a six-month record of 
portfolio holdings on the fund Web site,\639\ requiring a fund to post 
its daily liquid assets and weekly liquid assets for the same period 
would permit investors to analyze the relationship between the fund's 
portfolio holdings and its liquidity levels over time. Additionally, we 
believe that disclosure of information about net shareholder flow would 
provide helpful contextual information regarding the significance of 
the reported liquidity information, as a fund would require greater 
liquidity to respond to greater shareholder flow volatility, and vice 
versa.
---------------------------------------------------------------------------

    \638\ See infra note 769 and accompanying text.
    \639\ See rule 2a-7(c)(12).
---------------------------------------------------------------------------

    We request comment on the proposed amendments to rule 2a-7 that 
would require money market funds to disclose daily the percentages of 
fund assets invested in daily and weekly liquid assets, as well as the 
fund's net inflows or outflows.
     Would the proposed amendments be useful in assisting 
shareholders in better understanding how money market funds are managed 
and in assessing a fund's risk? Would the proposed amendments promote 
the goals of enhancing transparency and encouraging market discipline 
on money market funds in a way that increases stability in the short-
term financing markets? How, if at all, would the proposed amendments 
affect the amount of liquid assets that a money market fund's 
investment adviser purchases on behalf of the fund? Would disclosing 
information about net shareholder flows assist investors in 
understanding the significance of the reported liquidity information?
     Should we require that any more, any less, or any other 
information regarding portfolio liquidity be posted on money market 
funds' Web sites?
     As proposed, should we require this information to be 
posted ``prominently'' on the fund's Web site? Should we provide any 
other instruction as to the presentation of this information, in order 
to highlight the information and/or lead investors efficiently to the 
information? For example, should we require that the information be 
posted on the fund's home page or be accessible in no more than two 
clicks from the fund's home page?
     Should we require information regarding the percentage of 
money market fund assets invested in daily liquid assets and weekly 
liquid assets to be posted less frequently than daily? Should we 
require funds to maintain this information on their Web sites for a 
period of more or less than 6 months?
     Would the proposed amendments incentivize a money market 
fund, in certain circumstances, to sell assets that are not weekly 
liquid assets rather than weekly liquid assets? Will this harm non-
redeeming shareholders?
     How would the requirement for money market funds to 
disclose the percentages of fund assets invested in daily liquid assets 
and weekly liquid assets affect the behavior of fund shareholders and/
or the market as a whole? For instance, could this disclosure make 
shareholders quicker to redeem shares upon a decrease in portfolio 
liquidity, or generally increase the volatility of a fund's flows? 
Would this disclosure result in reducing the chances that better-
informed shareholders may redeem ahead of retail or less informed 
shareholders? If the liquidity fees and gates proposal is adopted, 
would transparency of fund liquidity be important to permit investors 
in funds other than the one imposing a fee to assess the liquidity 
position of their fund before determining whether to redeem? Would such 
transparency affect investors' redemptions in normal market conditions 
or just in periods when liquidity is costly? Would such transparency 
affect investors' willingness to buy shares? How are these factors 
related to what motivates money market fund investors to redeem?
     Would disclosure of money market funds' liquidity levels, 
coupled with portfolio holdings reported on Form N-MFP (and more 
frequent portfolio holdings disclosure on funds' Web sites, to the 
extent the Commission determines to require this \640\), enable other 
market participants to infer a fund's potential liquidity demand and 
likely trading needs by the fund? Would this disadvantage a money 
market fund in any way?
---------------------------------------------------------------------------

    \640\ See infra section III.F.4.
---------------------------------------------------------------------------

b. Economic Analysis
    The qualitative benefits and costs of the proposed requirements 
regarding disclosure of the percentage of a money market fund's assets 
that are invested in daily liquid assets and weekly liquid assets, as 
well as the fund's net inflows or outflows, are discussed above.\641\ 
We believe that the proposed requirements could increase informational 
efficiency by providing additional information about money market 
funds' liquidity to investors and the Commission. This in turn could 
assist investors in analyzing the risks associated with particular 
funds, which could increase allocative efficiency and could positively 
affect competition by permitting investors to choose whether to invest 
in certain funds based on this information. However, if investors were 
to move their assets among money market funds or decide to invest in 
investment products other than money market funds as a

[[Page 36929]]

result of the proposed disclosure requirements, this could adversely 
affect the competitive stance of certain money market funds, or the 
money market fund industry generally.
---------------------------------------------------------------------------

    \641\ See supra note 626 and accompanying text for a discussion 
of the reasons that the Commission staff has not measured the 
quantitative benefits of these proposed requirements at this time.
---------------------------------------------------------------------------

    The proposed requirements could also have effects on capital 
formation. The required disclosure could assist the Commission in 
overseeing money market funds and developing regulatory policy 
affecting the money market fund industry, which might affect capital 
formation positively if the resulting regulatory framework more 
efficiently or more effectively encouraged investors to invest in money 
market funds. The proposed requirements also may impose external market 
discipline on portfolio managers, which in turn could create market 
stability and enhance capital formation, if the resulting market 
stability encouraged more investors to invest in money market funds. 
However, the proposed requirements could detract from capital formation 
by decreasing market stability if investors became quicker to redeem 
during times of stress as a result of the proposed disclosure 
requirements. Accordingly, we do not have the information necessary to 
provide a reasonable estimate the effects of these proposed 
requirements on capital formation.
    Costs associated with these disclosure requirements include 
initial, one-time costs, as well as ongoing costs. Initial costs 
include the costs to design the schedule, chart, graph, or other 
depiction showing historical liquidity information in a manner that 
clearly communicates the required information and to make the necessary 
software programming changes to the fund's Web site to present the 
depiction in a manner that can be updated each business day. We 
estimate that the average one-time costs for each money market fund to 
design and present the historical depiction of daily liquid assets and 
weekly liquid assets would be $20,150.\642\ Funds also would incur 
ongoing costs to update the depiction of daily liquid assets and weekly 
liquid assets each business day. We estimate that the average ongoing 
annual costs that each fund would incur to update the required 
disclosure would be $9,184.\643\ Because money market funds currently 
must calculate the percentage of their assets that are invested in 
daily liquid assets and weekly liquid assets each day for purposes of 
compliance with the portfolio liquidity provisions of rule 2a-7, funds 
should incur no additional costs in obtaining this data for purposes of 
the proposed disclosure requirements.
---------------------------------------------------------------------------

    \642\ Staff estimates that these costs would be attributable to 
project assessment (associated with designing and presenting the 
historical depiction of daily liquid assets and weekly liquid 
assets), as well as project development, implementation, and 
testing. See supra note 245 (discussing the bases of our staff's 
estimates of operational and related costs). The costs associated 
with these activities are all paperwork-related costs and are 
discussed in more detail in infra section IV. See infra section 
IV.A.1.f.
    \643\ See id.
---------------------------------------------------------------------------

    We request comment on this economic analysis:
     Are any of the proposed disclosure requirements unduly 
burdensome, or would they impose any unnecessary costs?
     We request comment on the staff's estimates of the 
operational costs associated with the proposed disclosure requirements.
     We request comment on our analysis of potential effects of 
these proposed disclosure requirements on efficiency, competition, and 
capital formation.
3. Daily Web site Disclosure of Current NAV per Share
a. Proposed Disclosure Requirements
    We are proposing amendments to rule 2a-7 that would require each 
money market fund to disclose daily, prominently on its Web site, the 
fund's current NAV per share, rounded to the fourth decimal place in 
the case of a fund with a $1.0000 share price of an equivalent level of 
accuracy for funds with a different share price \644\ (the fund's 
``current NAV'') as of the end of the previous business day.\645\ The 
proposed amendments would require a fund to maintain a schedule, chart, 
graph, or other depiction on its Web site showing historical 
information about its daily current NAV per share for the previous 6 
months, and would require the fund to update this historical 
information each business day as of the end of the preceding business 
day.\646\
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    \644\ E.g., $10.000 or $100.00 per share.
    \645\ See proposed (FNAV) rule 2a-7(h)(10)(iii); proposed (Fees 
& Gates) rule 2a-7(h)(10)(iii).
    \646\ Id.
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    If we were to adopt the floating NAV alternative, the proposed 
amendments would effectively require a money market fund to publish 
historical information about the sale and redemption price of its 
shares each business day as of the end of each preceding business 
day.\647\ The proposed amendments would require a government money 
market fund or retail money market fund (which generally would be 
permitted to transact at stable price per share), on the other hand, to 
publish historical information about its market-based current NAV per 
share, rounded to the fourth decimal place in the case of funds with a 
$1.0000 share price or an equivalent level of accuracy for funds with a 
different share price, each business day as of the end of each 
preceding business day. Likewise, if we were to adopt the liquidity 
fees and gates alternative, the proposed amendments would require all 
money market funds to publish historical information about the fund's 
market-based current NAV per share each business day as of the end of 
each preceding business day.\648\ The proposed amendments would 
complement the current requirement for a money market fund to disclose 
its shadow price monthly on Form N-MFP.\649\
---------------------------------------------------------------------------

    \647\ See proposed (FNAV) rule 2a-7(h)(10)(iii); 17 CFR 270.22c-
1.
    \648\ See proposed (Fees & Gates) rule 2a-7(h)(10)(iii). The 
proposed amendments under the liquidity fees and gates alternative 
also would require money market funds to calculate their market-
based NAV at least once each business day. See infra section 
III.F.5.
    \649\ See Form N-MFP, Item 18. But see proposed Form N-MFP Item 
A.20 and B.5 (requiring money market funds to provide net asset 
value per share data as of the close of business on each Friday 
during the month reported).
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    Whether we adopt either of the proposed reform alternatives, we 
believe that daily disclosure of money market funds' current NAV per 
share would increase money market funds' transparency and permit 
investors to better understand money market funds' risks.\650\ While 
Form N-MFP information about money market funds' month-end shadow 
prices is currently publicly available with a 60-day lag,\651\ the 
proposed amendments would permit shareholders to reference funds' 
current NAV per share in near real time to assess the effect of market 
events on their portfolios.\652\ Public disclosure of money market 
funds' daily current NAV per share also could decrease funds' 
susceptibility to runs, as shareholders might be less likely to sell 
fund shares during the occurrence of negative market events if they 
could ascertain that their investment was not affected by such events 
on a near real-time basis.\653\ Requiring daily disclosure of

[[Page 36930]]

money market funds' current NAV per share also could prevent month-end 
``window dressing.'' \654\ This enhanced disclosure also could impose 
external market discipline on portfolio managers consistent with their 
investment objective, as well as the stability of short-term financing 
markets generally.\655\ However, the proposed disclosure could also 
change behavior, in that it could make shareholders quicker to redeem 
shares if they believe a decrease in the fund's current NAV signals 
portfolio deterioration or foreshadows other problems.\656\ The 
proposed disclosure also could increase the volatility of a fund's 
flows, even during times when the fund is not under stress, if 
shareholders are sensitive to changes in the fund's current NAV.\657\
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    \650\ See supra note 167 and accompanying text (discussing the 
extent to which investors treat money market funds as essentially 
risk-free).
    \651\ We are proposing to eliminate the 60-day delay in making 
Form N-MFP information publicly available. See infra section 
III.H.4.
    \652\ See Comment Letter of Capital Advisors Group, Inc. (Feb. 
1, 2013) (available in File No. FSOC-2012-0003) (``Capital Advisors 
Group FSOC Comment Letter'').
    \653\ See id. But see Federated Investors Feb. 15 FSOC Comment 
Letter, supra note 192 (noting that enhanced disclosure requirements 
``may have unintended consequences that should also be weighed.''); 
Larry G. Locke, Ethan Mitra, and Virginia Locke, Harnessing Whales: 
The Role of Shadow Price Disclosure in Money Market Mutual Fund 
Report, 11 J. Bus. & Econ. Res. 4 (2013) (asserting that, under the 
current Form N-MFP shadow price disclosure regime, there is no 
statistical correlation between the shadow price of money market 
funds and their investment activity, but that the effects on 
shareholder behavior of increased transparency and frequency of fund 
information reporting are hard to predict).
    \654\ See Capital Advisors Group FSOC Comment Letter, supra note 
652.
    \655\ See ICI Jan. 24 FSOC Comment Letter, supra note 25 
(maintaining that prime money market funds should be required to 
make frequent public disclosure (via their Web sites) of their 
market-based share price to ``enhance transparency and encourage a 
highly conservative approach to portfolio management'').
    \656\ See FSOC Proposed Recommendations, supra note 114 at 60.
    \657\ See id.
---------------------------------------------------------------------------

    Although current and prospective shareholders may presently obtain 
historical information about money market funds' month-end shadow 
prices on Form N-MFP, we believe that requiring a six-month record of 
the fund's daily current NAV on the fund's Web site would permit 
shareholders to access more detailed information in a more convenient 
manner than comparing monthly Form N-MFP filings. We believe that 
investors should be able to compare recent NAV information with 
previous information from which they (or others analyzing the data) may 
discern trends. Because money market funds are presently required to 
maintain a six-month record of portfolio holdings on the fund Web 
site,\658\ requiring a fund to post its daily current NAV for the same 
period would permit investors to analyze any relationship between the 
fund's portfolio holdings and its daily current NAV over time.
---------------------------------------------------------------------------

    \658\ See rule 2a-7(c)(12).
---------------------------------------------------------------------------

    There has been a significant amount of industry support for the 
more frequent disclosure of money market funds' current NAV per share. 
In January and February of 2013, a number of money market fund sponsors 
of large funds began voluntarily disclosing their funds' daily current 
NAV per share, calculated using available market quotations.\659\ 
Additionally, industry groups have advocated for more frequent public 
disclosure of money market funds' current NAV per share.\660\ We 
request comment on the proposed amendments to rule 2a-7 that would 
require money market funds to disclose the fund's daily market-based 
NAV per share on the fund Web site:
---------------------------------------------------------------------------

    \659\ A number of large fund complexes have begun (or plan) to 
disclose daily money market fund market valuations (i.e., shadow 
prices), including BlackRock, Charles Schwab, Federated Investors, 
Fidelity Investments, Goldman Sachs, J.P. Morgan, Reich & Tang, and 
State Street Global Advisors. See, e.g., Money Funds' New Openness 
Unlikely to Stop Regulation, Wall St. J. (Jan. 30, 2013).
    \660\ See e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; 
SIFMA FSOC Comment Letter, supra note 358, at 11.
---------------------------------------------------------------------------

     Would daily disclosure of money market funds' current NAV 
per share be useful to assist shareholders in increasing money market 
funds' transparency and better understanding money market funds' risks? 
Would the proposed amendments promote the goals of enhancing 
transparency and encouraging fund managers to manage portfolios in a 
manner that increases stability in the short-term financing markets? 
Would the daily disclosure of market prices encourage funds to invest 
in easier-to-price securities or less volatile securities? How, if at 
all, would the effects of the proposed disclosure requirement differ 
for stable price funds (which would be required to disclose their 
market-based current NAV per share) and floating NAV funds (which would 
be required to disclose the sale and redemption price of their shares)?
     How, if at all, have shareholders responded to the monthly 
disclosure of funds' current NAV per share, as required by the 2010 
amendments? Would shareholders respond differently to the proposed 
daily disclosure than they have to historical monthly disclosure?
     Should information regarding money market funds' current 
NAV per share be required to be posted to a fund's Web site less 
frequently than the proposed amendments would require? Should funds be 
required to maintain this information on their Web sites for a period 
of more or less than 6 months?
     As proposed, should we require this information to be 
posted ``prominently'' on the fund's Web site? Should we provide any 
other instruction as to the presentation of this information, in order 
to highlight the information and/or lead investors efficiently to the 
information, for example, should we require that the information be 
posted on the fund's home page or be accessible in no more than two 
clicks from the fund's home page?
     How would the requirement for money market funds to 
disclose their current NAV per share daily affect the behavior of fund 
shareholders and/or the market as a whole? For instance, could this 
disclosure make shareholders quicker to redeem shares upon a decrease 
in current NAV, or generally increase the volatility of a fund's flows?
b. Economic Analysis
    The qualitative benefits and costs of the proposed requirements 
regarding daily disclosure of a money market fund's current NAV per 
share are discussed above.\661\ We believe that the proposed 
requirements' effects on efficiency, competition, and capital formation 
would likely be similar to the effects of the proposed daily disclosure 
requirements regarding funds' daily liquid assets and weekly liquid 
assets, discussed above.\662\ We believe that the proposed requirements 
could increase informational efficiency by providing greater 
information about money market funds' daily current per-share NAV to 
investors and the Commission. This in turn could assist investors in 
analyzing the risks associated with particular funds, which could 
increase allocative efficiency and could positively affect competition 
by permitting investors to choose whether to invest in certain funds 
based on this information. However, if investors move their assets 
among money market funds or decide to invest in investment products 
other than money market funds as a result of the proposed disclosure 
requirements, this could adversely affect the competitive stance of 
certain money market funds, or the money market fund industry 
generally.
---------------------------------------------------------------------------

    \661\ See supra note 626 and accompanying text for a discussion 
of the reasons that the Commission staff has not measured the 
quantitative benefits of these proposed requirements at this time.
    \662\ See supra section III.F.2.
---------------------------------------------------------------------------

    The proposed requirements could also have effects on capital 
formation. On one hand, the proposed requirements may impose external 
market discipline on portfolio managers, which in turn could create 
market stability and enhance capital formation, if the resulting market 
stability encouraged more investors to invest in money market funds. On 
the other hand, the proposed requirements could detract from capital 
formation by decreasing market stability if investors became quicker to 
redeem during times of stress as a result of the proposed disclosure

[[Page 36931]]

requirements. Accordingly, we do not have the information necessary to 
provide a reasonable estimate of the effects of these proposed 
requirements on capital formation.
    Costs associated with these disclosure requirements include 
initial, one-time costs, as well as ongoing costs.\663\ Initial costs 
include the costs to design the schedule, chart, graph, or other 
depiction showing historical NAV information in a manner that clearly 
communicates the required information and to make the necessary 
software programming changes to the fund's Web site to present the 
depiction in a manner that will be able to be updated each business 
day. We estimate that the average one-time costs for each money market 
fund to design and present the fund's daily current NAV would be 
$20,150.\664\ Funds also would incur ongoing costs to update the 
depiction of the fund's current NAV each business day. We estimate that 
the average ongoing annual costs that each fund would incur to update 
the required disclosure would be $9,184.\665\ Because floating NAV 
money market funds would be required to calculate their sale and 
redemption price each day, these funds should incur no additional costs 
in obtaining this data for purposes of the proposed disclosure 
requirements. Stable price money market funds (including government 
money market funds and retail funds if we adopt the floating NAV 
proposal, and all funds if we adopt the liquidity fees and gates 
proposal), which would be required to calculate their current NAV per 
share daily pursuant to proposed amendments to rule 2a-7, likewise 
should incur no additional costs in obtaining this data for purposes of 
the proposed disclosure requirements.\666\
---------------------------------------------------------------------------

