[Federal Register Volume 79, Number 145 (Tuesday, July 29, 2014)]
[Notices]
[Pages 44076-44078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17748]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72658; File No. S7-08-14]
Notice of Proposed Exemptive Order Granting Permanent Exemptions
Under the Securities Exchange Act of 1934 From the Confirmation
Requirements of Exchange Act Rule 10b-10 for Certain Money Market Funds
July 23, 2014.
AGENCY: Securities and Exchange Commission.
ACTION: Notice of Proposed Exemptive Order; Request for Comment.
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SUMMARY: Pursuant to Section 36 of the Securities Exchange Act of 1934
(``Exchange Act'') and Exchange Act Rule 10b-10(f), the Securities and
Exchange Commission (``SEC'' or ``Commission'') is proposing to grant
exemptive relief, subject to certain conditions, from the immediate
confirmation delivery requirements of Exchange Act Rule 10b-10 for
transactions effected in shares of any open-end management investment
company registered under the Investment Company Act of 1940
(``Investment Company Act'') that holds itself out as a money market
fund operating in accordance with Rule 2a-7(c)(1)(ii) of the Investment
Company Act.
DATES: Comments must be received on or before August 19, 2014.
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/other.shtml); or
Send an email to [email protected]. Please include
File Number S7-08-14 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Kevin M. O'Neill,
Deputy Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-08-14. 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/other.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 charge; the Commission
does not edit personal identifying information from submissions. You
should only submit information that you wish to make publicly
available.
FOR FURTHER INFORMATION CONTACT: Natasha Vij Greiner, Branch Chief,
Jonathan C. Shapiro, Attorney-Adviser, George Makris, Attorney-Adviser,
at 202-551-5550, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.
I. Background
Exchange Act Rule 10b-10 addresses broker-dealers' obligations to
confirm their customers' securities transactions.\1\ Under Rule 10b-
10(a), a broker-dealer generally must provide customers with
information relating to their investment decisions at or before the
completion of a securities transaction.\2\ Rule 10b-10(b), however,
provides an exception for certain transactions in money market funds
that attempt to maintain a stable net asset value (``NAV'') and where
no sales load or redemption fee is charged.\3\ The exception permits
broker-dealers to provide transaction information to money market fund
shareholders on a monthly basis (subject to certain conditions set
forth in Rule 10b-10(b)(2) and (3)) in lieu of immediate confirmations
for all purchases and redemptions of shares of such funds.\4\
[[Page 44077]]
Accordingly, customers historically have received information for their
transactions in shares of money market funds on a monthly basis.
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\1\ 17 CFR 240.10b-10.
\2\ 17 CFR 240.10b-10(a).
\3\ 17 CFR 240.10b-10(b).
\4\ With respect to such money market funds, Exchange Act Rule
10b-10(b)(2) requires a broker-dealer to give or send to a customer
within five business days after the end of each monthly period a
written statement disclosing, each purchase or redemption, effected
for or with, and each dividend or distribution credited to or
reinvested for, the account of such customer during the month; the
date of such transaction; the identity, number, and price of any
securities purchased or redeemed by such customer in each such
transaction; the total number of shares of such securities in such
customer's account; any remuneration received or to be received by
the broker or dealer in connection therewith; and that any other
information required by Rule 10b-10(a) will be furnished upon
written request: Provided, however, that the written statement may
be delivered to some other person designated by the customer for
distribution to the customer. 17 CFR 240.10b-10(b)(2). Exchange Act
Rule 10b-10(b)(3) requires that such customer is provided with prior
notification in writing disclosing the intention to send the written
information referred to in Rule 10b-10(b)(1) in lieu of an immediate
confirmation. 17 CFR 240.10b-10(b)(3).
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Today, the Commission adopted amendments to Rule 2a-7 of the
Investment Company Act. Among other things, the amendments require
institutional prime money market funds, which, under the prior rule,
were permitted to maintain a stable net asset value, to sell and redeem
shares based on the current market-based value of the securities held
in their portfolios, i.e., transact at a ``floating'' NAV.\5\ As a
result, institutional prime money market funds, like other mutual
funds, will now be required to value their portfolio securities using
market-based factors (rather than amortized cost) and sell and redeem
shares at prices rounded to the fourth decimal place (rather than
rounded to the nearest penny).\6\ However, institutional prime money
market funds will continue to be subject to the ``risk limiting''
provisions of Rule 2a-7 and therefore will continue to be limited to
investing in short-term, high-quality, dollar-denominated
instruments.\7\
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\5\ See Money Market Fund Reform; Amendments to Form PF,
Securities Act Release No. 9616, Investment Advisers Act Release No.