    \663\ As discussed above, some money market funds presently 
publicize their current NAV per share daily on the fund's Web site. 
The staff expects these funds to incur few, if any, additional costs 
to comply with these proposed disclose requirements.
    \664\ Staff estimates that these costs would be attributable to 
project assessment (associated with designing and presenting the 
historical depiction of the fund's daily current NAV per share), as 
well as project development, implementation, and testing. See supra 
note 245 (discussing the bases of our staff's estimates of 
operational and related costs). The costs associated with these 
activities are all paperwork-related costs and are discussed in more 
detail in infra sections IV.A.1.f and IV.B.1.f.
    \665\ Id.
    \666\ See infra section III.F.5 (discussing the proposed 
requirement for stable price money market funds to calculate their 
current NAV per share daily, as well as the operational costs 
associated with this proposed daily calculation requirement).
---------------------------------------------------------------------------

    We request comment on this economic analysis:
     Are any of the proposed disclosure requirements unduly 
burdensome, or would they impose any unnecessary costs?
     We request comment on the staff's estimates of the 
operational costs associated with the proposed disclosure requirements.
     We request comment on our analysis of potential effects of 
these proposed disclosure requirements on efficiency, competition, and 
capital formation.
4. Disclosure of Portfolio Holdings
a. Harmonization of Rule 2a-7 and Form N-MFP Portfolio Holdings 
Disclosure Requirements
    Money market funds are currently required to file information about 
the fund's portfolio holdings on Form N-MFP within five business days 
after the end of each month, and to disclose much of the portfolio 
holdings information that Form N-MFP requires on the fund's Web site 
each month with 60-day delay.\667\ We are proposing amendments to rule 
2a-7 in order to harmonize the specific portfolio holdings information 
that rule 2a-7 currently requires funds to disclose on the fund's Web 
site with the corresponding portfolio holdings information proposed to 
be reported on Form N-MFP pursuant to proposed amendments to Form N-
MFP. We believe that these proposed amendments would benefit money 
market fund investors by providing additional, and more precise, 
information about portfolio holdings information, which could allow 
investors better to evaluate the current risks of the fund's portfolio 
investments. Specifically, we are proposing amendments to the 
categories of portfolio investments reported on Form N-MFP, and are 
therefore also proposing amendments to the categories of portfolio 
investments currently required to be reported on a money market fund's 
Web site.\668\ We are also proposing an amendment to Form N-MFP that 
would require funds to report the maturity date for each portfolio 
security using the maturity date used to calculate the dollar-weighted 
average life maturity, and therefore we are also proposing amendments 
to the current Web site disclosure requirements regarding portfolio 
securities' maturity dates.\669\ In addition, we are proposing 
amendments to the current requirement for funds to disclose the 
``amortized cost value'' of each portfolio security to reflect the fact 
that funds under each proposal would no longer be permitted to use the 
amortized cost method to value portfolio securities.\670\ Currently, we 
do not require funds to disclose the market-based value of portfolio 
securities on the fund's Web site, because doing so would disclose this 
information prior to the time the information becomes public on Form N-
MFP (on account of the current 60-day delay before Form N-MFP 
information becomes publicly available). Because we propose to remove 
this 60-day delay, we are also proposing that funds make the market-
based value of their portfolio securities available on the fund Web 
site at the same time that this information becomes public on Form N-
MFP.\671\
---------------------------------------------------------------------------

    \667\ See rule 2a-7(c)(12)(ii); rule 30b1-7; Form N-MFP, General 
Instruction A.
    \668\ See proposed (FNAV and Fees & Gates) rule 2a-
7(h)(10)(i)(B); proposed Form N-MFP, Item C.6.
    \669\ See proposed (FNAV and Fees & Gates) rule 2a-
7(h)(10)(i)(B); proposed Form N-MFP, Item C.12.
    \670\ See proposed (FNAV and Fees & Gates) rule 2a-
7(h)(10)(i)(B).
    \671\ See proposed (Fees & Gates) rule 2a 7(h)(10)(i)(B).
---------------------------------------------------------------------------

    Because the new information that a fund would be required to 
present on its Web site overlaps with the information that a fund would 
be required to disclose on Form N-MFP, we anticipate that the costs a 
fund will incur to draft and finalize the disclosure that will appear 
in its Web site will largely be incurred when the fund files Form N-
MFP, as discussed below in section III.H.6. In addition, we estimate 
that a fund would incur annual costs of $2,484 associated with updating 
its Web site to include the required monthly disclosure.\672\
---------------------------------------------------------------------------

    \672\ The costs associated with updating the fund's Web site are 
paperwork-related costs and are discussed in infra section 
IV.A.1.f.i.
---------------------------------------------------------------------------

     We request comment on the Web site disclosure that we 
propose to harmonize with the disclosure proposed to be reported on 
Form N-MFP. Should any of the information that is proposed to be 
reported on Form N-MFP, and that we propose to require funds to 
disclose on the fund's Web site, not be required to appear on the 
fund's Web site?
     We request comment on the staff's estimates of the 
operational costs associated with the proposed disclosure requirements.
b. Request for Comment About Additional Web Site Disclosure on 
Portfolio Holdings
    Because certain money market funds have high portfolio turnover 
rates, the monthly disclosure requirement described above may not 
permit fund investors to fully understand a fund's portfolio 
composition and its attendant

[[Page 36932]]

risks.\673\ For this reason, during times of stress, uncertainty 
regarding portfolio composition could increase investors' incentives to 
redeem in between reporting periods, as they would not be able to 
determine if their fund is exposed to certain stressed assets.\674\
---------------------------------------------------------------------------

    \673\ See Federal Reserve Bank Presidents FSOC Comment Letter, 
supra note 38 (noting that as of month end November 2012, prime 
funds turned over on average 44% of portfolio assets every week).
    \674\ See id.
---------------------------------------------------------------------------

    We are considering whether to require more frequent disclosure of 
money market funds' portfolio holdings on a fund's Web site, including 
the market value of individual portfolio securities.\675\ Increasing 
the frequency of such disclosure might provide greater transparency to 
investors and the Commission regarding the risks of the investments 
held by money market funds. More frequent portfolio holdings disclosure 
also could assist investors, particularly during times of stress, in 
differentiating between money market funds based on the quality and 
stability of their investments, potentially limiting the incentive to 
run.\676\ In addition, requiring money market funds to disclose their 
portfolio holdings more frequently may impose external market 
discipline on portfolio managers consistent with their investment 
objective.\677\
---------------------------------------------------------------------------

    \675\ We also request comment on whether we should require more 
frequent filing of Form N-MFP, which would result in more frequent 
disclosure of portfolio holdings on Form N-MFP, in infra section 
III.H.5.
    \676\ See FSOC Proposed Recommendations, supra note 114, at 60.
    \677\ See supra notes 654 and 655 and accompanying text. See 
also RSFI Study, supra note 21, at 38 (noting that increased 
transparency of portfolio holdings ``might dampen a fund manager's 
willingness to hold securities whose ratings are at odds with the 
underlying risk, especially at times when credit conditions are 
deteriorating'').
---------------------------------------------------------------------------

    On the other hand, more frequent disclosure of portfolio holdings 
could make investors quicker to redeem when these holdings show signs 
of deterioration, and also could encourage money market funds to use 
less differentiated investment strategies.\678\ More frequent 
disclosure of portfolio holdings also might lead to ``front running'' 
of the portfolio, where other investors could trade ahead of money 
market fund purchasers, or ``free riding,'' where other investors 
mirror the investment strategies of the money market fund. In past 
years, some fund complexes have begun disclosing money market fund 
portfolio holdings weekly and daily on their Web sites, citing 
shareholder demand as the impetus for this disclosure.\679\
---------------------------------------------------------------------------

    \678\ See FSOC Proposed Recommendations, supra note 114, at 61.
    \679\ See, e.g., Dreyfus FSOC Comment Letter, supra note 174 
(``We decided to disclose portfolio holdings daily for client-
servicing purposes to facilitate due diligence inquiries from fund 
shareholders on portfolio composition issues on a real-time basis in 
a manner consistent with applicable law. Institutional investors in 
particular are keenly aware of risk of loss in their money market 
fund investments. As part of their due diligence, they regularly 
analyze Dreyfus fund portfolio holdings for credit, issuer, 
liquidity, and counterparty concerns, among others.''); Colleen 
Sullivan & Mike Schnitzel, Money Funds Move to Update Holdings 
Faster, FUND ACTION, Sept. 29, 2008, available at http://www.fundaction.com/pdf/FA092908.pdf (noting that American Beacon 
Funds, Fidelity Investments, Evergreen Investments, Oppenheimer 
Funds, and Sentinel Investments provide money market fund portfolio 
holdings information more frequently than monthly, for reasons 
related to investor demand).
    In addition, such Web site disclosures would also address issues 
related to selective disclosure of portfolio holdings. See 
Disclosure Regarding Market Timing and Selective Disclosure of 
Portfolio Holdings, Securities Act Release No. 33-8408 (Apr. 19, 
2004) [69 FR 22300 (Apr. 23, 2004)] at section II.C.
---------------------------------------------------------------------------

    We request comment on whether we should require money market funds 
to disclose portfolio holdings via their Web site more frequently than 
monthly.
     Would more frequent disclosure of money market funds' 
portfolio holdings be useful to assist shareholders in assessing a 
fund's risk? Would more frequent disclosure promote the goals of 
enhancing transparency, permitting shareholders to differentiate 
between money market funds, and encouraging fund managers to manage 
portfolios in a manner that increases stability in the short-term 
financing markets? How, if at all, would more frequent disclosure of 
portfolio holdings affect the portfolio assets that a money market 
fund's investment adviser purchases on behalf of the fund?
     What type of investors would be most likely to benefit 
from more frequent disclosure of money market funds' portfolio 
holdings? Would this disclosure allow more attentive investors to 
disadvantage less attentive investors?
     If more frequent disclosure of money market funds' 
portfolio holdings would be useful, how frequently should such 
disclosure be required? Daily? Weekly?
     During the 2007-2008 financial crisis, some funds 
voluntarily chose to disclose portfolio information more frequently 
than usual, while other funds did not change their disclosure 
practices. How and why did funds make these decisions, and how did 
investors respond? How would the benefits and costs of disclosure be 
affected by moving from a voluntary system to a mandated system? What 
would be the benefits of retaining a voluntary system? Would investors 
view voluntary disclosure as a signal regarding the level of 
transparency of a fund?
     Should any requirement for more frequent disclosure of 
portfolio holdings be limited to a certain type or types of money 
market fund (e.g., prime money market funds, which have historically 
been more prone to heavy redemptions during times of market stress than 
other kinds of money market funds)? \680\
---------------------------------------------------------------------------

    \680\ See supra notes 79-89 and accompanying text.
---------------------------------------------------------------------------

     How would more frequent disclosure of money market funds' 
portfolio holdings affect the behavior of fund shareholders and/or the 
market as a whole? For instance, would this disclosure increase or 
decrease funds' susceptibility to runs, affect money market funds' 
ability to use differentiated investment strategies, or lead to ``front 
running'' or ``free riding''?
     If we were to require more frequent Web site disclosure of 
money market funds' portfolio holdings, should we also require more 
frequent filing of Form N-MFP (which includes certain portfolio 
information that we do not currently require, and do not currently 
propose to require, funds to disclose on their Web sites) with the 
Commission? If so, should we require Form N-MFP to be filed as 
frequently as we require Web site disclosure of portfolio holdings? 
What impact would this have, if any, on analysts who use Form N-MFP 
data?
5. Daily Calculation of Current NAV per Share Under the Liquidity Fees 
and Gates Proposal
a. Proposed Daily NAV Calculation Requirement for Stable Price Funds
    We are proposing amendments to rule 2a-7 that would require stable 
price funds (including government and retail funds under the floating 
NAV proposal, and all funds under the fees and gates proposal) to 
calculate the fund's current NAV per share based on current market 
factors at least once each business day.\681\ Rule 2a-7 currently 
requires money market funds to calculate the fund's NAV per share, 
using available market quotations (or an appropriate substitute that 
reflects current market conditions), at such intervals as the board of 
directors determines appropriate and reasonable in light of current 
market conditions.\682\ We believe that daily disclosure of money 
market funds' current NAV per share

[[Page 36933]]

would increase money market funds' transparency and permit investors to 
better understand money market funds' risks, and thus we propose 
amendments to rule 2a-7 that would require this proposed 
disclosure.\683\ Because we are proposing to require money market funds 
to disclose their current NAV daily on the fund Web site, we 
correspondingly are proposing to amend rule 2a-7 to require funds to 
make this calculation on a daily basis, rather than at the board's 
discretion.\684\ Many money market funds already calculate and disclose 
their current NAV on a daily basis, and thus we do not expect that 
requiring all money market funds to perform a daily calculation should 
entail significant additional costs.\685\
---------------------------------------------------------------------------

    \681\ See proposed (FNAV and Fees & Gates) rule 2a-
7(h)(10)(iii); see also text accompanying supra notes 644 and 645 
for definition of ``current NAV.''
    \682\ Rule 2a-7(c)(8)(ii). Item 18 of Form N-MFP currently 
requires a fund to disclose its market-based NAV monthly.
    \683\ See supra section III.F.3.
    \684\ If we were to adopt the floating NAV alternative, money 
market funds would be required to calculate a potentially 
fluctuating sale and redemption price daily, and therefore, under 
the floating NAV alternative, we do not propose to amend rule 2a-7 
in order to require daily market-based NAV calculations.
    \685\ The costs for those funds that do not already calculate 
and disclose their market-based NAV on a daily basis are discussed 
in detail below. See infra notes 689-693 and accompanying text.
---------------------------------------------------------------------------

    We request comments on the proposed amendments to rule 2a-7 that 
would require money market funds to calculate their current NAV daily 
if the we were to adopt the liquidity fees and gates alternative.
     Would the proposed daily calculation requirement affect 
what assets a money market fund purchases? For example, would the 
requirement make funds less willing to invest in assets that are more 
difficult to value, or in more volatile assets?
     Rule 2a-7 currently requires a money market fund's board 
of directors to review the amount of deviation between the fund's 
market-based NAV per share and the fund's amortized cost per share 
``periodically.'' \686\ If we require a money market fund to calculate 
its current NAV daily, should we also require the fund's board to 
review the deviation between the current NAV per share and the fund's 
intended stable price per share at a specified interval? If so, what 
would be an appropriate interval? Weekly? Monthly? Quarterly?
---------------------------------------------------------------------------

    \686\ Rule 2a-7(c)(8)(ii)(A)(2). The proposed amendments to rule 
2a-7 do not include this requirement, as money market funds under 
each proposal generally would no longer be able to use amortized 
cost valuation for their portfolio holdings. See supra notes 140, 
177, 182, and 328 and accompanying text.
---------------------------------------------------------------------------

b. Economic Analysis
    The qualitative benefits and costs of the proposed requirement for 
money market funds to calculate the fund's current NAV per share daily 
are discussed above.\687\ We believe that this proposed requirement may 
positively affect competition, in that it would require all money 
market funds to calculate their daily current per-share NAV. Presently, 
some funds but not others calculate their current NAV per share daily, 
and therefore the proposed requirement would help level the associated 
costs incurred by all money market funds and neutralize any competitive 
advantage associated with determining not to calculate daily current 
per-share NAV. We believe that the effects on efficiency and capital 
formation of calculating the fund's current NAV daily cannot be 
separated from the effects of disclosing money market funds' current 
NAV per share daily, which are discussed above.
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    \687\ See supra note 626 and accompanying text for a discussion 
of the reasons that the Commission staff has not measured the 
quantitative benefits of these proposed requirements at this time.
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    The costs associated with this proposed requirement include the 
costs for funds to determine the current values of their portfolio 
securities each day. We estimate that 25% of active money market funds, 
or 147 funds, will incur new costs to comply with this 
requirement.\688\ However, the proposed requirement will result in no 
additional costs for those money market funds that presently determine 
their current NAV per share daily on a voluntary basis.\689\
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    \688\ Commission staff estimates that there are currently 586 
active money market funds. This estimate is based on a staff review 
of reports on Form N-MFP filed with the Commission for the month 
ended February 28, 2013. 586 money market funds x 25% = 147 money 
market funds.
    \689\ Based on our understanding of money market fund valuation 
practices, we estimate that 75% of active money market funds 
presently determine their current NAV daily.
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    All money market funds are presently required to disclose their 
market-based NAV per share monthly on Form N-MFP, and if the proposed 
amendments to Form N-MFP are adopted, the frequency of this disclosure 
would increase to weekly.\690\ As discussed below, some money market 
funds license a software solution from a third party that is used to 
assist the funds to prepare and file the information that Form N-MFP 
requires, and some funds retain the services of a third party to 
provide data aggregation and validation services as part of preparing 
and filing of reports on Form N-MFP on behalf of the fund.\691\ We 
expect, based on conversations with industry representatives, that 
money market funds that do not presently calculate the current values 
of their portfolio securities each day would generally use the same 
software or service providers to calculate the fund's current NAV per 
share daily that they presently use to prepare and file Form N-MFP, and 
for these funds, the associated base costs of using this software or 
these service providers should not be considered new costs. However, 
the third-party software suppliers or service providers may charge more 
to funds to calculate a fund's current NAV per share daily, which costs 
would be passed on to the fund. While we do not have the information 
necessary to provide a point estimate (as they depend on a variety of 
factors, including discounts relating to volume and economies of scale, 
which pricing services may provide to certain funds), we estimate that 
the average additional annual costs that a fund would incur associated 
with calculating its current NAV daily would range from $6,111 to 
$24,444.\692\ Assuming, as discussed above, that 147 money market funds 
do not presently determine and publish their current NAV per share 
daily, the average additional annual cost that these 147 funds will 
collectively incur would range from $898,317 to $3,593,268.\693\ These 
costs could be less than our estimates if funds were to receive 
significant discounts based on economies of scale or the volume of 
securities being priced.
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    \690\ See proposed Form N-MFP Item A.21 and B.5 (requiring money 
market funds to provide net asset value per share data as of the 
close of business on each Friday during the month reported).
    \691\ See infra sections III.H.6, IV.A.3 and IV.B.3.
    \692\ We estimate, based on discussions with industry 
representatives, that obtaining the price of a portfolio security 
would range from $0.25-$1.00 per CUSIP number per quote. We estimate 
that each money market fund's portfolio consists of, on average, 
securities representing 97 CUSIP numbers. Therefore, the additional 
daily costs to calculate a fund's market-based NAV per share would 
range from $24.25 ($0.25 x 97]) to $97.00 ($1.00 x 97). The 
additional annual costs would therefore range from $6,111 (252 
business days in a year x $24.25) to $24,444 (252 business days in a 
year x $97.00).
    \693\ This estimate is based on the following calculations: low 
range of $6,111 x 147 funds = $898,317; high range of $24,444 x 147 
funds = $3,593,268. See supra note 692. This figure likely 
overestimates the costs that stable price funds would incur if the 
floating NAV proposal were adopted. This is because fewer than 586 
active money market funds would be stable price funds required to 
calculate their current NAV per share daily, and thus the estimate 
of 147 funds (25% x 586 active funds) that would be required to 
comply with this requirement is likely overinclusive. Under the 
floating NAV proposal, floating NAV funds would calculate their 
shares' purchase and sale price daily, but the costs associated with 
this calculation are included in the costs discussed above at 
section III.A.7.
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    We request comment on this economic analysis:
     Are any of the proposed requirements unduly burdensome, or 
would they impose any unnecessary costs?
     We request comment on the staff's estimates of the 
operational costs

[[Page 36934]]

associated with the proposed disclosure requirements. In particular, we 
request comment on our assumption that money market funds would 
generally use the same software or service providers to calculate the 
fund's current NAV per share daily that they presently use to prepare 
and file Form N-MFP.
     We request comment on our analysis of potential effects of 
these proposed requirements on efficiency, competition, and capital 
formation.
6. Money Market Fund Confirmation Statements
    Rule 10b-10 under the Securities Exchange Act of 1934 (the 
``Confirmation Rule'') addresses broker-dealers' obligations to confirm 
their customers' securities transactions. The rule provides an 
exception for transactions in money market funds that attempt to 
maintain a stable net asset value and where no sales load or redemption 
fee is charged.\694\ The rule permits a broker-dealer to provide 
transaction information to fund shareholders on a monthly basis in lieu 
of individual, immediate confirmations for all purchases and 
redemptions of shares of these money market funds.
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    \694\ See Exchange Act rule 10b-10(b).
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    The floating NAV proposal, if adopted, would negate applicable 
exemptions that have historically permitted money market funds to 
maintain a stable net asset value. Instead, money market funds, like 
other mutual funds, would sell and redeem shares at prices that reflect 
the current market values of their portfolio securities. Given the 
likelihood that share prices of money market funds that are not exempt 
from the floating NAV proposal will fluctuate, broker-dealers may not 
be permitted under the Confirmation Rule to provide money market fund 
shareholders transaction information on a monthly basis.\695\
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    \695\ Our proposal includes exemptions from the floating NAV 
requirement for government and retail money market funds, which 
would permit these funds to continue to maintain a stable price per 
share. See supra sections III.A.3 and III.A.4. Accordingly, for 
investor transactions in such exempt funds, broker-dealers would 
still be able to take advantage of the exception in the Confirmation 
Rule and send monthly transaction reports.
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    The Confirmation Rule was designed to provide customers with the 
relevant information relating to their investment decisions at or 
before the completion of a transaction. The Confirmation Rule exception 
was adopted because the Commission believed that in cases where funds 
maintain a constant net asset value per share and no load is charged, 
monthly statements were adequate to ensure investor protection due to 
the stable pricing of the fund shares.\696\ However, for transactions 
in a floating NAV fund, investors would not know relevant information 
about the costs of transacting in fund shares before, or at the time 
of, the transaction. Because of the floating NAV, investors may desire 
to obtain more immediate confirmations for all purchases and 
redemptions to obtain better price transparency at or before the 
completion of a transaction. We request comment on whether, if we adopt 
the floating NAV requirement, we should leave the Confirmation Rule 
unchanged, which would have the effect of requiring broker-dealers to 
provide fund investors immediate confirmations of their transactions.
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    \696\ The Commission's adopting release extending the 
confirmation delivery requirement exception noted that ``where 
shares are priced at a constant net asset value per share and no 
load is charged, the need for investors to receive immediate 
confirmations does not appear to outweigh the cost to broker-dealers 
of providing the confirmation.'' See Exchange Act Release 34-19887 
(Apr. 18, 1983); [48 FR 17585 (Apr. 25, 1983)], at section II.1.
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     Should broker-dealers be required to provide immediate 
confirmations to shareholders of funds with a floating NAV, or should 
broker-dealers be permitted to continue to provide confirmations for 
these transactions on a monthly basis? What are the advantages and 
disadvantages of requiring broker-dealers to provide fund shareholders 
with immediate confirmations of transactions in floating NAV money 
market funds rather than monthly confirmations?
     If a floating NAV were implemented, what are the reasons 
why shareholders might prefer to receive this information immediately? 
Are there any additional costs to broker-dealers associated with 
providing immediate confirmations? If so, what are the nature and 
magnitude of such costs? Should the Commission consider alternative 
exceptions to the Confirmation Rule in the context of a floating NAV, 
such as permitting confirmations to be provided to shareholders for 
some different time period (e.g., weekly statements)? What benefits and 
costs would be associated with any alternative approach?
     How, if at all, do the proposed amendments that require 
money market funds to disclose daily market-based NAV per share affect 
the need for immediate confirmations?

G. New Form N-CR

    We are proposing a new rule that would require money market funds 
to file new Form N-CR with the Commission when certain events 
occur.\697\ The information reported on Form N-CR would include 
instances of portfolio security default, sponsor support of funds, and 
other similar significant events. We believe that this information 
would enable the Commission to enhance its oversight of money market 
funds and its ability to respond to market events. It would also 
provide investors with better and more timely disclosure of potentially 
important events. The Commission would be able to use the information 
provided on Form N-CR in its regulatory, disclosure review, inspection, 
and policymaking roles. Like Form 8-K under the Exchange Act,\698\ Form 
N-CR would require disclosure, by means of a current report filed with 
the Commission, related to specific reportable events. A report on Form 
N-CR would be made public on the Commission's Electronic Data 
Gathering, Analysis, and Retrieval system (``EDGAR'') immediately upon 
filing. We would require reporting on Form N-CR under both of the 
reform alternatives we are proposing today, but the Form would differ 
in certain respects depending on the alternative that we adopt.
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    \697\ Proposed rule 30b1-8.
    \698\ 17 CFR 249.308.
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1. Proposed Disclosure Requirements Under Both Reform Alternatives
    Under both the floating NAV alternative and the liquidity fees and 
gates alternative, we are proposing to require that money market funds 
file a current report on new Form N-CR within a specified period of 
time after the occurrence of certain events.\699\ Under each proposed 
alternative, we would require a money market fund to file a report on 
Form N-CR if the issuer of one or more of the fund's portfolio 
securities, or the issuer of a demand feature or guarantee, experiences 
a default or event of insolvency \700\ (other

[[Page 36935]]

than an immaterial default unrelated to the financial condition of the 
issuer), and immediately before the default or event of insolvency the 
portfolio security or securities (or the securities subject to the 
demand feature or guarantee) accounted for at least \1/2\ of 1% of the 
fund's total assets.\701\ Although rule 2a-7 currently requires money 
market funds to report defaults or events of insolvency to the 
Commission by email,\702\ we believe that requiring funds to report 
these events on Form N-CR would provide important transparency to fund 
shareholders, and also would provide information more uniformly and 
efficiently to the Commission. Form N-CR would require funds to 
disclose certain information about these reportable events, including 
the nature and financial effect of the default or event of insolvency, 
as well as the security or securities affected.\703\ The Commission 
believes that the factors specified in the required disclosure are all 
necessary to understand the nature and extent of the default, as well 
as the potential effect of the default on the fund's operations and its 
portfolio as a whole.
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    \699\ Proposed (FNAV) Form N-CR General Instructions; proposed 
(Fees & Gates) Form N-CR General Instructions. Proposed Form N-CR 
would also require a fund to report the following general 
information: (i) the date of the report; (ii) the registrant's 
central index key (``CIK'') number; (iii) the EDGAR series 
identifier; (iv) the Securities Act file number; and (v) the name, 
email address, and telephone number of the person authorized to 
receive information and respond to questions about the filing. See 
proposed (FNAV) Form N-CR Part A; proposed (Fees & Gates) Form N-CR 
Part A. The name, email address, and telephone number of the person 
authorized to receive information and respond to questions about the 
filing would not be disclosed publicly on EDGAR.
    \700\ See 17 CFR 270.5b-3(c)(2) (defining ``event of 
insolvency'' as (i) an admission of insolvency, the application by 
the person for the appointment of a trustee, receiver, 
rehabilitator, or similar officer for all or substantially all of 
its assets, a general assignment for the benefit of creditors, the 
filing by the person of a voluntary petition in bankruptcy or 
application for reorganization or an arrangement with creditors; 
(ii) the institution of similar proceedings by another person which 
proceedings are not contested by the person; or (iii) the 
institution of similar proceedings by a government agency 
responsible for regulating the activities of the person, whether or 
not contested by the person).
    \701\ See proposed (FNAV) Form N-CR Part B; proposed (Fees & 
Gates) Form N-CR Part B; see also rule 2a-7(c)(7)(iii)(A).
    \702\ See rule 2a-7(c)(7)(iii)(A). We propose to eliminate this 
requirement should proposed Form N-CR be adopted, as it would 
duplicate with the proposed Form N-CR reporting requirements 
discussed in this section.
    \703\ See proposed (FNAV) Form N-CR Part B; proposed (Fees & 
Gates) Form N-CR Part B. Proposed Form N-CR would require a fund to 
disclose the following information: (i) the security or securities 
affected; (ii) the date or dates on which the defaults or events of 
insolvency occurred; (iii) the value of the affected securities on 
the dates on which the defaults or events of insolvency occurred; 
(iv) the percentage of the fund's total assets represented by the 
affected security or securities; and (v) a brief description of the 
actions the fund plans to take in response to such event. See id.
    An instrument subject to a demand feature or guarantee would not 
be deemed to be in default, and an event of insolvency with respect 
to the security would not be deemed to have occurred, if: (i) in the 
case of an instrument subject to a demand feature, the demand 
feature has been exercised and the fund has recovered either the 
principal amount or the amortized cost of the instrument, plus 
accrued interest; (ii) the provider of the guarantee is continuing, 
without protest, to make payments as due on the instrument; or (iii) 
the provider of a guarantee with respect to an unrated, first-tier 
asset-backed security, as defined by rule 2a-7, is continuing, 
without protest, to provide credit, liquidity, or other support as 
necessary to permit the asset-backed security to make payments as 
due. See Instruction to proposed (FNAV) Form N-CR Part B; 
Instruction to proposed (Fees & Gates) Form N-CR Part B. This 
instruction is based on the current definition of the term 
``default'' in the provisions of rule 2a-7 that require funds to 
report defaults or events of insolvency to the Commission. See rule 
2a-7(c)(7)(iv).
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    We would require funds to file a report on Form N-CR within one 
business day after the default or event of insolvency occurs, which 
time frame balances, we believe, the exigency of the report with the 
time it will reasonably take a fund to compile the required 
information.\704\ The Commission and shareholders have a significant 
interest in receiving the information filed in response to Form N-CR 
Part B as soon as possible, as the default or event of insolvency 
required to be reported could signal circumstances that may require 
Commission action or analysis, and that may affect an investor's 
decision to purchase shares of the fund or remain invested in the fund.
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    \704\ See General Instruction A to proposed (FNAV) Form N-CR; 
general Instruction A to proposed (Fees & Gates) Form N-CR.
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    Additionally, we believe that current reports of occasions on which 
a money market fund receives financial support from a sponsor or other 
fund affiliate would provide important transparency to shareholders and 
the Commission, and also could help shareholders better understand the 
ongoing risks associated with an investment in the fund.\705\ 
Therefore, under each proposed reform alternative, we would require all 
money market funds to report all instances of sponsor support on 
proposed Form N-CR. Specifically, we propose to require money market 
funds to file Form N-CR if the fund's sponsor, or another affiliated 
person of the fund, provides any form of financial support to the 
fund.\706\ The term ``financial support'' includes, but is not limited 
to, (i) any capital contribution, (ii) purchase of a security from the 
fund in reliance on rule 17a-9, (iii) purchase of any defaulted or 
devalued security at par, (iv) purchase of fund shares, (v) execution 
of letter of credit or letter of indemnity, (vi) capital support 
agreement (whether or not the fund ultimately received support), (vii) 
performance guarantee, or (viii) any other similar action to increase 
the value of the fund's portfolio or otherwise support the fund during 
times of stress.\707\ Form N-CR would require funds receiving such 
financial support to disclose certain information about the support, 
including the nature, amount, and terms of the support, as well as the 
relationship between the person providing the support and the 
fund.\708\ The Commission believes that factors specified in the 
required disclosure are necessary for investors to understand the 
nature and extent of the sponsor's discretionary support of the 
fund.\709\ The Commission also believes that these factors are 
necessary for Commission staff to analyze the economic effects of 
financial support that money market funds receive from sponsors or 
other affiliated persons.
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    \705\ See supra section III.F.1.b (discussing the potential 
benefits and costs of the proposed requirement for a money market 
fund to disclose on its Web site any present occasion on which the 
fund receives financial support from a sponsor or other fund 
affiliate).
    \706\ See proposed (FNAV) Form N-CR Part C; proposed (Fees & 
Gates) Form N-CR Part C.
    \707\ See id.
    \708\ See id. Proposed Form N-CR would require a fund to 
disclose the following information: (i) a description of the nature 
of the support; (ii) the person providing support; (iii) a brief 
description of the relationship between the person providing the 
support and the fund; (iv) a brief description of the reason for the 
support; (v) the date the support was provided; (vi) the amount of 
support; (vii) the security supported, if applicable; (viii) the 
market-based value of the security supported on the date support was 
initiated, if applicable; (ix) the term of support; and (x) a brief 
description of any contractual restrictions relating to support.
     In addition, if an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such a person, 
purchases a security from the fund in reliance on rule 17a-9, the 
money market fund would be required to provide the purchase price of 
the security, as well as certain other information. Instruction to 
proposed (FNAV) Form N-CR Part C; Instruction to proposed (Fees & 
Gates) Form N-CR Part C.
    \709\ See supra note 607.
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    We would require funds to file a report on Form N-CR within one 
business day after a fund receives such financial support,\710\ which 
time frame we believe balances the exigency of the report with the time 
it will reasonably take a fund to compile the required information. The 
Commission and shareholders have a significant interest in receiving 
the information filed in response to Form N-CR Part C as soon as 
possible, as the financial support required to be reported could signal 
circumstances that may require Commission action or analysis, and that 
may affect an investor's decision to purchase shares of the fund or 
remain invested in the fund.
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    \710\ See General Instruction A to proposed (FNAV) Form N-CR; 
general Instruction A to proposed (Fees & Gates) Form N-CR.
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    Today, when a sponsor supports a fund by purchasing a security 
pursuant to rule 17a-9, we require prompt disclosure of the purchase by 
email to the Director of the Commission's Division of Investment 
Management, but we do not otherwise receive notice of such support 
unless the fund needs and requests no-action or other relief.\711\ The 
proposed Form N-CR reporting requirement would permit the

[[Page 36936]]

Commission additionally to receive notification of other kinds of 
financial support (which could affect a fund as significantly as a 
security purchase pursuant to rule 17a-9) and a description of the 
reason for the support, and it would also assist investors in 
understanding the extent to which money market funds receive financial 
support from their sponsors or other affiliates.\712\
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    \711\ See rule 2a-7(c)(7)(iii)(B). We propose to eliminate this 
requirement should proposed Form N-CR be adopted, as it would 
duplicate with the proposed Form N-CR reporting requirements 
discussed in this section.
    \712\ As discussed above, money market funds' receipt of 
financial support from sponsors and other affiliates has not 
historically been disclosed to investors, which has resulted in a 
lack of clarity among investors about which money market funds have 
received such financial support. See supra text following note 49.
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    Under either alternative proposal, we also would require funds that 
are permitted to transact at a stable price to file a report on 
proposed Form N-CR on the first business day after any day on which the 
fund's current NAV per share \713\ (rounded to the fourth decimal place 
in the case of a fund with a $1.0000 share price, or an equivalent 
level of accuracy for funds with a different share price) deviates 
downward significantly from its intended stable price (generally, 
$1.00). We believe that this requirement to file a report for each day 
the fund's current NAV is low would not only permit the Commission and 
others to better monitor indicators of stress in specific funds or fund 
groups and in the industry, but also help increase money market funds' 
transparency and permit investors to better understand money market 
funds' risks.\714\ We believe that a deviation of \1/4\ of 1 percent is 
sufficiently significant that it could signal future, further 
deviations in the fund's NAV that could require a stable price fund's 
board to consider re-pricing the fund's shares (among other 
actions).\715\ To this end, if we adopt the floating NAV alternative, 
we would require only government or retail money market funds to file a 
report on Form N-CR if the fund's current NAV per share deviates 
downward from its intended stable price by more than \1/4\ of 1 
percent.\716\ If we adopt the liquidity fees and gates alternative, we 
would require all money market funds to file a report on Form N-CR if 
the fund's current NAV per share deviates downward from its intended 
stable price by more than \1/4\; of 1 percent.\717\ The Commission 
believes that the factors specified in the required disclosure are all 
necessary to understanding the nature and extent of the deviation, as 
well as the potential effect of the deviation on the fund's operations.
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    \713\ See text accompanying supra notes 644 and 645 for 
definition of ``current NAV.''
    \714\ See generally supra section III.F.3.b (discussing the 
potential benefits and costs of the proposed requirement for a money 
market fund to disclose its current NAV on its Web site).
    \715\ See rule 2a-7(c)(8)(ii)(B) and (C); see also rule 30b1-6T 
(interim final temporary rule (no longer in effect) requiring money 
market funds to provide the Commission certain weekly portfolio and 
valuation information if their market-based net asset value per 
share declines below 99.75% of its stable NAV).
    \716\ Proposed (FNAV) Form N-CR Part D. Proposed Form N-CR would 
require a fund to disclose the following information: (i) the date 
or dates on which such deviation exceeded \1/4\ of 1 percent; (ii) 
the extent of deviation between the fund's current NAV per share and 
its intended stable price; and (iii) the principal reason for the 
deviation, including the name of any security whose market-based 
value or sale price, or whose issuer's downgrade, default, or event 
of insolvency (or similar event) has contributed to the deviation.
    \717\ Proposed (Fees & Gates) Form N-CR Part D. Proposed Form N-
CR would require a fund to disclose the following information: (i) 
the date or dates on which such deviation exceeded \1/4\ of 1 
percent; (ii) the extent of the deviation between the fund's current 
net asset value per share and its intended stable price; and (iii) 
the principal reason for the deviation, including the name of any 
security whose market-based value or sale price, or whose issuer's 
downgrade, default, or event of insolvency (or similar event) has 
contributed to the deviation.
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    We would require funds to file a report on Form N-CR within one 
business day following the reportable movement of the fund's current 
NAV, which time frame we believe balances the exigency of the report 
with the time it will reasonably take a fund to compile the required 
information.\718\ The Commission and shareholders have a significant 
interest in receiving the information filed in response to Form N-CR 
Part D as soon as possible, as the NAV deviation required to be 
reported could signal circumstances that may require Commission action 
or analysis, and that may affect an investor's decision to purchase 
shares of the fund or remain invested in the fund.
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    \718\ See General Instruction A to proposed (FNAV) Form N-CR; 
general Instruction A to proposed (Fees & Gates) Form N-CR.
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    We request comments on the proposed general disclosure requirements 
of new Form N-CR:
     Are there any other events that warrant a current report 
filing obligation for money market funds under either or both of the 
proposed reform alternatives? If so, what are they? Should we add any 
additional disclosure requirements to proposed Form N-CR? Should any 
proposed requirements not be included in Form N-CR?
     With respect to the proposed requirement for stable price 
money market funds to report certain deviations between the fund's 
current NAV and its intended stable price per share, is our proposed 
threshold of reporting (\1/4\ of 1 percent deviation) appropriate? How 
frequently should we expect to receive reports based on this threshold? 
Which threshold would help the public differentiate funds that are 
having difficulties maintaining their stable price from those that are 
not? Should we adopt a lower threshold (such as 10 or 20 basis points) 
or a higher threshold (such as 30 or 40 basis points)? Why or why not? 
How would investors interpret and respond to this reporting threshold? 
Would it affect their purchase and redemption activity in the reporting 
fund or in other funds, and if so, how and why?
     Do the proposed reporting deadlines for each part 
appropriately balance the Commission's and the public's need for 
information on current events affecting money market funds with the 
costs of preparing and submitting a report on Form N-CR? Should we 
require a longer or shorter time frame in which to file a report on any 
of the parts of Form N-CR?
     Would the particular information that we propose requiring 
funds to report in response to Parts B, C, and D of Form N-CR be useful 
to shareholders in understanding the events triggering the filing of 
Form N-CR, as well as certain of the risks associated with an 
investment in the fund? Should we require any more, any less, or any 
other information to be reported?
     How frequently do commenters anticipate that funds would 
file Form N-CR to report a default or event of insolvency with respect 
to portfolio securities, the provision of financial support to the 
fund, or a significant deviation between the fund's current per-share 
NAV and its intended stable price? For how many consecutive days do 
commenters anticipate that funds would likely report low current NAVs? 
Under what conditions would these reports trigger investor redemptions? 
Under what conditions would these reports affect investor purchases?
     Which types of investors (or other parties) would be most 
likely to monitor Form N-CR filings in real time?
     Would the proposed requirement to file a report in 
response to Part C of Form N-CR make funds less likely to request 
sponsor support? Why or why not? How would this affect the sponsor's 
willingness to provide support?
     Would the requirement to file a report in response to Part 
D of Form N-CR make funds more likely to request sponsor support? Why 
or why not? How would this affect the sponsor's willingness to provide 
support?
     How would the requirement to file Form N-CR affect the 
fund's investment decisions? Would the reporting requirement make the 
fund more