3879, Investment Company Act Release No. 31166, at section III.B
(July 23, 2014) (``Money Market Fund Reform Adopting Release'').
\6\ Id.; Investment Company Act Rule 2a-7(c)(1)(ii), 17 CFR
270.2a-7(c)(1)(ii).
\7\ Money Market Fund Reform Adopting Release, at 143; see also
Investment Company Act Rule 2a-7(d), 17 CFR 270.2a-7(d) (risk-
limiting conditions).
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Given that share prices of such institutional prime money market
funds likely will fluctuate under the amended rule, absent exemptive
relief, broker-dealers will not be able to continue to rely on the
current exception under Rule 10b-10(b) for transactions in money market
funds operating in accordance with Rule 2a-7(c)(1)(ii).\8\ Instead,
broker-dealers will be required to provide immediate confirmations for
all such transactions.
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\8\ See generally Money Market Fund Reform; Amendments to Form
PF, Securities Act Release No. 9408, Investment Advisers Act Release
No. 3616, Investment Company Act Release No. 30551 (June 5, 2013),
78 FR 36834, 36934 (June 19, 2013); see also Exchange Act Rule 10b-
10(b)(1), 17 CFR 240.10b-10(b)(1) (limiting alternative monthly
reporting to money market funds that attempt to maintain a stable
net asset value).
As adopted, government and retail money market funds are exempt
from the Investment Company Act Rule 2a-7(c)(1)(ii) floating NAV
requirement, and therefore, will continue to maintain a stable NAV.
See Money Market Fund Reform Adopting Release, at sections III.C.1
and III.C.2. Accordingly, for investor transactions in such exempt
funds, broker-dealers would continue to qualify under the exception
under Rule 10b-10 and be permitted to send monthly transaction
reports.
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In the money market fund reform proposing release,\9\ the
Commission requested comment on whether, if the Commission adopted the
floating NAV requirement, broker-dealers should be required to provide
immediate confirmations to all institutional prime money market fund
investors. Commenters generally urged the Commission not to impose such
a requirement, arguing that there would be significant costs associated
with broker-dealers providing immediate confirmations.\10\ Such costs
are expected to include both (1) the ongoing costs of creating and
sending trade-by-trade confirmations and (2) the costs of implementing
new systems to generate confirmations.\11\ The Commission recognizes
that there may be costs associated with requiring immediate
confirmations for such transactions,\12\ and is aware that such costs
may be passed on to investors in funds subject to the floating NAV
requirements.\13\ Nonetheless, given that institutional prime money
market funds likely will fluctuate in price, some investors may find
value in receiving information relating to their investment decisions
at or before the completion of a securities transaction. The Commission
requests comments regarding these potential benefits.
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\9\ Money Market Fund Reform; Amendments to Form PF, 78 FR
36934.
\10\ See Letter from Paul Schott Stevens, President and CEO,
Investment Company Institute, to Elizabeth M. Murphy, Secretary,
Commission, dated September 17, 2013 (``Investment Company Institute
Letter''), at 37, available at http://www.sec.gov/comments/s7-03-13/s70313-200.pdf; Letter from Timothy W. Cameron, Managing Director,
SIFMA Asset Management Group, John Maurello, Managing Director,
SIFMA Private Client Group, Matthew J. Nevins, Managing Director and
Associate General Counsel, SIFMA Asset Management Group, dated Sept.
17, 2013 (``9/17/13 SIFMA Letter''), at Appendices 1 and 2,
available at http://www.sec.gov/comments/s7-03-13/s70313-199.pdf;
Letter from J. Charles Cardona, President, The Dreyfus Corporation,
to Elizabeth M. Murphy, Secretary, Commission, dated September 17,
2013 (``Dreyfus Letter''), at 35, available at http://www.sec.gov/comments/s7-03-13/s70313-167.pdf; Letter from John D. Hawke, Jr.,
Arnold & Porter, on behalf of Federated Investors, Inc. and its
subsidiaries, to Chair Mary Jo White, Commission, dated September
17, 2013 (``Federated Letter''), at 22, available at http://www.sec.gov/comments/s7-03-13/s70313-225.pdf; Letter from Anthony J.
Carfang, Partner, Cathryn R. Gregg, Partner, Paul LaRock, Principal,
Steven Wiley, Manager, Treasury Strategies, Inc., to Elizabeth M.
Murphy, Secretary, Commission, dated September 12, 2013 (``Treasury
Strategies Letter''), available at http://www.sec.gov/comments/s7-03-13/s70313-118.pdf.
\11\ See, e.g., Federated Letter, at 22.