[[Page 36937]]

conservative, investing in safer securities to reduce the chance of 
being required to file Form N-CR? Would this affect fund yield to the 
point that it would affect how investors choose to invest in the fund?
2. Additional Proposed Disclosure Requirements Under Liquidity Fees and 
Gates Alternative
    We propose to require that money market funds file a report on Form 
N-CR if a fund reaches the threshold triggering board consideration of 
a liquidity fee or redemption gate, if we adopt the proposed liquidity 
fees and gates alternative. This report would include a description of 
the fund's response (such as whether and why a fee was not imposed, as 
rule 2a-7 requires by default, or whether any why a gate was 
imposed).\719\ The Commission believes that the factors specified in 
the required disclosure are necessary for investors and the Commission 
to understand the circumstances surrounding the fund's weekly liquid 
assets falling below 15% of total fund assets, or the imposition or 
removal of a liquidity fee or gate. This in turn could affect the 
Commission's oversight of the fund and regulation of money market funds 
generally, and could influence investors' decisions to purchase shares 
of the fund or remain invested in the fund. Disclosure of the board's 
analysis regarding whether to impose a liquidity fee or gate could 
provide investors and the Commission with a greater understanding of 
the events affecting and potentially causing stress to the fund, and 
could provide insight into the manner in which the board handles 
periods of fund stress.
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    \719\ Proposed (Fees & Gates) Form N-CR Parts E and F. 
Specifically, we propose requiring a report to be filed on Form N-CR 
if a fund's weekly liquid assets fall below 15% of total fund assets 
as set forth in proposed (Fees & Gates) rule 2a-7(c)(2). We would 
require the fund to disclose the following information: (i) the date 
on which the fund's weekly liquid assets fell below 15% of total 
fund assets; (ii) if the fund imposes a liquidity fee pursuant to 
proposed (Fees & Gates) rule 2a-7(c)(2)(i), the date on which the 
fund instituted the liquidity fee; (iii) a brief description of the 
facts and circumstances leading to the fund's weekly liquid assets 
falling below 15% of total fund assets; and (iv) a short discussion 
of the board of directors' analysis supporting its decision that 
imposing a liquidity fee pursuant to proposed (Fees & Gates) rule 
2a-7(c)(2)(i) (or not imposing such a liquidity fee) would be in the 
best interest of the fund. Proposed (Fees & Gates) Form N-CR Part E.
     Similarly, if a money market fund whose weekly liquid assets 
fall below 15% of total fund assets suspends the fund's redemptions 
pursuant to [rule 2a-7(c)(2)(ii)], we would require the fund to 
disclose the following information: (i) the date on which the fund's 
weekly liquid assets fell below 15% of total fund assets; (ii) the 
date on which the fund initially suspended redemptions; (iii) a 
brief description of the facts and circumstances leading to the 
fund's weekly liquid assets falling below 15% of total fund assets; 
and (iv) a short discussion of the board of directors' analysis 
supporting its decision to suspend the fund's redemptions. Proposed 
(Fees & Gates) Form N-CR Part F.
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    We would also require money market funds to file a report on Form 
N-CR when the board lifts the fee or resumes redemptions of fund 
shares.\720\ We would require funds to file an initial report on Form 
N-CR on the first business day following any occasion on which the 
fund's weekly liquid assets fall below 15% of its total assets, the 
fund's board imposes (or removes) a liquidity fee, or the fund's board 
temporarily suspends (or resumes) the fund's redemptions, which report 
would provide the date of the triggering event(s).\721\ Funds would 
need to file an amendment to the initial report on Form N-CR by the 
fourth business day following any of these triggering events, which 
amendment would provide additional detailed information about the 
event(s) (namely, a description of the facts and circumstances leading 
to the triggering event, as well as a discussion of the fund board's 
analysis supporting the decision with respect to the imposition of fees 
or gates).\722\ We believe that these reporting requirements would 
permit the Commission to better monitor and respond to indicators of 
stress, and also would help alert shareholders to events that could 
influence their decision to purchase shares of the fund, as well as 
their decision or ability to sell fund shares. We believe that the 
deadlines of one business day for filing an initial report and four 
business days for amending the initial report balance the exigency of 
the reports with the time it will reasonably take a fund to compile the 
required information. The Commission and shareholders have a 
significant interest in knowing that a fund's weekly liquid assets have 
fallen below 15% of total fund assets, and that the fund has imposed or 
removed a liquidity fee or gate, as soon as possible. This information 
directly affects investors' ability to redeem shares of a fund, and it 
could be a material factor in determining whether to purchase or redeem 
fund shares. The Commission requires this information to effectively 
oversee money market funds that have come under stress, and to ensure 
the protection of investors in these funds. The Part E and Part F 
initial reports, as well as Part G, do not require funds to submit 
substantial analysis of the underlying factors; thus, we propose to 
require funds to submit Part E and Part F initial reports, as well as 
Part G, within one business day of the event triggering the filing.
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    \720\ Proposed (Fees & Gates) Form N-CR Part G. Specifically, we 
would require the fund to disclose the date on which the fund 
removed the liquidity fee and/or resumed fund redemptions.
    \721\ See General Instruction A to (Fees & Gates) Form N-CR; 
Instructions to proposed (Fees & Gates) Form N-CR Parts E and F.
    \722\ Id. The instructions to proposed (Fees & Gates) Form N-CR 
Part E and Part F specify which information a fund must file in the 
initial report, and which information a fund must file in the 
amendment to the initial report. Specifically, funds would need to 
include the date of the triggering event(s) on the initial report. 
The amendment to the initial report would include a brief 
description of the facts and circumstances leading to the fund's 
weekly liquid assets falling below 15% of total fund assets, and a 
short discussion of the board's rationale in determining whether to 
impose a liquidity fee (if the fund is filing Part E) or gate (if 
the fund is filing Part F).
     Proposed (Fees & Gates) Form N-CR Part G would not require an 
amendment after its initial filing, because Part G simply requires a 
fund to disclose the date on which the fund lifted liquidity fees 
and/or resumed fund redemptions.
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    The Commission and shareholders also have a substantial interest in 
receiving the information that a fund would submit in amending an 
initial report filed in response to events specified in Part E or Part 
F. However, we believe that receiving an analysis of the factors 
leading to the imposition of fees and/or gates, as well as the board's 
determination whether to impose a fee and/or gates, would be of less 
immediate concern to the Commission and shareholders. Also, the 
disclosure in the amendment would require more time to compose and 
compile than the information required to be submitted in the initial 
report. Because funds would be required to submit a moderate amount of 
explanatory information in amending initial Part E or Part F reports, 
and because the personnel of a fund required to file a Part E or Part F 
report will likely simultaneously be occupied resolving fund liquidity 
pressures, we propose to permit funds to submit amendments to initial 
Part E or Part F reports within four business days.
    We request comments on the proposed additional requirements in new 
Form N-CR specific to the proposed liquidity fees and gates 
alternative:
     Should we add any additional disclosure requirements to 
proposed Form N-CR specific to the proposed liquidity fees and gates 
alternative? Should any of the proposed requirements not be included in 
Form N-CR?
     Should we require reporting not just when a fund reaches 
the thresholds that trigger consideration of board action, but also 
before those triggers are reached? If so, when should we require 
reporting? When weekly liquid assets reach 25% of portfolio assets? 
Some other number? What additional

[[Page 36938]]

information should we ask? Would a higher reporting requirement result 
in too-frequent reporting?
     Should we require reporting not just when a fund reaches 
the thresholds that trigger consideration of board action, but also at 
some threshold after those triggers are reached? If yes, when should we 
require the additional reporting? When weekly liquid assets reach 10% 
of portfolio assets? Some other number? Should we require similar 
reporting when daily liquid assets drop below a certain threshold? If 
so, what threshold should we require? When daily liquid assets reach 
0%, or should we set a higher threshold such as 5%?
     Would the particular information that we propose requiring 
funds to report in response to Parts E, F, and G of Form N-CR be useful 
to shareholders in understanding the events triggering the filing of 
Form N-CR? Should we require any more, any less, or any other 
information to be reported?
     How frequently do commenters anticipate that funds would 
file reports on proposed Form N-CR in response to the proposed 
requirements specific to the proposed liquidity fees and gates 
alternative? What average length of time do commenters anticipate 
transpiring between a fund's initial report in response to Part E or 
Part F of Form N-CR, and a fund's report in response to Part G of Form 
N-CR?
     Do the proposed reporting deadlines appropriately balance 
the Commission's and the public's need for information on current 
events affecting money market funds with the costs of preparing and 
submitting a report on Form N-CR? Does the proposed requirement to file 
an initial report on Form N-CR for Parts E and F within one business 
day following a triggering event, and then to file an amended report 
within four business days following the event, appropriately balance 
the exigency of the reports with the time that it will reasonably take 
a fund to compile the required information for each part? Should we 
require a longer or shorter time frame in which to file a report on 
Form N-CR for any of the parts?
     Are there any other events that warrant a current report 
filing obligation under the proposed liquidity fees and gates 
alternative?
     How, if at all, would the requirement to file Form N-CR 
affect the fund's investment decisions, including the fund's decision 
to invest in weekly liquid assets?
     How, if at all, would the requirement to file Form N-CR 
affect the fund's decisions with respect to accepting investments from 
certain groups of shareholders? For example, would funds be less likely 
to accept investments from large shareholders or short-term 
shareholders?
     How, if at all, would the requirement to file Form N-CR 
affect the board's decisions surrounding the imposition of liquidity 
fees and gates? Would the Form N-CR filing requirement affect the 
board's willingness to deviate from the default liquidity fee 
requirements? Why or why not?
3. Economic Analysis
    As discussed above, we believe that the Form N-CR reporting 
requirements would provide important transparency to investors and the 
Commission, and also could help investors better understand the risks 
associated with a particular money market fund, or the money market 
fund industry generally. The Form N-CR reporting requirements would 
permit investors and the Commission to receive information about 
certain money market fund material events consistently and relatively 
quickly. As discussed above, we believe that investors and the 
Commission have a significant interest in receiving this information 
because it would permit investors and the Commission to monitor 
indicators of stress in specific funds or fund groups, as well as the 
money market fund industry, and also to analyze the economic effects of 
certain material events. The Form N-CR reporting requirements could 
give investors and the Commission a greater understanding of the 
circumstances leading to events of stress, and also how a fund's board 
handles events of stress. We believe that investors could find all of 
this information to be material and helpful in determining whether to 
purchase fund shares, or remain invested in a fund. However, we 
recognize that the Form N-CR reporting requirements have operational 
costs (discussed below), and also may result in opportunity costs, in 
that personnel of a fund that has experienced an event that requires 
Form N-CR reporting may lose a certain amount of time that could be 
used to respond to that event because of the need to comply with the 
reporting requirement. However, as discussed above, we believe that the 
proposed time frames for filing reports on Form N-CR balance the 
exigency of the report with the time it will reasonably take a fund to 
compile the required information.
    We believe that the proposed Form N-CR reporting requirements may 
complement the benefits of increased transparency of publicly available 
money market fund information that have resulted from the requirement 
that money market funds report their portfolio holdings and other key 
information on Form N-MFP each month. The RSFI Study found that the 
additional disclosures that money market funds are required to make on 
Form N-MFP improve fund transparency (although funds file the form on a 
monthly basis with no interim updates, and the Commission currently 
makes the information public with a 60-day lag).\723\ The RSFI Study 
also noted that this ``increased transparency, even if reported on a 
delayed basis, might dampen a fund manager's willingness to hold 
securities whose ratings are at odds with the underlying risk, 
especially at times when credit conditions are deteriorating.'' \724\ 
Additionally, the availability of public, standardized, money market 
fund-related data that has resulted from the Form N-MFP filing 
requirement has assisted both the Commission and the money market fund 
industry in various studies and analyses of money market fund 
operations and risks.\725\ The proposed Form N-CR reporting requirement 
could extend these benefits of Form N-MFP by providing additional 
transparency about money market funds' risks on a near real-time basis, 
which may, like Form N-MFP disclosure, impose market discipline on 
portfolio managers and provide additional data that would allow 
investors to make investment decisions, and the Commission and the 
money market fund industry to conduct risk- and operations-related 
analyses.
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    \723\ See RSFI Study, supra note 21, at 31; see also infra note 
793 and accompanying text (discussing the Commission's proposal to 
eliminate the 60-day delay in making Form N-MFP information publicly 
available).
    \724\ See RSFI Study, supra note 21, at 38.
    \725\ See, e.g., Money Market Mutual Funds, Risk, and Financial 
Stability in the Wake of the 2010 Reforms, 19 ICI Research 
Perspective No. 1 (Jan. 2013), at n.29 (noting that certain 
portfolio-related data points are often only available from the 
SEC's Form N-MFP report).
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    We believe that the proposed reporting requirements may positively 
affect regulatory efficiency because all money market funds would be 
required to file information about certain material events on a 
standardized form, thus improving the consistency of information 
disclosure and reporting, and assisting the Commission in overseeing 
individual funds, and the money market fund industry generally, more 
effectively. The proposed requirements also could positively affect 
informational efficiency. This could assist investors in understanding 
various risks associated with certain

[[Page 36939]]

funds, and risks associated with the money market fund industry 
generally, which in turn could assist investors in choosing whether to 
purchase or redeem shares of certain funds. The proposed requirements 
could positively affect competition because funds could compete with 
each other based on certain information required to be disclosed on 
Form N-CR, as well as based on more traditional competitive factors 
such as price and yield. For instance, investors might see a fund that 
invests in securities whose issuers have never experienced a default as 
a more attractive investment than a similar fund that frequently files 
reports in response to Form N-CR Part B (``Default or Event of 
Insolvency of portfolio security issuer''). However, if investors move 
their assets among money market funds or decide to invest in investment 
products other than money market funds as a result of the Form N-CR 
reporting requirements, this could negatively affect the competitive 
stance of certain money market funds, or the money market fund industry 
generally. If money market fund investors decide to move all or a 
substantial portion of their money out of the market, this could 
negatively affect capital formation.\726\ On the other hand, capital 
formation could be positively affected if the Form N-CR reporting 
requirements were to assist the Commission in overseeing and regulating 
the money market fund industry, and the resulting regulatory framework 
more efficiently or more effectively encouraged investors to invest in 
money market funds. Additional effects of these proposed filing 
requirements on efficiency, competition, and capital formation would 
vary according to the event precipitating the Form N-CR filing, and 
they are substantially similar to the effects of other proposed 
disclosure requirements, as discussed in more detail above.\727\
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    \726\ For an analysis of the potential macroeconomic effects of 
our proposals, see supra section III.E.1.
    \727\ We believe that the effects on efficiency, competition, 
and capital formation of filing Form N-CR in response to Part B or C 
would overlap significantly with the effects of the proposed 
disclosure requirements regarding the financial support provided to 
money market funds. See discussion in supra section III.F.1.b. We 
believe that the effects of filing Form N-CR in response to Part D 
would overlap significantly with the effects of the proposed 
disclosure requirements regarding a money market fund's daily 
market-based NAV per share. See discussion in supra section 
III.F.3.b. We believe that the effects of filing Form N-CR in 
response to Parts E, F, and G would overlap significantly with the 
effects of the proposed disclosure requirements regarding current 
and historical instances of the imposition of liquidity fees and/or 
gates. See supra section III.B.8.f.
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    The operational costs of filing Form N-CR in response to the events 
specified in Parts B-G of Form N-CR are discussed below.\728\ The 
Commission staff has not measured the quantitative benefits of these 
proposed requirements at this time because of uncertainty about how 
increased transparency may affect different investors' understanding of 
the risks associated with money market funds and their imposition of 
market discipline.\729\
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    \728\ These costs incorporate the costs of responding to Part A 
(``General information'') of Form N-CR. We anticipate that the costs 
associated with responding to Part A will be minimal, because Part A 
requires a fund to submit only basic identifying information.
    \729\ Likewise, uncertainty regarding the proposed disclosure's 
effect on different investors' behavior makes it difficult for the 
SEC staff to measure the quantitative benefits of the proposed 
requirements at this time.
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    We have estimated that the costs of filing a report in response to 
an event specified on Part B of Form N-CR would be higher than the 
costs that money market funds currently incur in complying with rule 
2a-7(c)(7)(iii)(A), which requires money market funds to report 
defaults or events of insolvency to the Commission by email.\730\ We 
estimate the costs of filing a report in response to an event specified 
on Part B of Form N-CR to be $1,708 per filing,\731\ and we expect, 
based on our estimate of the average number of notifications of events 
of default or insolvency that money market funds currently file each 
year, that the Commission would receive approximately 20 such filings 
per year.\732\ Therefore, we expect that the annual costs relating to 
filing a report on Form N-CR in response to an event specified on Part 
B would be $34,160.\733\
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    \730\ The requirements of rule 2a-7(c)(7)(iii)(A) and the 
requirement of Part B of Form N-CR are substantially similar, 
although Part B on its face specifies more information to be 
reported than rule 2a-7(c)(7)(iii)(A). However, Commission staff 
understands that funds disclosing events of default or insolvency 
pursuant to rule 2a-7(c)(7)(iii)(A) already have historically 
reported substantially the same information proposed to be required 
by Part B.
    \731\ The costs associated with filing Form N-CR in response to 
an event specified on Part B of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.A.4 and 
IV.B.4.
    \732\ See Submission for OMB Review, Comment Request, Extension: 
Rule 2a-7, OMB Control No. 3235-0268, Securities and Exchange 
Commission [77 FR 236 (Dec. 7, 2012)].
    \733\ These estimates are based on the following calculations: 
$1,708 (cost per report) x 20 filings per year = $34,160 per year. 
See supra notes 731-732 and accompanying text.
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    Likewise, we have estimated that the costs of filing a report in 
response to an event specified on Part C of Form N-CR in part by 
reference to the costs that money market funds currently incur in 
complying with rule 2a-7(c)(7)(iii)(B), which requires disclosure to 
the Commission by email when a sponsor supports a money market fund by 
purchasing a security in reliance on rule 17a-9. However, because Part 
C of Form N-CR defines ``financial support'' more broadly than the 
purchase of a security from a fund in reliance on rule 17a-9, and 
because the requirements of Part C of Form N-CR are more extensive than 
the requirements of rule 2a-7(c)(7)(iii)(B), we expect that the costs 
associated with filing a report in response to a Part C event would be 
higher than the current costs of compliance with rule 2a-
7(c)(7)(iii)(B). We estimate the costs of filing a report in response 
to an event specified on Part C of Form N-CR to be $1,708 per 
filing,\734\ and we expect, based in part by reference to our estimate 
of the average number of notifications of security purchases in 
reliance on rule 17a-9 that money market funds currently file each 
year, that the Commission would receive approximately 40 such filings 
per year.\735\ Therefore, we expect that the annual costs relating to 
filing a report on Form N-CR in response to an event specified on Part 
C would be $68,320.\736\
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    \734\ The costs associated with filing Form N-CR in response to 
an event specified on Part C of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.A.4 and 
IV.B.4.
    \735\ See Submission for OMB Review, Comment Request, Extension: 
Rule 2a-7, OMB Control No. 3235-0268, Securities and Exchange 
Commission [77 FR 236 (Dec. 7, 2012)].
    \736\ These estimates are based on the following calculations: 
$1,708 (cost per report) x 40 filings per year = $68,320 per year. 
See supra notes 734-735 and accompanying text.
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    As discussed in more detail in section IV below, we have estimated 
the costs associated with filing a report on Form N-CR in response to 
an event specified on Part D, E, F, or G on a broad average basis. In 
particular, in an event of filing, the staff believes a fund's 
particular circumstances that gave rise to a reportable event would be 
the predominant factor in determining the time and costs associated 
with filing a report on Form N-CR. Accordingly, on average, we estimate 
the costs of filing a report in response to an event specified on Part 
D of Form N-CR to be $1,708 per report.\737\ On average, we estimate 
the costs of filing a report in response to an event specified on Part 
E or Part F of Form N-CR to be $1,708 per filing.\738\ On average, we 
estimate