\12\ Money Market Fund Reform Adopting Release, at section
III.B.7.
\13\ See, e.g., Dreyfus Letter, at 35 (``Confirming transactions
in [variable net asset value money market mutual funds] on a
transaction basis will increase costs, which will be passed on to
[money market mutual fund] investors or underwriters.'').
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II. Discussion of Proposed Relief
After careful consideration, the Commission is proposing to grant
exemptive relief pursuant to Section 36 of the Exchange Act \14\ and
Exchange Act Rule 10b-10(f) \15\ that would allow broker-dealers,
subject to certain conditions, to provide transaction information to
investors in any money market fund operating pursuant to Rule 2a-
7(c)(1)(ii) on a monthly basis in lieu of providing immediate
confirmations.
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\14\ Section 36 of the Exchange Act authorizes the Commission to
conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities, or
transactions, from certain provisions of the Exchange Act or certain
rules or regulations thereunder, by rule, regulation, or order, to
the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of investors.
15 U.S.C. 78mm.
\15\ Exchange Act Rule 10b-10(f) specifies the Commission may
conditionally or unconditionally exempt any broker or dealer from
the requirements of Rule 10b-10(a) and Rule 10b-10(b) with regard to
specific transactions or specific classes of transactions for which
the broker or dealer will provide alternative procedures to effect
the purposes of the rule. 17 CFR 240.10b-10(f).
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The floating NAV requirement, as adopted, only applies to
institutional prime money market funds--not to government or retail
money market funds.\16\ Shareholders that invest in institutional prime
money market funds will continue to have extensive investor protections
separate and apart from the protections provided under Exchange Act
Rule 10b-10. For example, as stated above, funds subject to the
floating NAV requirement will continue to be subject to the ``risk
limiting'' conditions of Rule 2a-7.\17\ These conditions limit the risk
in a money market fund's portfolio by governing the credit quality,
liquidity, diversification, and maturity of money market investments.
Accordingly, mutual funds that hold themselves out as money market
funds--including institutional prime money market funds--may acquire
only investments that are short-term, high-quality, dollar-denominated
instruments.\18\
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\16\ See Investment Company Act Rule 2a-7(c)(1)(ii), 17 CFR
270.2a-7(c)(1)(ii). As defined in Investment Company Act Rule 2a-
7(a)(25), as amended, a retail money market fund is defined as a
money market fund that has policies and procedures reasonably
designed to limit all beneficial owners of the fund to natural
persons. 17 CFR 270.2a-7(a)(25). Under Rule 2a-7(a)(16), a
government money market fund is defined as a money market fund that
invests 99.5 percent or more of its total assets in cash, government
securities, and/or repurchase agreements that are collateralized
fully. 17 CFR 270.2a-7(a)(16).
\17\ See Investment Company Act Rule 2a-7(d), 17 CFR 270.2a-7(d)
(risk-limiting conditions).
\18\ Id.; see also Money Market Fund Reform Adopting Release, at
143.
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[[Page 44078]]
While institutional prime money market fund shares will fluctuate,
they are not likely to fluctuate daily, primarily due to the high
quality and short duration of such funds' underlying portfolio
securities.\19\ In addition, the Commission anticipates that
information on prices will be available through other means.\20\ For
example, under the new fund disclosure requirements of Investment
Company Act Rule 2a-7(h)(10)(iii), investors--including institutional
investors--will be able to access a fund's daily mark-to-market NAV per
share on a money market fund's Web site.\21\ Moreover, as previously
noted, commenters raised concerns about the costs associated with
requiring immediate confirmation for such transactions, which, to some
extent, may be passed on to investors.\22\
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\19\ Id., at 155 n.491. Based on staff analysis of Form N-MFP
data between November 2010 and November 2013, 53% of money market
funds would have fluctuated in price over a twelve-month period with
an NAV priced using basis point rounding, compared with less than 5%
of money market funds that would have fluctuated in price using 10
basis point rounding. Id., at 158-59.
\20\ Id., at section III.E.9.c.
\21\ 17 CFR 270.2a-7(h)(10)(iii).
\22\ Another commenter stated that institutions and
intermediaries can demand more frequent confirmations through
independent negotiations with money market fund providers. See
Dreyfus Letter, at 35. Such an option, however, would not
necessarily be available for retail investors in institutional prime
money market funds.
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Under Exchange Act Rule 10b-10(b), the exemption from providing
immediate confirmations consistent with the written notification
requirements under Rule 10b-10(a) is subject to certain conditions.\23\
The Commission preliminarily believes that these conditions are also
appropriate for institutional prime money market funds subject to the
floating NAV requirement under Rule 2a-7(c)(1)(ii) in order to provide
customers with consistent information for all money market fund
transactions.