[[Page 36940]]

the costs of filing a report in response to an event specified on Part 
G of Form N-CR to be $1,708 per filing.\739\
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    \737\ See infra section IV.A.4 and IV.B.4.
    \738\ Id. This estimate includes the costs of filing an initial 
report, as well as amending the initial report. See instructions to 
proposed (Fees & Gates) Form N-CR Parts E, F.
    \739\ Id.
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    We request comment on this economic analysis:
     Would any of the proposed disclosure requirements impose 
unnecessary costs? Why or why not?
     How many filings would be made each year in response to 
the events specified on each of Part B, Part C, Part D, Part E, Part F, 
and Part G of Form N-CR?
     Please comment on our analysis of the potential effects of 
these proposed disclosure requirements on efficiency, competition, and 
capital formation.

H. Amendments to Form N-MFP Reporting Requirements

    The Commission is proposing to amend Form N-MFP, the form that 
money market funds use to report to us their portfolio holdings and 
other key information each month. We use the information to monitor 
money market funds and support our examination and regulatory programs. 
Each fund must file information on Form N-MFP electronically within 
five business days after the end of each month. We make the information 
public 60 days after the end of the month.\740\ Money market funds 
began reporting this information to us in November 2010.\741\
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    \740\ See rule 30b1-7(b).
    \741\ On average, 616 money market funds filed Form N-MFP with 
us each month during 2012. Funds reported information on nearly 
68,000 securities on average each month.
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    We are proposing to amend Form N-MFP to reflect amendments to rule 
2a-7 discussed above, as well as request certain additional information 
that would be useful for our oversight of money market funds, and make 
other improvements to the form based on our experience with filings 
submitted during the past two and a half years. As discussed below in 
section III.H.1, our proposed amendments related to rule 2a-7 changes 
proposed elsewhere in this Release would be adopted under either 
regulatory alternative. Regardless of the regulatory alternative 
adopted, or if neither alternative is adopted, we anticipate that we 
would adopt the other amendments that we propose to make to the Form 
described in this section relating to new reporting requirements, 
clarifying amendments, and public availability of information (sections 
III.H.2-III.H.4 below) because they would be relevant to the 
Commission's efforts to oversee the stability of money market funds and 
compliance with rule 2a-7.\742\ In connection with these amendments, we 
propose to renumber the items of Form N-MFP to separate the items into 
four separate sections.\743\
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    \742\ References to Form N-MFP will be ``Proposed Form N-MFP 
Item.'' We are not proposing to amend items in Form N-MFP that 
reference credit ratings. References to credit ratings will be 
addressed in a separate rulemaking. See supra note 130 and 
accompanying text.
    \743\ See proposed Form N-MFP: (i) General information (Items 1-
8); (ii) information about each series of the fund (Items A.1-A.21; 
(iii) information about each class of the fund (Items B.1-B.8); and 
(iv) information about portfolio securities (Items C.1-C.25). Our 
proposed renumbering of the items will enable us to add or delete 
items in the future without having to re-number all subsequent items 
in the form.
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1. Amendments Related to Rule 2a-7 Reforms
    Under our floating NAV proposal or our liquidity fees and gates 
proposal, we would revise Form N-MFP to reflect certain proposed 
amendments to rule 2a-7. Because both alternative proposals would 
require that all money market funds (including government and retail 
money market funds otherwise exempt) value portfolio securities using 
market-based factors and/or fair value pricing (not amortized cost 
\744\), we propose to amend the items in Form N-MFP that reference 
``amortized cost.'' Those items instead would require that funds 
disclose the ``value'' of portfolio securities.\745\
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    \744\ As discussed above, money market funds, like other mutual 
funds, would be able to use amortized cost to value securities with 
maturities of 60 days or less provided the fund's board determines 
that the security's fair value is its amortized cost and the 
circumstances do not suggest otherwise. See supra note 136 and 
accompanying discussion. Because the board in these circumstances 
must conclude that the amortized value of the securities is the fair 
value of the securities, there would be no need for separate 
disclosure of both values. In addition, government and retail money 
market funds, which would be exempt from our floating NAV proposal, 
would be required to value portfolio securities using market-based 
factors (not amortized cost), but continue to be allowed to use 
penny rounding to maintain a stable price per share. See supra 
sections III.A.3 and III.A.4.
    \745\ Form N-MFP requires that each series of a fund disclose 
the total amortized cost of its portfolio securities (Item 13) and 
the amortized cost for each portfolio security (Item 41). We propose 
to amend Items 13 and 41 by replacing amortized cost with ``value'' 
as defined in section 2(a)(41) of the Act. See proposed Form N-MFP 
Items A.14.b, C.18, and proposed Form N-MFP General Instructions, E. 
Definitions. As a result, we propose to remove current Form N-MFP 
Items 45 and 46, which require that a fund disclose the value of 
each security using available market quotations, both with and 
without the value of any capital support agreement. Proposed Form N-
MFP Item C.18 would require that MMFs report portfolio security 
market values both including and excluding the value of any sponsor 
support. To improve transparency of MMF's risks, we propose to 
clarify that MMFs must disclose the value of ``any sponsor support'' 
applicable to a particular portfolio security, rather than ``capital 
support agreements'' as stated in current Form N-MFP Items 45 and 
46.
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    Accordingly, without amortized cost, funds would not have a 
``shadow price'' to disclose. Therefore, we also propose to eliminate 
the items in Form N-MFP that require disclosure of ``shadow prices.'' 
\746\ A fund would still be required to disclose the net asset value 
per share at the series level and class level, but we propose to 
require that each monthly report include the net asset value per share 
as of the close of business on each Friday during the month reported. 
Thus, while funds would continue to file reports on Form N-MFP once 
each month (as they do today), certain limited information (such as the 
NAV per share) would be reported on a weekly basis. In addition, we 
propose to require, both for each series and each class, reporting of 
the net asset value per share, rounded to the fourth decimal place for 
a fund with a $1.00 share price (or an equivalent level of accuracy for 
funds with a different share price).\747\ If we adopted our floating 
NAV proposal, this would conform net asset value per share reporting to 
the rounding convention in our rule proposal.\748\ If we adopted our 
liquidity fees and gates proposal, these items would in effect require 
reporting of the fund's price per share without penny rounding. This 
information would be used by the Commission and others to identify 
money market funds that continue to seek to maintain a stable price per 
share \749\ and better evaluate any potential deviations in their 
unrounded share price. Finally, we propose to amend the category 
options at the series level that money market funds use to identify 
themselves and include government funds that would

[[Page 36941]]

be exempt under either alternative proposal.\750\
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    \746\ Form N-MFP currently requires a fund to disclose the 
shadow price of the fund series (Item 18) and each fund class (Item 
25), both of which we propose to eliminate.
    We also propose to amend the definition of ``money market fund'' 
to conform to our proposed amendment. As proposed, a money market 
fund means a fund that holds itself out as a money market fund and 
meets all of the requirements of rule 2a-7 (eliminating the specific 
reference to rule 2a-7's maturity, quality, and diversification 
requirements). See proposed Form N-MFP General Instructions, E. 
Definitions (defining ``Money Market Fund'').
    \747\ See proposed Form N-MFP Items A.21 and B.5 (noting that if 
the reporting date falls on a holiday or other day on which the fund 
does not calculate the net asset value per share, provide the value 
as of the close of business on the date in that week last 
calculated). This reporting instruction also applies to our proposed 
weekly reporting of daily and weekly liquid assets. See proposed 
Form N-MFP Item A.13.
    \748\ See proposed (FNAV) rule 2a-7(c)(1).
    \749\ We propose to require that a fund that seeks to maintain a 
stable price per share state the price that the fund seeks to 
maintain. See proposed Form N-MFP Item A.18.
    \750\ See proposed Form N-MFP Item A.10 (adding ``Exempt 
Government'' category). If we adopt the floating NAV alternative, we 
would also add a new category for ``Exempt Retail'' funds.
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    Our proposed amendment to require that each monthly report include 
the net asset value per share as of the close of business on each 
Friday during the month reported would be consistent with other actions 
taken by the Commission and fund industry participants to increase the 
frequency of disclosure of funds' NAV per share (on funds' Web 
sites).\751\ Despite the increased frequency of disclosure within the 
monthly report, funds would continue to file reports on Form N-MFP once 
each month. By including this information in Form N-MFP, in addition to 
a fund's Web site, Commission staff and others may better monitor the 
risks that may be present in declining prices, for example. This 
information, if available on Form N-MFP, could then be aggregated and 
analyzed across the fund industry. If we adopt our floating NAV 
proposal, funds required to price their shares at the market-based NAV 
per share would already have this information readily available. Also, 
as noted above, many money market funds have begun disclosing shadow 
prices daily on fund Web sites and therefore we believe this 
information is readily available to funds. Any effect resulting from 
our proposed amendment to require that each monthly report include NAV 
per share data on a weekly basis is included in our economic analysis 
of our proposed amendment to require that money market funds disclose 
NAV per share daily on fund Web sites.\752\ Finally, we note that the 
remaining proposed changes would omit or amend disclosure requirements 
that would no longer be relevant if we adopt the changes we are 
proposing to rule 2a-7. Accordingly, we do not believe that the 
proposed amendments would impose costs on money market funds other than 
those required to modify systems used to aggregate data and file 
reports on Form N-MFP. These costs are discussed in section III.H.6 
below.
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    \751\ See supra section III.F.3 (proposing to require that money 
market funds disclose on fund Web sites the fund's current market-
based NAV per share); see also infra note 793 and accompanying text 
(noting the current industry trend to disclose shadow prices daily 
on fund Web sites).
    \752\ See supra section III.F.3.
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    We believe that the proposed revised form will be easier for 
investors to understand because the simplifications allow investors to 
focus on a single market-based valuation for individual portfolio 
securities and the fund's overall NAV per share. This approach is also 
consistent with today's standard practice for mutual funds that are not 
money market funds. We expect that the overall effects will be to 
increase efficiency for not only investors but also the funds 
themselves. As discussed above, the floating NAV proposal and the 
liquidity fees and gates proposal will affect both competition and 
capital formation. Because we believe that investors are likely to make 
at least incremental changes to their trading patterns in money market 
funds due to the proposed changes to Form N-MFP, it is likely that the 
changes will affect competition and capital formation. Although it is 
difficult to quantify the size of these effects without better 
knowledge about how investors will respond, we believe that the effects 
from the proposed changes to Form N-MFP will be small relative to the 
effects of the underlying alternative proposals. We seek comment on 
this aspect of our proposal.
     Should money market funds be required to include in each 
monthly Form N-MFP filing the NAV per share as of the close of business 
on each Friday during the month reported? Or should we require that 
money market funds report market-based NAV per share data daily on Form 
N-MFP? Would the costs be significantly different from reporting 
monthly data, as is currently required? Would the costs to funds be 
significantly different from reporting weekly data, as we propose 
above? Please describe the associated costs.
     Do commenters agree with our analysis of potential effects 
on efficiency, competition, and capital formation?
2. New Reporting Requirements
    We are also proposing (regardless of the alternative proposal 
adopted, if any) several new items to Form N-MFP that we believe will 
improve our (and investors') ability to monitor money market 
funds.\753\ These proposed amendments would address gaps in information 
that have become apparent during the time we have received Form N-MFP 
filings and our staff has analyzed the data. As discussed further 
below, each proposed amendment requires reporting of additional 
information that should be readily available to the fund and, in many 
cases, should infrequently change from report to report.
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    \753\ The proposed new reporting requirements, clarifying 
amendments, amendments related to public availability of 
information, and potential amendment to Form N-MFP's filing date, 
discussed in infra sections III.H.2-5 are separate from the proposed 
amendments to Form N-MFP related to the rule 2a-7 reforms discussed 
above (see supra section III.H.1). Thus, even if we do not adopt 
amendments to rule 2a-7, we may adopt the other proposed amendments 
to Form N-MFP.
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    Several proposed amendments are designed to help us and investors 
better identify fund portfolio securities.\754\ To facilitate 
monitoring and analysis of the risks posed by funds, it is important 
for Commission staff to be able to identify individual portfolio 
securities. Fund shareholders and potential investors that are 
evaluating the risks of a fund's portfolio would similarly benefit from 
the clear identification of a fund's portfolio securities. Currently, 
the form requests information about the CUSIP number of a security, 
which the staff uses as a search reference. The staff has found that 
some securities reported by money market funds lack a CUSIP number, and 
this absence has reduced the usefulness of other information 
reported.\755\ To address this issue going forward, we propose to 
require that funds report, in addition to the CUSIP, the Legal Entity 
Identifier (``LEI'') that corresponds to the security.\756\ The 
proposed amendments would also

[[Page 36942]]

require that funds report at least one other security identifier.\757\
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    \754\ We also propose to require that a fund provide the name, 
email address, and telephone number of the person authorized to 
receive information and respond to questions about Form N-MFP. We 
plan to exclude this information from Form N-MFP information that is 
made publicly available through EDGAR. Proposed Form N-MFP Item 8.
    \755\ Our inability to identify specific securities, for 
example, limits our ability to compare ownership of the security 
across multiple funds and monitor issuer exposure. During the month 
of February 2013, funds reported 6,821 securities without CUSIPs 
(approximately 10% of all securities reported on the form).
    \756\ See proposed Form N-MFP Item C.4; Proposed Form N-MFP 
General Instructions, E. Definitions (defining ``LEI''). To ensure 
accurate identification of Form N-MFP filers and update the Form for 
pending industry-wide changes, we are also proposing that each 
registrant provide its LEI, if available. See proposed Form N-MFP 
Item 3. The Legal Entity Identifier is a unique identifier 
associated with a single corporate entity and is intended to provide 
a uniform international standard for identifying counterparties to a 
transaction. The Commission has begun to require disclosure of the 
LEI, once available. See, e.g., Form PF, Reporting Form for 
Investment Advisers to Private Funds and Certain Commodity Pool 
Operators and Commodity Trading Advisors, available at http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf. A global LEI 
standard is currently in the implementation stage. See Frequently 
Asked Questions: Global Legal Entity Identifier (LEI) (Feb. 2013), 
U.S. Treasury Dept., available at http://www.treasury.gov/initiatives/ofr/data/Documents/LEI_FAQs_February2013_FINAL.pdf. 
Consistent with staff guidance provided in a Form PF Frequently 
Asked Questions (http://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml), funds that have been issued a CFTC Interim Compliant 
Identifier (``CICI'') by the Commodity Futures Trading Commission 
may provide this identifier in lieu of the LEI until a global LEI 
standard is established.
    \757\ See proposed Form N-MFP Item C.5 (requiring that, in 
addition to the CUSIP and LEI, a fund provide at least one 
additional security identifier (e.g., ISIN, CIK or other unique 
identifier)). Security identifiers should be readily available to 
funds. See, e.g., http://www.sec.gov/edgar/searchedgar/cik.htm 
(providing a CIK lookup that is searchable by company name). We are 
also proposing to require that a fund provide the CUSIP number and 
LEI (if available) for a security subject to a repurchase agreement. 
See proposed Form N-MFP Items C.8.c. and C.8.d.
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    We also propose amendments that are designed to help the staff (and 
investors) better identify certain risk characteristics that the form 
currently does not capture. Responses to these new items, together with 
other information reported, would improve the staff's (and investors') 
understanding of a fund and its potential risks. First, we propose to 
require funds to report whether a security is categorized as a level 1, 
level 2, or level 3 measurement in the fair value hierarchy under U.S. 
Generally Accepted Accounting Principles.\758\ Level 1 measurements 
include quoted prices for identical securities in an active market 
(e.g., active exchange-traded equity securities; U.S. government and 
agency securities). Level 2 measurements include: (i) Quoted prices for 
similar securities in active markets; (ii) quoted prices for identical 
or similar securities in non-active markets; and (iii) pricing models 
whose inputs are observable or derived principally from or corroborated 
by observable market data through correlation or other means for 
substantially the full term of the security. Securities categorized as 
level 3 are those whose value cannot be determined by using observable 
measures (such as market quotes and prices of comparable instruments) 
and often involve estimates based on certain assumptions.\759\
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    \758\ See Accounting Standards Codification 820, ``Fair Value 
Measurement''; Proposed Form N-MFP Item C.20.
    \759\ See Accounting Standards Codification 820, ``Fair Value 
Measurement''.
---------------------------------------------------------------------------