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\23\ See 17 CFR 240.10b-10(b); see also supra, Note 4, citing
certain specific relevant conditions.
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Given that there will be price fluctuations in institutional prime
money market funds, the Commission preliminarily believes that it may
be necessary or appropriate in the public interest and consistent with
the protection of investors to also require that broker-dealers provide
immediate confirmations upon a customer's request. Accordingly, to be
eligible for the exemption from Rule 10b-10(a), the Commission proposes
an additional condition beyond those in place pursuant to Rule 10b-
10(b). Specifically, the Commission proposes that, to be exempt from
the immediate confirmation requirements of Rule 10b-10(a), the broker-
dealer must (1) notify the customer of its ability to request delivery
of an immediate confirmation, consistent with the written notification
requirements of Exchange Act Rule 10b-10(a), and (2) not receive any
such request from the customer. This condition would provide investors
with an option to receive confirmation information regarding a
transaction at or before the completion of a securities transaction,
while also providing relief to broker-dealers in circumstances where
customers would not view this additional information as beneficial.
Taking all of these factors into consideration, and consistent with
the exemptions and related conditions applicable to money market funds
that attempt to maintain a stable NAV, the Commission preliminarily
believes that a conditional exemption is necessary and appropriate in
the public interest, and consistent with the protection of investors.
Therefore, the Commission proposes to exempt broker-dealers from the
written notification requirements under Exchange Act Rule 10b-10(a)
when effecting transactions in money market funds operating in
accordance with Investment Company Act Rule 2a-7(c)(1)(ii), for or with
the account of a customer, where: (i) No sales load is deducted upon
the purchase or redemption of shares in the money market fund, (ii) the
broker-dealer complies with the provisions of Rule 10b-10(b)(2) and
Rule 10b-10(b)(3) that are applicable to money market funds that
attempt to maintain a stable NAV referenced in Rule 10b-10(b)(1),\24\
and (iii) the broker-dealer has notified the customer of its ability to
request delivery of an immediate confirmation consistent with the
written notification requirements of Exchange Act Rule 10b-10(a) and
has not received such request from the customer.
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\24\ The proposed conditions under ``(i)'' and ``(ii)'' above
are consistent with the confirmation delivery requirements provided
in Exchange Act Rule 10b-10(b) for all transactions in investment
companies that attempt to maintain a constant NAV where no sales
load or redemption fee is charged. 17 CFR 240.10b-10(b).
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Solicitation of Comment
The Commission requests comment on all aspects of this proposed
exemptive order, including, but not limited to, the following
questions:
Do the monthly statements and other requirements under
Rule 10b-10(b)(2) and (3) provide an appropriate alternative to
immediate confirmations for transactions in floating NAV money market
funds? What are the advantages and disadvantages to various market
participants (including broker-dealers, shareholders, and funds) of
permitting broker-dealers to provide fund shareholders of floating NAV
money market funds with monthly confirmation statements?
What are the reasons why shareholders might prefer to
receive confirmation information immediately for floating NAV money
market funds? What are the costs to broker-dealers associated with
providing immediate confirmations? In particular, what are the nature
and magnitude of such costs associated with providing immediate
confirmations, and what, if any, costs would be passed along to
investors?
Should the Commission consider any alternatives other than
the proposed exemption to the Exchange Act Rule 10b-10 requirements in
the context of a floating NAV fund outlined above, such as requiring
the provision of confirmations to shareholders at some different time
interval (e.g., weekly statements)? Should broker-dealers be required
to provide immediate confirmations upon request by an investor? Rather
than requiring immediate confirmations upon request by an investor,
should the Commission consider any alternatives (e.g., requiring next-
day delivery upon investor request)? What benefits and costs would be
associated with any alternative approach?
Should the Commission give investors the option to request
delivery of an immediate confirmation statement for floating NAV money
market funds? If investors should have that option, should the
Commission require that broker-dealers notify the customer of its
ability to request delivery of an immediate confirmation? What are the
advantages and disadvantages of providing investors with the ability to
request immediate confirmations? What are the potential effects on
broker-dealers, investors, or other market participants? Should the
Commission consider an alternative approach, such as requiring
immediate confirmations unless the customer opts out?
Would providing an exemption from the immediate
confirmation delivery requirements of Exchange Act Rule 10b-10, as
proposed, provide appropriate relief to broker-dealers and, at the same
time, provide sufficient information to investors?
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17748 Filed 7-28-14; 8:45 am]
BILLING CODE 8011-01-P