    We understand that most money market fund portfolio securities are 
categorized as level 2. Although we understand that very few of a money 
market fund's portfolio securities are currently valued using 
unobservable inputs, information about any such securities would enable 
our staff to identify individual securities that may be more 
susceptible to wide variations in pricing.\760\ Commission staff could 
also use this information to monitor for increased valuation risk in 
these securities, and to the extent there is a concentration in the 
security across the industry, identify potential outliers that warrant 
additional monitoring or investigation. Our proposed amendment would 
permit the Commission and others to analyze movements in the assets in 
each level, for example, movements in level 2 securities as a 
percentage of net assets. In addition, Commission staff would be better 
able to identify anomalies in reported data by aggregating all money 
market fund holdings industry-wide into the various level categories. 
We believe that most funds directly evaluate the fair value level 
measurements when they acquire the security and re-assess the 
measurements when they perform portfolio valuations.\761\ Accordingly, 
we believe that funds should have ready access to the nature of the 
portfolio security valuation inputs used.
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    \760\ For a discussion of some of the challenges regulators may 
face with respect to Level 3 accounting, see, e.g., Konstantin 
Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, in 
25 Rev. Fin. Stud. 55-95 (2011).
    \761\ Funds should regularly evaluate the pricing methodologies 
used and test the accuracy of fair value prices (if used). See 
Accounting Series Release No. 118, Financial Reporting Codification 
(CCH) section 404.03 (Dec. 23, 1970).
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     Would our new proposed requirements help us better 
identify certain risk characteristics that the form currently does not 
capture?
     Would information about each security's categorization as 
a level 1, level 2, or level 3 measurement better enable our staff to 
identify individual securities that may be more susceptible to wide 
variations in pricing?
     Is our understanding about how fund sponsors value most 
money market fund portfolio securities (i.e., using Level 2 
measurements) correct?
     Do our assumptions about fund valuation procedures and 
access to the nature of portfolio security valuation inputs correspond 
to fund practices? Is this information readily available to a fund?
     Are there other ways in which a fund could identify and 
disclose securities that do not have readily available market 
quotations or observable inputs?
     Do commenters agree that this information will help the 
Commission and investors better identify risk characteristics?
    Second, we would require that funds disclose additional information 
about each portfolio security, including, in addition to the total 
principal amount,\762\ the purchase date, the yield at purchase, the 
yield as of the Form N-MFP reporting date (for floating and variable 
rate securities, if applicable),\763\ and the purchase price.\764\ We 
would require that funds report this information separately for each 
lot purchased.\765\ In addition, we propose to require that money 
market funds disclose the same information for any security sold during 
the reporting period.\766\ Because money market funds often hold 
multiple maturities of a single issuer, each time a security is 
purchased or sold, price discovery occurs and an issuer yield curve 
could be updated and used for revaluing all holdings of that particular 
credit. Therefore, our proposed amendments would have the incidental 
benefit of facilitating price discovery and would enable the Commission 
and others to evaluate pricing consistency across funds (and identify 
potential outliers).\767\ We request comment on this aspect of our 
proposal.
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    \762\ Current Form N-MFP Item 40.
    \763\ We understand that the yields on variable rate demand 
notes, for example, may vary daily, weekly, or monthly. Our proposed 
amendment would provide Commission staff and others with a way to 
monitor the market's response to changes in credit quality, as well 
as identify potential outliers. We believe that money market funds 
have this information readily available because funds require this 
information to calculate daily distributions of income, and thus, 
should not impose costs on funds (other than those discussed in 
infra section III.H.6).
    \764\ See proposed N-MFP Item C.17. Because yield at purchase 
would be disclosed in a separate item, we propose to delete the 
reference to ``(including coupon or yield)'' from current Form N-MFP 
Item 27 (Proposed Form N-MFP Item C.2). The purchase price must be 
reported as a percentage of par, rounded to the nearest one 
thousandth of one percent. See proposed Form N-MFP Item C.17.e. We 
believe this represents the standard convention for pricing fixed-
income securities. For example, a security issued at a 1% premium to 
par would report the purchase price as $101.000.
    \765\ See proposed Form N-MFP Item C.17.
    \766\ See proposed Form N-MFP Item C.25 (requiring that a fund 
disclose, for each security sold by the series during the reporting 
period, (i) the total principal amount; (ii) the purchase price; 
(iii) the sale date; (iv) the yield at sale; and (v) the sale price. 
Information about any securities sold by the fund during the 
reporting period would also provide the Commission and others with 
important information about how the fund may be handling heavy 
redemptions (e.g., selling securities at a haircut).
    \767\ See Federal Reserve Bank Presidents FSOC Comment Letter, 
supra note 38 (suggesting that more frequent reporting on Form N-MFP 
might increase price discovery (for market-based NAV calculations)).
---------------------------------------------------------------------------

     Do commenters agree that our proposed additional 
requirements would facilitate price discovery? Would any of our 
proposed additional requirements not facilitate price discovery? Are 
there other requirements than those proposed that would be helpful?
     Should we require a different convention for pricing fixed 
income securities? If so, what?
    In addition, we would require funds to report the amount of cash 
they

[[Page 36943]]

hold,\768\ the fund's Daily Liquid Assets and Weekly Liquid 
Assets,\769\ and whether each security is considered a Daily Liquid 
Asset or Weekly Liquid Asset.\770\ Unlike the other items of disclosure 
on Form N-MFP which must be disclosed on a monthly basis, we propose to 
require that funds report the Daily Liquid Assets and Weekly Liquid 
Assets on a weekly basis. Similarly, we propose to require that money 
market funds disclose the weekly gross subscriptions (including 
dividend reinvestments) and weekly gross redemptions for each share 
class, once each week during the month reported.\771\ As discussed 
earlier, money market funds would continue to file reports on Form N-
MFP once each month, but certain information (including disclosure of 
Daily and Weekly Liquid Assets and shareholder flow) would be reported 
weekly within the Form.
---------------------------------------------------------------------------

    \768\ See proposed Form N-MFP Item A.14.a; Proposed Form N-MFP 
General Instructions, E. Definitions (requiring disclosure of the 
amount of cash held and defining ``cash'' to mean demand deposits in 
insured depository institutions and cash holdings in custodial 
accounts). We propose to amend Item 14 of Current Form N-MFP (total 
value of other assets) to clarify that ``other assets'' excludes the 
value of assets disclosed separately (e.g., cash and the value of 
portfolio securities). See proposed Form N-MFP Item A.14.c. Our 
proposed amendment would ensure that reported amounts are not double 
counted.
    \769\ See proposed Form N-MFP Item A.13.
    \770\ Proposed Form N-MFP Items C.21-C.22.
    \771\ See proposed Form N-MFP Item B.6. We propose to continue 
to require that money market funds also disclose the monthly gross 
subscriptions and monthly gross redemptions for the month reported. 
See current Form N-MFP Item 23 (proposed Form N-MFP Item B.6.f).
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    Our proposed amendments would provide Commission staff and others 
with more relevant data to efficiently monitor fund risk, such as the 
likelihood that a fund might trip a liquidity-based trigger (e.g., a 
liquidity fee or gate, if that regulatory alternative is adopted) and 
correlated risk shifts in liquidity across the industry.\772\ Increased 
periodic disclosure of the daily and weekly liquid assets on Form N-MFP 
would provide increased transparency into how funds manage their 
liquidity, and it may also impose market discipline on portfolio 
managers. In addition, increased disclosure of weekly gross 
subscriptions and gross redemptions (reported weekly, in addition to 
monthly) would improve the ability of the Commission and others to 
better understand the significance of other liquidity disclosures 
required by our proposals (e.g., daily and weekly liquid assets). As a 
result, investors may make more informed investment decisions and fund 
managers may manage fund portfolios in a way that enhances stability in 
the short-term financing markets. We also propose to require that funds 
disclose whether, during the reporting period, any person paid for or 
waived all or part of the fund's operating expenses or management 
fees.\773\ Information about expense waivers will help us understand 
potential strains on a fund's investment adviser during periods of low 
interest rates. We request comment on these aspects of our proposed 
reforms.
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    \772\ As discussed in section III.F.2, under either alternative 
proposal, money market funds would also be required to disclose each 
day on its Web site the fund's Daily Liquid Assets and Weekly Liquid 
Assets.
    \773\ Proposed Form N-MFP Item B.8 (requiring that funds provide 
the name of the person and describe the nature and amount the 
expense payment or fee waiver, or both (reported in dollars).
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     Would reporting the daily and weekly liquid asset levels 
and gross subscriptions and redemptions as of the close of business 
each Friday during the reporting period conflict with the fund's other 
disclosure requirements, which are required only as of the last 
business day or any later calendar day in the month? Should we require 
that this information be provided to the Commission more or less 
frequently, or at a different time or day each week?
     Would reporting on expense waivers help us and investors 
better understand potential financial strains on a fund's investment 
adviser?
     Do commenters agree that increased transparency will lead 
to greater market discipline on portfolio managers and lead investors 
to make more informed decisions?
    We also propose to require that funds disclose the total percentage 
of shares outstanding, to the nearest tenth of one percent, held by the 
twenty largest shareholders of record.\774\ This information would help 
us (and investors) identify funds with significant potential redemption 
risk stemming from shareholder concentration, and evaluate the 
likelihood that a significant market or credit event might result in a 
run on the fund or the imposition of a liquidity fee or gate, if we 
were to adopt that aspect of our proposal.\775\ Investors may avoid 
overly concentrated funds and this preference may incentivize some 
funds to avoid becoming too concentrated. This may, in turn, increase 
investment costs for large shareholders that are compelled to spread 
their investments across multiple funds, especially if they choose 
funds from multiple fund groups. We request comment on this proposed 
reporting.
---------------------------------------------------------------------------

    \774\ See, e.g., Fidelity Investments, An Analysis of the SEC 
Study on Money Market Mutual Funds: Considering the Scope and Impact 
of Possible Further Regulation (Jan. 2013) at 5, available at 
https://www.sec.gov/comments/mms-response/mmsresponse-16.pdf 
(suggesting one key factor that could be used to distinguish between 
retail and institutional money market funds be whether the top 20 
shareholders accounts for greater than or less than 15% of the 
fund's assets).
    \775\ Proposed Form N-MFP Item A.19. We are also proposing to 
require that a fund disclose the number of shares outstanding, to 
the nearest hundredth, at both the series level and class level. 
Proposed Form N-MFP Items A.17 and B.4. This information would 
permit us to verify or detect errors in information provided on Form 
N-MFP, such as net asset value per share.
---------------------------------------------------------------------------

     Would the total percentage of shares outstanding held by 
the fund's twenty largest shareholders help us and investors identify 
funds with significant potential redemption risk stemming from 
shareholder concentration?
     Would the use of omnibus accounts reduce the value of 
information about shareholder concentration? If so, is there other data 
we could require that would yield more useful information?
     Could funds or shareholders ``game'' this reporting 
requirement by splitting a large investment into smaller pieces? Are 
there reasonable rules the Commission could adopt to address this 
potential ``gaming?''
     Should we require that funds report the total holdings of 
a different number of top shareholders (e.g., five, ten, or thirty 
shareholders)?
     Should we require the reporting of this information only 
if the top shareholders of record own in the aggregate at least a 
certain total percentage of the fund's outstanding shares? If so, how 
many shareholders should we consider, and what should that threshold be 
(e.g., 1%, 2%, or 5%)?
     Is there a better way to assess the risks associated with 
shareholder concentration? Should we require aggregation of holdings by 
affiliates?
    In addition, we propose that funds report the maturity date for 
each portfolio security using the maturity date used to calculate the 
dollar-weighted average life maturity (``WAL'') (i.e., without 
reference to the exceptions in rule 2a-7(i) regarding interest rate 
readjustments).\776\ In 2010, we adopted a requirement that limits the 
WAL of a fund's portfolio to 120 calendar days because we were 
concerned about the extent to which a manager could expose a fund to 
credit spread risk associated with longer-term, adjustable-rate 
securities.\777\ This information will assist the Commission in 
monitoring and evaluating this risk, at the security level, as well as 
help evaluate

[[Page 36944]]

compliance with rule 2a-7's maturity provisions. In addition, our 
proposed amendments would make clear that funds disclose for each 
security all three maturity calculations as required under rule 2a-7: 
dollar-weighted average portfolio maturity (``WAM''), WAL, and the 
final legal maturity date.\778\ Finally, the proposed amendments would 
require that a fund disclose additional information about certain types 
of securities held by the fund.\779\ We request comment on our proposed 
amendments.
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    \776\ Proposed Form N-MFP Item C.12.
    \777\ See 2010 Adopting Release, supra note 92, at section 
II.B.2.
    \778\ We also propose to clarify that the maturity date required 
to be reported in current Form--N-MFP Item 35 is the maturity date 
used to calculate WAM under proposed (FNAV and Fees & Gates) rule 
2a-7(d)(1)(ii) (see proposed Form N-MFP Item C.11) and the maturity 
date required to be reported in current Form--N-MFP Item 36 is the 
final legal maturity date, i.e., the date on which, in accordance 
with the terms of the security without regard to any interest rate 
readjustment or demand feature, the principal amount must 
unconditionally be paid (see proposed Form N-MFP Item C.13). The 
final legal maturity date, as clarified, will help us distinguish 
between debt securities that are issued by the same issuer.
    \779\ We propose to amend the investment categories in proposed 
Form N-MFP Item C.6 to include new categories: ``Non U.S. Sovereign 
Debt,'' ``Non-U.S. Sub-Sovereign Debt,'' ``Other Asset-Backed 
Security,'' ``Non-Financial Company Commercial Paper'' (instead of 
``Other Commercial Paper''), and ``Collateralized Commercial 
Paper,'' and amend ``U.S. Government Agency Debt'' and ``Certificate 
of Deposit (including Time Deposits and Euro Time Deposits).'' The 
new investment categories would help Commission staff identify 
particular exposures that otherwise are often reported in other less 
descriptive categories (e.g., reporting sovereign debt as ``treasury 
debt'' or reporting asset-backed securities (that are not commercial 
paper) as ``other note'' or ``other instrument''). We note that a 
fund should only designate a security as ``U.S. Treasury Repurchase 
Agreement'' or ``Government Agency Repurchase Agreement'' when the 
underlying collateral is 100% Treasuries or Government Agency, 
respectively; otherwise, a fund should use the ``Other Repurchase 
Agreement'' category. We are also proposing to include a requirement 
that a fund disclose, where applicable, the period remaining until 
the principal amount of a security may be recovered through a demand 
feature and whether a security demand feature is conditional. 
Proposed Form N-MFP Items C.14.e. and C.14.f. These proposed 
amendments would improve the Commission's and investors' ability to 
evaluate and monitor a security's credit and default risk.
---------------------------------------------------------------------------

     Do commenters agree that disclosure of each security's WAL 
will assist the Commission and investors in evaluating credit spread 
risk? We note that Form N-MFP currently requires that funds disclose 
each security's WAM and final legal maturity date.\780\
---------------------------------------------------------------------------

    \780\ Current Form N-MFP Item 35 (the maturity date taking into 
account the maturity shortening provisions of rule 2a-7(d), i.e., 
``WAM'') and Item 36 (the final legal maturity date taking into 
account any maturity date extensions that may be effected at the 
option of the issuer).
---------------------------------------------------------------------------

     Would our proposed amendments to the category of 
investment increase the accuracy of how securities are categorized 
currently? Should we include other investment categories?
    As detailed above, our proposed new reporting requirements are 
intended to address gaps in the reporting regime that Commission staff 
has identified through two and a half years of experience with Form N-
MFP and to enhance the ability of the Commission and investors to 
monitor funds. Although the potential benefits are difficult to 
quantify, they would improve the ability of the Commission and 
investors to identify (and analyze) a fund's portfolio securities 
(e.g., by requiring disclosure of LEIs and an additional security 
identifier beyond CUSIPs already required). In addition, many of our 
proposed new reporting requirements would enhance the ability of the 
Commission and investors to evaluate a fund's risk characteristics (by 
requiring that fund's disclose, for example, the following data: 
security categorizations as level 1, level 2, or level 3 measurements; 
more detailed information about securities at the time of purchase; 
liquidity metrics; and information about shareholder concentration). We 
believe that the additional information required should be readily 
available to funds as a matter of general business practice and 
therefore would not impose costs on money market funds other than those 
required to modify systems used to aggregate data and file reports on 
Form N-MFP. These costs are discussed in section III.H.6 below.
    Our proposed new reporting requirements may improve informational 
efficiency by improving the transparency of potential risks in money 
market funds and promoting better-informed investment decisions, which, 
in turn, will lead to a better allocation of capital. Similarly, the 
increased transparency may promote competition as fund managers are 
exposed to external market discipline and better-informed investors who 
may be more likely to select an alternative investment if they are not 
comfortable with the risk-return profile of their fund. The newly 
disclosed information may cause some money market fund investors to 
exchange their assets between different money market funds, but because 
we do not have the information necessary to provide a reasonable 
estimate, we are unable to estimate this with specificity. In addition, 
some investors may exchange assets between money market funds and 
alternative investments or other segments of the short-term financing 
markets, but we are unable to estimate how frequently this will happen 
with specificity and we do not know how the other underlying assets 
compare with those of money market funds. Therefore, we are unable to 
estimate the overall net effect on capital formation. Nevertheless, we 
believe that the net effect will be small, especially during normal 
market conditions.
    We request general comment on our proposed new reporting 
requirements.
     Do commenters agree that the information we would require 
is readily available to funds as a matter of general business practice? 
If not, are there other types of readily available data that would 
provide us with similar information?
     Are there costs associated with our proposed new reporting 
requirements (other than to make systems modifications discussed below) 
that we have not considered? If so, please describe the nature and 
amounts of those costs.
     Is there additional information that we have not 
identified that could be useful to us or investors in monitoring money 
market funds? How should such information be reported?
3. Clarifying Amendments
    We are proposing (regardless of the alternative proposal adopted, 
if any) several amendments to clarify current instructions and items of 
Form N-MFP. Revising the form to include these clarifications should 
improve the ability of fund managers to complete the form and improve 
the quality of the data they submit to us.\781\ We believe that many of 
our proposed clarifying amendments are consistent with current filing 
practices.\782\
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    \781\ We are proposing technical changes to the ``General 
Information'' section of the form that will clarify the 
circumstances under which a money market fund must complete certain 
question sub-parts. See proposed Form N-MFP Items 6 and 7.
    \782\ As discussed below, the proposed amendments are consistent 
with guidance our staff has provided to money market fund managers 
and service providers completing Form N-MFP.
---------------------------------------------------------------------------

    We understand that some fund managers compile the fund's portfolio 
holdings information as of the last calendar day of the month, even if 
that day falls on a weekend or holiday. To provide flexibility, we 
propose to amend the instructions to Form N-MFP to clarify that, unless 
otherwise specified, a fund may report information on Form N-MFP as of 
the last business day or any later calendar day of the month.\783\ We 
also propose to revise the

[[Page 36945]]

definition of ``Master-Feeder Fund'' to clarify that the definition of 
``Feeder Fund'' includes unregistered funds (such as offshore 
funds).\784\ Our proposed amendments also would clarify that funds 
should calculate the WAM and WAL reported on Form N-MFP using the same 
methods they use for purposes of compliance with rule 2a-7.\785\ We 
also propose to require that funds disclose in Part B (Class-Level 
Information about the Fund) the required information for each class of 
the series, regardless of the number of shares outstanding in the 
class.\786\
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    \783\ See proposed Form N-MFP General Instruction A (Rule as to 
Use of Form N-MFP); proposed rule 30b1-7. Our proposed approach is 
also consistent with a previous interpretation provided by our 
staff. See Staff Responses to Questions about Rule 30b1-7 and Form 
N-MFP, Question I.B.1 (revised July 29, 2011), available at http://www.sec.gov/divisions/investment/guidance/formn-mfpqa.htm.
    \784\ See proposed Form N-MFP General Instruction E (defining 
``Master-Feeder Fund,'' and defining ``Feeder Fund'' to include a 
registered or unregistered pooled investment vehicle). Form N-MFP 
requires that a master fund report the identity of any feeder fund. 
Our proposed amendment is designed to address inconsistencies in 
reporting of master-feeder fund data that we have observed in 
filings, and would help us determine the extent to which feeder 
funds, wherever located, hold a master fund's shares. The change 
would reflect how we understand data from master-feeder funds is 
collected by the Investment Company Institute for its statistical 
reports. We are also proposing to make grammatical and conforming 
amendments to proposed Form N-MFP Items A.7 and A.8.
    \785\ See proposed Form N-MFP Items A.11 and A.12 (defining 
``WAM'' and ``WAL'' and cross-referencing the maturity terms to rule 
2a-7). We also propose to amend the 7-day gross yield to require 
that the resulting yield figure be carried to (removing the words 
``at least'') the nearest hundredth of one per cent and clarify that 
master and feeder funds should report the 7-day gross yield (current 
Form -N-MFP Item 17) at the master-fund level. Proposed Form N-MFP 
Item A.20. These proposed amendments are intended to achieve 
consistency in reporting and remove potential ambiguity for feeder 
funds when reporting the 7-day gross yield.
    \786\ See text before proposed Form N-MFP Item B.1. Our staff 
has found that funds inconsistently report fund class information, 
for example, when a fund does not report a fund class registered on 
Form N-1A because the fund class has no shares outstanding. Our 
proposed amendment is intended to clarify a fund's reporting 
obligations and provide Commission staff (and investors) with more 
complete information about each fund's capital structure.
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    We also are proposing to amend the reporting requirements for 
repurchase agreements by restating the item's requirements as two 
distinct questions.\787\ The amendment would make clear that 
information about the securities subject to a repurchase agreement must 
be disclosed regardless of how the fund treats the acquisition of the 
repurchase agreement for purposes of rule 2a-7's diversification 
requirements.\788\ Finally, we propose to amend the items in Form N-MFP 
that require information about demand features, guarantors, or 
enhancement providers to make clear that funds should disclose the 
identity of each demand feature issuer, guarantor, or enhancement 
provider and the amount (i.e., percentage) of fractional support 
provided.\789\ Our amendments also would clarify that a fund is not 
required to provide additional information about a security's demand 
feature(s) or guarantee(s) unless the fund is relying on the demand 
feature or guarantee to determine the quality, maturity, or liquidity 
of the security.\790\
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    \787\ See proposed Form N-MFP Item C.7 (requiring that a fund 
disclose if it is treating the acquisition of a repurchase agreement 
as the acquisition of the underlying securities (i.e., collateral) 
for purposes of portfolio diversification under rule 2a-7). See 
proposed Form N-MFP Item C.8 (requiring that a fund describe the 
securities subject to the repurchase agreement, including: (a) name 
of the collateral issuer; (b) CUSIP; (c) LEI (if available); (d) 
maturity date; (e) coupon or yield; (f) principal amount; (g) value 
of the collateral; and (h) the category of investments. We also 
propose to require that a fund specify whether the repurchase 
agreement is ``open'' (i.e., by its terms, will be extended or 
``rolled'' each business day unless the investor chooses to 
terminate it). This information should be readily available to funds 
and would enhance the ability of Commission staff and others to 
evaluate the risks (e.g., rollover risk or the duration of the 
lending) presented by investments in repurchase agreements. See 
proposed Form N-MFP Item C.8.a. Our proposal would also provide a 
specific list of investment categories from which funds may choose, 
including new categories (Equity; Corporate Bond; Exchange Traded 
Fund; Trust Receipt (other than for U.S. Treasuries); and 
Derivative). Finally, our proposal would also clarify that a fund is 
required to disclose the name of the collateral issuer (and not the 
name of the issuer of the repurchase agreement). In addition, when 
disclosing a security's coupon or yield (as required in proposed 
Form N-MFP Item C.8.f), a fund would be required to report (i) the 
stated coupon rate, where the security is issued with a stated 
coupon; (ii) the interest rate at purchase, for instance, if the 
security is issued at a discount (without a stated coupon); and 
(iii) the coupon rate as of the Form N-MFP reporting date, if the 
security is floating or variable rate.
    \788\ We propose several other clarifications to other items. 
See proposed Form N-MFP Item 1 (amending the format of reporting 
date provided by funds); and proposed Form N-MFP Item A.10 
(modifying, for consistency, the names of money market fund 
categories).
    \789\ See proposed Form N-MFP Items C.14-C.16.
    \790\ Form N-MFP already requires that a fund disclose only 
security enhancements on which the fund is relying to determine the 
quality, maturity, or liquidity of the security. See current Form N-
MFP Item 39. Similarly, we propose to amend current Form N-MFP Items 
37 (demand features) and 38 (guarantees) to make clear that funds 
are required to disclose information relating to demand features and 
guarantees only when the fund is relying on these features to 
determine the quality, maturity, or liquidity of the security. See 
proposed Form N-MFP Items C.14 and C.15.
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    As discussed above, our proposed clarifying amendments are intended 
to improve the quality of the data we receive on Form N-MFP by 
clarifying a number of reporting obligations so that all funds report 
information on Form N-MFP in a consistent manner. Accordingly, we do 
not believe that our proposed clarifying amendments would impose any 
new costs on funds other than those required to modify systems used to 
aggregate data and file reports on Form N-MFP. These costs are 
discussed in section III.H.6 below. Because our proposed clarifying 
amendments would not change funds' current reporting obligations, we 
believe there would be no effect on efficiency, competition, or capital 
formation.
    We request comment on our proposed clarifying amendments.
     Is our understanding about current fund practices correct?
     Would our proposed amendments provide greater clarity and 
flexibility to funds? Are they consistent with current fund practices?
     Would our proposed amendments alter the manner in which 
data is currently reported to us on Form N-MFP, or alter the amount of 
data reported?
     Are there other clarifying amendments that we should 
consider that would improve the consistency and utility of the 
information reported on Form N-MFP to Commission staff and others?
     Should we adopt our proposed clarifying amendments even if 
we do not adopt either the floating NAV or liquidity fees and gates 
proposals?
4. Public Availability of Information
    Currently, each money market fund must file information on Form N-
MFP electronically within five business days after the end of each 
month and that information is made publicly available 60 days after the 
end of the month for which it is filed. We propose (regardless of the 
alternative proposal adopted, if any) to make Form N-MFP publicly 
available immediately upon filing.\791\ The delay, which we instituted 
when we adopted the form in 2010, responded to commenters' concerns 
regarding potential reactions of investors to the disclosure of funds' 
portfolio information and shadow NAVs.\792\ Although we did not believe 
that it was necessary to keep the portfolio information private for 60 
days, we believed then that the shadow price data should not be made 
public immediately. However, we now believe that the immediate release 
of the shadow price

[[Page 36946]]

data would not be harmful. This is based, in part, on our understanding 
that many money market funds now disclose their shadow prices every 
business day on their Web sites. Therefore we propose (under both 
alternatives we are proposing today) to eliminate the 60-day delay in 
making the information on the form publicly available.\793\
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    \791\ See proposed rule 30b1-7 (eliminating subsection (b), 
public availability).
    \792\ See 2010 Adopting Release, supra note 92, at section 
II.E.2 (noting that there may be less need in the future to require 
a 60-day delay). Commenters also objected to the disclosure of 
information filed on Form N-MFP because of the competitive effects 
on funds or fund managers. In the adopting release, we stated our 
belief that the competitive risks were overstated by commenters. We 
noted that the risks of trading ahead of funds (``front running'') 
or ``free riding'' on a fund's investment strategies were minimal 
because of the short-term nature of money market fund investments 
and the restricted universe of eligible portfolio securities.
    \793\ A number of large fund complexes have begun (or plan) to 
disclose daily money market fund market valuations (i.e., shadow 
prices), including BlackRock, Charles Schwab, Federated Investors, 
Fidelity Investments, Goldman Sachs, J.P. Morgan, Reich & Tang, and 
State Street Global Advisors. See, e.g., Money Funds' New Openness 
Unlikely to Stop Regulation, Wall St. J. (Jan. 30, 2013).
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    Eliminating the 60-day delay would provide more timely information 
to the public and greater transparency of money market fund 
information, which could promote efficiency. This disclosure could also 
make the monthly disclosure on Form N-MFP more relevant to investors, 
financial analysts, and others by improving their ability to more 
timely assess potential risks and make informed investment decisions. 
In other words, investors may be more likely to use the reported 
information because it is more timely and informative. In response to 
this potential heightened sensitivity of investors to the reported 
information, some funds might move toward more conservative investment 
strategies to reduce the chance of having to report bad outcomes. 
Because, as discussed above, shadow prices (which were a primary reason 
why we adopted the 60-day delay in making filings public) have been 
disclosed by a number of money market funds since February 2013 without 
incident, we do not believe that eliminating the 60-day delay would 
affect capital formation. We request comment on this aspect of our 
proposal.
     Do commenters believe that our five-day filing deadline 
continues to be appropriate? Should the filing delay be shorter or 
longer? Please provide support for any suggested change to the filing 
deadline.
     Do commenters agree that there have not been adverse 
impacts from recent publication of daily shadow NAVs by a number of 
large money market funds?
     Is a 60-day delay in making the information public still 
necessary to protect against possible ``front running'' or ``free 
riding?'' Have any developments occurred that should cause us to 
reconsider our 2010 decision that the information required to be 
disclosed would not be competitively sensitive?
     Would a shorter delay (45, 30, or 15 days) be more 
appropriate? If so, why?
     Do commenters agree with our estimated impact on 
efficiency, competition, and capital formation?
     Should we adopt our proposed amendment to eliminate the 
60-day delay even if we do not adopt either the floating NAV or 
liquidity fees and gates proposals?
5. Request for Comment on Frequency of Filing
    To increase further the transparency of money market funds and the 
utility of information disclosed, the Commission requests comment 
(regardless of the alternative proposal adopted, if any) on increasing 
the frequency of filing Form N-MFP from monthly to weekly. Given the 
rapidly changing composition of money market fund portfolios and 
increased emphasis on portfolio liquidity (i.e., shortened 
maturities),\794\ the information provided on Form N-MFP may become 
stale and less relevant. We believe that increasing the frequency of 
disclosure, as well as eliminating the 60-day delay in making 
information on Form N-MFP publicly available (discussed above), would 
further increase transparency into money market funds and make the 
information more relevant to investors, academic researchers, financial 
analysts, and economic research firms. We note that, under our floating 
NAV proposal, more frequent disclosure on Form N-MFP could also 
facilitate more accurate market-based valuations.\795\ While we do not 
have the information necessary to provide a point estimate of the 
additional costs that may be imposed on funds because of more frequent 
filings of reports on Form N-MFP, we believe that the increased costs 
per fund would be negligible because most funds use a licensed software 
solution (either directly or through a third-party service provider) 
and would experience significant economies of scale.\796\ Despite the 
incremental increase in costs to file the report more frequently, more 
timely and relevant data may increase competition and efficiency for 
the same reasons discussed above with respect to our proposed amendment 
to eliminate the 60-day delay.
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    \794\ The RSFI Study notes that as of November 30, 2012, the 
typical prime fund held over 25% of its portfolio in daily liquid 
assets (``DLA'') (with 10% DLA required under rule 2a-7) and nearly 
50% of its portfolio in weekly liquid assets (``WLA'') (with 30% WLA 
required under rule 2a-7). See RSFI Study, supra note 21, at 20.
    \795\ See supra note 767 and accompanying text.
    \796\ Staff estimates that our proposed amendments to Form N-MFP 
(12 filings per year) would result in, at the outside range, a 
first-year aggregate additional 49,810 total burden hours at a total 
cost of $12.9 million, and external costs of $373,680. See infra 
section IV.A.3. We expect that funds would incur substantially lower 
costs that those described above if we were to require that reports 
on Form N-MFP be filed weekly, rather than monthly as currently 
required.
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    We request comment on increasing the frequency of the filing of 
Form N-MFP.
     Do commenters agree with our analysis of the benefits and 
costs associated with increasing the frequency of disclosure of reports 
on Form N-MFP? Why or why not?
     Would increasing the frequency of reporting affect the 
investment strategies employed by fund managers, for example, causing 
managers to increase risk taking?
     Would fund managers be more likely to ``front-run'' or 
reverse engineer another fund's portfolio strategy?
     Would increasing the frequency of disclosure affect the 
costs or benefits associated with our proposed amendment to eliminate 
the 60-day delay in public availability? If so, how?
     What types of costs would funds incur to change from 
monthly to weekly filing of reports on Form N-MFP? Would funds have 
sufficient time to evaluate and validate data received from outside 
vendors?
     Should we increase the filing frequency even if we do not 
adopt either the floating NAV or liquidity fees and gates proposals?
6. Operational Implications
    We anticipate that fund managers would incur costs to gather the 
new items of information we propose to require on Form N-MFP. To reduce 
costs, we have decided to propose needed improvements to the form at 
the same time we are proposing amendments necessitated by the 
amendments to rule 2a-7 we are proposing. We note that our proposed 
clarifying amendments should not affect, or should only minimally 
affect, current filing obligations or the information content of the 
filings.
    We expect that the operational costs to money market funds to 
report the information required in proposed Form N-MFP would be the 
same costs we discuss in the Paperwork Reduction Act analysis in 
section IV of the Release, below. As discussed in more detail in that 
section, our staff estimates that our proposed amendments to Form N-MFP 
would result in, at the outside range, a first-year aggregate 
additional 49,810 burden hours at a total cost of $12.9 million plus 
$373,680 in total external costs (which represent fees to license a 
software solution and fees to retain a

[[Page 36947]]

third-party service provider).\797\ Our operational cost estimates are 
based on our floating NAV proposal, but would not change if we instead 
adopted our liquidity fees and gates alternative proposal.
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    \797\ See infra section IV.A.3.
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    We request comment on our analysis of operational implications 
summarized above and described in detail in sections IV.A.3 and IV.B.3 
below. We also request comment on the costs and benefits described 
above, including whether any proposed disclosure requirements are 
unduly burdensome or would impose unnecessary costs.

I. Amendments to Form PF Reporting Requirements

    The Commission is proposing to amend Form PF, the form that certain 
investment advisers registered with the Commission use to report 
information regarding the private funds they manage, including 
``liquidity funds,'' which are private funds that seek to maintain a 
stable NAV (or minimize fluctuations in their NAVs) and thus can 
resemble money market funds.\798\ We adopted Form PF, as required by 
the Dodd-Frank Act,\799\ to assist FSOC in its monitoring and 
assessment of systemic risk; to provide information for FSOC's use in 
determining whether and how to deploy its regulatory tools; and to 
collect data for use in our own regulatory program.\800\ As discussed 
in more detail below, FSOC and the Commission have recognized the risks 
that may be posed by cash management products other than money market 
funds, including liquidity funds, and the potentially increased 
significance of such products in the event we adopt further money 
market fund reforms such as those we propose today.\801\ Therefore, to 
enhance FSOC's ability to monitor and assess systemic risks in the 
short-term financing markets and to facilitate our oversight of those 
markets and their participants, we propose today to require large 
liquidity fund advisers--registered advisers with $1 billion or more in 
combined money market fund and liquidity fund assets--to file virtually 
the same information with respect to their liquidity funds' portfolio 
holdings on Form PF as money market funds are required to file on Form 
N-MFP.\802\
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    \798\ For purposes of Form PF, a ``liquidity fund'' is any 
private fund that seeks to generate income by investing in a 
portfolio of short term obligations in order to maintain a stable 
net asset value per unit or minimize principal volatility for 
investors. See Glossary of Terms to Form PF.
    \799\ See Reporting by Investment Advisers to Private Funds and 
Certain Commodity Pool Operators and Commodity Trading Advisors on 
Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011) 
[76 FR 71128 (Nov. 16, 2011)] (``Form PF Adopting Release'') at 
section I. Form PF is a joint form between the Commission and the 
CFTC only with respect to sections 1 and 2 of the Form; section 3, 
which we propose to amend, and section 4, were adopted only by the 
Commission. Id.
    \800\ FSOC's regulatory tools include, for example, designating 
nonbank financial companies that may pose risks to U.S. financial 
stability for supervision by the Board of Governors of the Federal 
Reserve System, and issuing recommendations to primary financial 
regulators for more stringent regulation of financial activities 
that FSOC determines may create or increase systemic risk. Although 
Form PF is primarily intended to assist FSOC in its monitoring 
obligations under the Dodd-Frank Act, we also may use information 
collected on Form PF in our regulatory program, including 
examinations, investigations, and investor protection efforts 
relating to private fund advisers. See Form PF Adopting Release, 
supra note 799, at sections II and VI.A.
    \801\ See infra note 816 and accompanying text.
    \802\ We propose to incorporate in a new Question 63 in section 
3 of Form PF the substance of virtually all of the questions on Part 
C of Form N-MFP as we propose to amend that form, except that we 
have modified the questions where appropriate to reflect that 
liquidity funds are not subject to rule 2a-7 (although some 
liquidity funds have a policy of complying with rule 2a-7's risk-
limiting conditions) and have not added questions that would 
parallel Items C.7 and C.9 of Form N-MFP. We do not propose to 
include a question that would parallel Item C.7 because that item 
relates to whether a money market fund is treating the acquisition 
of a repurchase agreement as the acquisition of the collateral for 
purposes of rule 2a-7's diversification testing; liquidity funds, in 
contrast, are not subject to rule 2a-7's diversification 
limitations, and the information on repurchase agreement collateral 
we propose to collect through new Question 63(g) on Form PF would 
allow us to better understand liquidity funds' use of repurchase 
agreements and their collateral. Item C.9 asks whether a portfolio 
security is a rated first tier security, rated second tier security, 
or no longer an eligible security. We did not include a parallel 
question in Form PF because these concepts would not necessarily 
apply to liquidity funds, and we believe the additional questions on 
Form PF would provide sufficient information about a portfolio 
security's credit quality and the large liquidity fund adviser's use 
of credit ratings.
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    We share the concern expressed by some commenters that, if further 
money market fund reforms cause investors to seek alternatives to money 
market funds, including private funds that seek to maintain a stable 
NAV but that are not registered with the Commission, this shift could 
reduce transparency of the potential purchasers of short-term debt 
instruments, and potentially increase systemic risk.\803\ We discuss in 
detail the potential for money market fund investors to reallocate 
their assets to alternative investments in section III.E above. The 
amendments that we propose to Form PF today are designed to achieve two 
primary goals. First, they are designed to ensure to the extent 
possible that any further money market fund reforms do not decrease 
transparency in the short-term financing markets, and to better enable 
FSOC to monitor and address any related systemic risks and to better 
enable us to develop effective regulatory policy responses to any shift 
in investor assets. Second, the proposed amendments to Form PF are 
designed to allow FSOC and us to more effectively administer our 
regulatory programs even if investors do not shift their assets as a 
result of any further money market fund reforms, as the increased 
transparency concerning liquidity funds, combined with information we 
already collect on Form N-MFP, will provide a more complete picture of 
the short-term financing markets in which liquidity funds and money 
market funds both invest.
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    \803\ See, e.g., Dreyfus FSOC Comment Letter, supra note 174 
(opposing a floating NAV and citing adverse redistribution of 
systemic risk); Dreyfus 2009 Comment Letter, supra note 350 
(opposing a floating NAV and stating that, after surveying 37 of its 
largest institutional money market fund shareholders (representing 
over $60 billion in assets) regarding a floating NAV, 67% responded 
that their business could not continue to invest in a floating NAV 
product and that they would have to seek an alternative investment 
option); Nat. Assoc. of State Treasurers PWG Comment Letter, supra 
note 567 (opposing a floating NAV because, among other reasons, ``a 
floating NAV would push investors to less regulated or non-regulated 
markets''); AFP Jan. 2011 PWG Comment Letter, supra note 567 
(reporting results of a survey of its members reflecting that four 
out of five organizations would likely move at least some of their 
assets out of money market funds if the funds were required to use 
floating NAVs, with 22% reporting that they would move their money 
market fund investments to ``fixed-value investment vehicles (e.g., 
offshore money market funds, enhanced cash funds and stable value 
vehicles)''); ICI Apr 2012 PWG Comment Letter, supra note 62 
(enclosing a survey commissioned by the Investment Company Institute 
and conducted by Treasury Strategies, Inc. finding, among other 
things, that if the Commission were to require money market funds to 
use floating NAVs, 79% of the 203 corporate, government, and 
institutional investors that responded to the survey would decrease 
their money market fund investments or stop using the funds); 
Federated Investors Alternative 1 FSOC Comment Letter, supra note 
161 (stating that requiring money market funds to use floating NAVs, 
among other things, ``would cause investors to move liquidity 
balances elsewhere,'' including to ``to bank-sponsored short-term 
investment funds, hedge funds and offshore investment vehicles that 
are less transparent, less regulated, less efficient and result in 
the same `roll-over risk' for issuers in the money markets that the 
Council apparently wants to ameliorate through its plan to change 
the structure of MMFs''); ICI Jan. 24 FSOC Comment Letter, supra 
note 25 (stating that if money market funds were required to use 
floating NAVs, ``[i]t is very likely that institutional investors 
would continue to seek out diversified investment pools that strive 
to maintain a stable value'' and that ``[m]ost of these pools are 
not regulated under the Investment Company Act--and some of them lie 
beyond the jurisdictional reach of U.S. regulators'').
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1. Overview of Proposed Amendments to Form PF
    Our proposal would apply to large liquidity fund advisers, which 
generally are SEC-registered investment advisers that advise at least 
one liquidity fund

[[Page 36948]]

and manage, collectively with their related persons, at least $1 
billion in combined liquidity fund and money market fund assets.\804\ 
Large liquidity fund advisers today are required to file information on 
Form PF quarterly, including certain information about each liquidity 
fund they manage.\805\ Under our proposal, for each liquidity fund it 
manages, a large liquidity fund adviser would be required to provide, 
quarterly and with respect to each portfolio security, the following 
information for each month of the reporting period: \806\
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    \804\ An adviser is a large liquidity fund adviser if it has at 
least $1 billion combined liquidity fund and money market fund 
assets under management as of the last day of any month in the 
fiscal quarter immediately preceding its most recently completed 
fiscal quarter. See Form PF: Instruction 3 and Section 3. This $1 
billion threshold includes assets managed by the adviser's related 
persons, except that an adviser is not required to include the 
assets managed by a related person that is separately operated from 
the adviser. Id. An adviser's related persons include persons 
directly or indirectly controlling, controlled by, or under common 
control with the investment adviser. See Form PF: Glossary of Terms 
(defining the term ``related person'' by reference to Form ADV). 
Generally, a person is separately operated from an investment 
adviser if the adviser: (1) Has no business dealings with the 
related person in connection with advisory services the adviser 
provides to its clients; (2) does not conduct shared operations with 
the related person; (3) does not refer clients or business to the 
related person, and the related person does not refer prospective 
clients or business to the adviser; (4) does not share supervised 
persons or premises with the related person; and (5) has no reason 
to believe that its relationship with the related person otherwise 
creates a conflict of interest with the adviser's clients. See Form 
PF: Glossary of Terms (defining the term by reference to Form ADV).
    \805\ See Form PF: Instruction 3 and Section 3.
    \806\ See Question 63 of proposed Form PF. Advisers would be 
required to file this information with their quarterly liquidity 
fund filings with data for the quarter broken down by month. 
Advisers would not be required to file information on Form PF more 
frequently as a result of today's proposal because large liquidity 
fund advisers already are required to file information each quarter 
on Form PF. See Form PF: Instruction 9.
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     The name of the issuer;
     The title of the issue;
     The CUSIP number;
     The legal entity identifier or LEI, if available;
     At least one of the following other identifiers, in 
addition to the CUSIP and LEI, if Available: ISIN, CIK, or any other 
unique identifier;
     The category of investment (e.g., Treasury debt, U.S. 
government agency debt, Asset-backed commercial paper, certificate of 
deposit, repurchase agreement \807\);
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    \807\ For repurchase agreements we are also proposing to require 
large liquidity fund advisers to provide additional information 
regarding the underlying collateral and whether the repurchase 
agreement is ``open'' (i.e., whether the repurchase agreement has no 
specified end date and, by its terms, will be extended or ``rolled'' 
each business day (or at another specified period) unless the 
investor chooses to terminate it).
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     If the rating assigned by a credit rating agency played a 
substantial role in the liquidity fund's (or its adviser's) evaluation 
of the quality, maturity or liquidity of the security, the name of each 
credit rating agency and the rating each credit rating agency assigned 
to the security;
     The maturity date used to calculate weighted average 
maturity;
     The maturity date used to calculate weighted average life;
     The final legal maturity date;
     Whether the instrument is subject to a demand feature, 
guarantee, or other enhancements, and information about any of these 
features and their providers;
     For each security, reported separately for each lot 
purchased, the total principal amount; the purchase date(s); the yield 
at purchase and as of the end of each month during the reporting period 
for floating or variable rate securities; and the purchase price as a 
percentage of par;
     The value of the fund's position in the security and, if 
the fund uses the amortized cost method of valuation, the amortized 
cost value, in both cases with and without any sponsor support;
     The percentage of the liquidity fund's assets invested in 
the security;
     Whether the security is categorized as a level 1, 2, or 3 
asset or liability on Form PF; \808\
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    \808\ See Question 14 of Form PF. See also infra notes 758-761 
and accompanying and following text.
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     Whether the security is an illiquid security, a daily 
liquid asset, and/or a weekly liquid asset, as defined in rule 2a-7; 
and
     Any explanatory notes.\809\
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    \809\ We also propose to define the following terms in Form PF: 
Conditional demand feature; credit rating agency; demand feature; 
guarantee; guarantor; and illiquid security. See proposed Form PF: 
Glossary of Terms.
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    We also propose to remove current Questions 56 and 57 on Form PF. 
These questions generally require large liquidity fund advisers to 
provide information about their liquidity funds' portfolio holdings 
broken out by asset class (rather than security by security). We and 
FSOC would be able to derive the information currently reported in 
response to those questions from the new portfolio holdings information 
we propose to require advisers to provide. We also are proposing to 
require large liquidity fund advisers to provide information about any 
securities sold by their liquidity funds during the reporting period, 
including sale and purchase prices.\810\ Finally, we propose to require 
large liquidity fund advisers to identify any money market fund advised 
by the adviser or its related persons that pursues substantially the 
same investment objective and strategy and invests side by side in 
substantially the same positions as a liquidity fund the adviser 
reports on Form PF.\811\
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    \810\ See Question 64 of proposed Form PF. See also supra notes 
766-767 and accompanying text.
    \811\ See Question 65 of proposed Form PF. This question is 
based on the current definition of a ``parallel fund structure'' in 
Form PF. See Glossary of Terms to Form PF (defining a ``parallel 
fund structure'' as ``[a] structure in which one or more private 
funds (each, a `parallel fund') pursues substantially the same 
investment objective and strategy and invests side by side in 
substantially the same positions as another private fund'').
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2. Utility of New Information, Including Benefits, Costs, and Economic 
Implications
    The amendments that we propose today are designed to enhance FSOC's 
ability to fulfill its mission, and thereby to facilitate FSOC's 
ability to take measures to protect the U.S. economy from significant 
harm from future financial crises.\812\ As we have explained, the 
information that advisers today must report on Form PF concerning their 
liquidity funds is designed to assist FSOC in assessing the risks 
undertaken by liquidity funds, their susceptibility to runs, and how 
their investments might pose systemic risks either among liquidity 
funds or through contagion to registered money market funds.\813\ The 
information that advisers must report today also is intended to aid 
FSOC in its determination of whether and how to deploy its regulatory 
tools.\814\ Finally, the information that advisers must report today is 
designed to assist FSOC in assessing the extent to which a liquidity 
fund is being managed consistent with restrictions imposed on 
registered money market funds that might mitigate their likelihood of 
posing systemic risk.\815\
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    \812\ See Form PF Adopting Release, supra note 799, at nn.455-
457 and accompanying and following text (explaining that ``Congress 
responded to the recent financial crisis, in part, by establishing 
FSOC as the center of a framework intended `to prevent a recurrence 
or mitigate the impact of financial crises that could cripple 
financial markets and damage the economy' ''; the goal of this 
framework, we explained, ``is the avoidance of significant harm to 
the U.S. economy from future financial crises'') (internal citations 
omitted).
    \813\ See Form PF Adopting Release, supra note 799, at section 
II.C.3.
    \814\ Id.
    \815\ Id.
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    We believe, based on our staff's consultations with staff 
representing the members of FSOC, that the additional information we 
propose to require advisers to report on Form PF will assist FSOC in 
carrying out these responsibilities. FSOC and the

[[Page 36949]]

Commission have recognized the risks that may be posed by cash 
management products other than money market funds, including liquidity 
funds, and the potentially increased significance of such products in 
the event we adopt further money market fund reforms such as those we 
propose today.\816\ FSOC also stated that it and its members ``intend 
to use their authorities, where appropriate and within their 
jurisdictions, to address any risks to financial stability that may 
arise from various products within the cash management industry in a 
consistent manner,'' as ``[s]uch consistency would be designed to 
reduce or eliminate any regulatory gaps that could result in risks to 
financial stability if cash management products with similar risks are 
subject to dissimilar standards.'' \817\ We expect, therefore, that 
requiring advisers to provide additional information on Form PF as we 
propose today would enhance FSOC's ability to assess systemic risk 
across the short-term financing markets.
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    \816\ See FSOC Proposed Recommendations, supra note 114, at 7 
(``The Council recognizes that regulated and unregulated or less-
regulated cash management products (such as unregistered private 
liquidity funds) other than MMFs may pose risks that are similar to 
those posed by MMFs, and that further MMF reforms could increase 
demand for non-MMF cash management products. The Council seeks 
comment on other possible reforms that would address risks that 
might arise from a migration to non-MMF cash management products.'') 
We, too, have recognized that ``[l]iquidity funds and registered 
money market funds often pursue similar strategies, invest in the 
same securities and present similar risks.'' See Form PF Adopting 
Release, supra note 799, at section II.A.4. See also Reporting by 
Investment Advisers to Private Funds and Certain Commodity Pool 
Operators and Commodity Trading Advisors on Form PF, Investment 
Advisers Act Release No. 3145 (Jan. 26, 2011) [76 FR 8068 (Feb. 11, 
2011)] (``Form PF Proposing Release''), at n.68 and accompanying 
text (explaining that, ``[d]uring the financial crisis, several 
sponsors of `enhanced cash funds,' a type of liquidity fund, 
committed capital to those funds to prevent investors from realizing 
losses in the funds,'' and noting that ``[t]he fact that sponsors of 
certain liquidity funds felt the need to support the stable value of 
those funds suggests that they may be susceptible to runs like 
registered money market funds''). See generally supra notes 113-118 
and accompanying text.
    \817\ See FSOC Proposed Recommendations, supra note 114, at 7. 
The President's Working Group on Financial Markets reached a similar 
conclusion, noting that because vehicles such as liquidity funds 
``can take on more risks than MMFs, but such risks are not 
necessarily transparent to investors . . . , unregistered funds may 
pose even greater systemic risks than MMFs, particularly if new 
restrictions on MMFs prompt substantial growth in unregistered 
funds.'' See PWG Report, supra note 111, at 21. The potentially 
increased risks posed by liquidity funds were of further concern 
because these risks ``are difficult to monitor, since [unregistered 
cash management products like liquidity funds] provide far less 
market transparency than MMFs.'' Id. at 35.
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    We propose to require only large liquidity fund advisers to report 
this additional information for the same reason that we previously 
determined to require these advisers to provide more comprehensive 
information on Form PF: So that the group of private fund advisers 
filing more comprehensive information on Form PF will be relatively 
small in number but represent a substantial portion of the assets of 
their respective industries.\818\ Based on information filed on Form PF 
and Form ADV, as of February 28, 2013, we estimate that there were 
approximately 25 large liquidity fund advisers (out of 55 total 
advisers that advise at least one liquidity fund), with their aggregate 
liquidity fund assets under management representing approximately 98% 
of liquidity fund assets managed by advisers registered with the 
Commission.
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    \818\ See Form PF Adopting Release, supra note 799, at n.88 and 
accompanying text.
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    This threshold also should minimize the costs of our proposed 
amendments because large liquidity fund advisers already are required 
to make quarterly reports on Form PF and, as of February 28, 2013, 
virtually all either advise a money market fund or have a related 
person that advises a money market fund. Requiring large liquidity fund 
advisers to provide substantially the same information required by Form 
N-MFP therefore may reduce the burdens associated with our proposal, 
which we discuss below, because large liquidity fund advisers generally 
already have (or may be able to obtain access to) the systems, service 
providers, and/or staff necessary to capture and report the same types 
of information for reporting on Form N-MFP. These same systems, service 
providers, and/or staff may allow large liquidity fund advisers to 
comply with our proposed changes to Form PF more efficiently and at a 
reduced cost than if we were to require advisers to report information 
that differed materially from that which the advisers must file on Form 
N-MFP.
    In addition to our concerns about FSOC's ability to assess systemic 
risk, we also are concerned about losing transparency regarding money 
market fund investments that may shift into liquidity funds if we were 
to adopt the money market reforms we propose today and our ability 
effectively to formulate policy responses to such a shift in investor 
assets.\819\ We note in particular that a run on liquidity funds could 
spread to money market funds because, for example, both types of funds 
often invest in the same securities as noted above.\820\ Our ability to 
formulate a policy response to address this risk could be diminished if 
we had less transparency concerning the portfolio holdings of liquidity 
funds as compared to money market funds, and thus were not able as 
effectively to assess the degree of correlation between various funds 
or groups of funds that invest in the short-term financing markets, or 
if we were unable proactively to identify funds that own distressed 
securities. Indeed, Form PF, by defining large liquidity fund advisers 
subject to more comprehensive reporting requirements as advisers with 
$1 billion in combined money market fund and liquidity fund assets 
under management today reflects the similarities between money market 
funds and liquidity funds and the need for comprehensive information 
concerning advisers' management of large amounts of short-term assets 
through either type of fund. The need for this comprehensive data would 
be heightened if money market fund investors shift their assets to 
liquidity funds in response to any further money market fund reforms.
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    \819\ See, e.g., RSFI Study, supra note 21, at section 4.C 
(analysis of investment alternatives to money market funds, 
considering, among other issues, the potential for investors to 
shift their assets to money market fund alternatives, including 
liquidity funds, in response to further money market fund reforms 
and certain implications of a shift in investor assets).
    \820\ Liquidity funds may generally have a more institutional 
shareholder base because the funds rely on exclusions from the 
Investment Company Act's definition of ``investment company'' 
provided by section 3(c)(1) or 3(c)(7) of that Act. See section 
202(a)(29) of the Advisers Act (defining the term ``private fund'' 
to mean ``an issuer that would be an investment company, as defined 
in section 3 of the Investment Company Act (15 U.S.C. 80a-3), but 
for section 3(c)(1) or 3(c)(7) of that Act''). Funds relying on 
those exclusions sell their shares in private offerings which in 
many cases are restricted to investors who are ``accredited 
investors'' as defined in rule 501(a) under the Securities Act. 
Investors in funds relying on section 3(c)(7), in addition, 
generally must be ``qualified purchasers'' as defined in section 
2(a)(51) of the Investment Company Act. The funds' more 
institutional shareholder base may increase the potential for a run 
to develop at a liquidity fund. As discussed in greater detail in 
section II.C of this Release, redemption data from the 2007-2008 
financial crisis show that some institutional money market fund 
investors are likely to redeem from distressed money market funds 
more quickly than other investors and to redeem a greater percentage 
of their holdings. This may be indicative of the way institutional 
investors in liquidity funds would behave, particularly liquidity 
funds that more closely resemble money market funds.
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    Finally, this increased information on liquidity funds managed by 
large liquidity fund advisers also would be useful to us and FSOC even 
absent a shift in money market fund investor assets. Collecting this 
information about these liquidity funds would, when combined with 
information collected on Form N-MFP, provide us and FSOC a more 
complete picture of the short-term financing markets, allowing each of 
us to more effectively fulfill our statutory

[[Page 36950]]

mandates. For example, the contagion risk we discuss above--of a run 
starting in a liquidity fund and spreading to money market funds--may 
warrant our or FSOC's attention even today. But it may be impossible 
effectively to assess this risk today without more detailed information 
about the portfolio holdings of the liquidity funds managed by advisers 
who manage substantial amounts of short-term investments and the 
ability to combine that data with the information we collect on Form N-
MFP.
    For example, if a particular security or issuer were to come under 
stress, our staff today would be unable to determine which liquidity 
funds, if any, held that security. This is because advisers currently 
are required only to provide information about the types of assets 
their liquidity funds hold, rather than the individual positions.\821\ 
Our staff could see the aggregate value of all of a liquidity fund's 
positions in unsecured commercial paper issued by non-U.S. financial 
institutions, for example, but could not tell whether the fund owned 
commercial paper issued by any particular non-U.S. financial 
institution. If a particular institution were to come under stress, the 
aggregated information available today would not allow us or our staff 
to determine the extent to which liquidity funds were exposed to the 
financial institution; lacking