[Federal Register Volume 79, Number 157 (Thursday, August 14, 2014)]
[Rules and Regulations]
[Pages 47735-47983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17747]



[[Page 47735]]

Vol. 79

Thursday,

No. 157

August 14, 2014

Part II





 Securities and Exchange Commission





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17 CFR Parts 230, 239, et al.





 Money Market Fund Reform; Amendments to Form PF; Final Rule

Federal Register / Vol. 79 , No. 157 / Thursday, August 14, 2014 / 
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, 270, 274 and 279

[Release No. 33-9616, IA-3879; IC-31166; FR-84; File No. S7-03-13]
RIN 3235-AK61


Money Market Fund Reform; Amendments to Form PF

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is adopting amendments to the rules that govern money market 
mutual funds (or ``money market funds'') under the Investment Company 
Act of 1940 (``Investment Company Act'' or ``Act''). The amendments are 
designed to address money market funds' susceptibility to heavy 
redemptions in times of stress, 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, 
their benefits. The SEC is removing the valuation exemption that 
permitted institutional non-government money market funds (whose 
investors historically have made the heaviest redemptions in times of 
stress) to maintain a stable net asset value per share (``NAV''), and 
is requiring those 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'' NAV. The SEC also is adopting amendments that will give 
the boards of directors of money market funds new tools to stem heavy 
redemptions by giving them discretion to impose a liquidity fee if a 
fund's weekly liquidity level falls below the required regulatory 
threshold, and giving them discretion to suspend redemptions 
temporarily, i.e., to ``gate'' funds, under the same circumstances. 
These amendments will require all non-government money market funds to 
impose a liquidity fee if the fund's weekly liquidity level falls below 
a designated threshold, unless the fund's board determines that 
imposing such a fee is not in the best interests of the fund. In 
addition, the SEC is adopting amendments designed to make money market 
funds more resilient by increasing the diversification of their 
portfolios, enhancing their stress testing, and improving transparency 
by requiring money market funds to report additional information to the 
SEC and to investors. Finally, the amendments require investment 
advisers to certain large unregistered liquidity funds, which can have 
many of the same economic features as money market funds, to provide 
additional information about those funds to the SEC.

DATES: Effective Date: October 14, 2014.
    Compliance Dates: The applicable compliance dates are discussed in 
section III.N. of the Release titled ``Compliance Dates.''

FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Amanda 
Hollander Wagner, Senior Counsel; Andrea Ottomanelli Magovern, Senior 
Counsel; Erin C. Loomis, Senior Counsel; Kay-Mario Vobis, Senior 
Counsel; Thoreau A. Bartmann, Branch Chief; Sara Cortes, Senior Special 
Counsel; or Sarah G. ten Siethoff, Assistant Director, 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 adopting 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], 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 Part 270.
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Table of Contents

I. Introduction
II. Background
    A. Role of Money Market Funds
    B. Certain Economic Features of Money Market Funds
    1. Money Market Fund Investors' Desire To Avoid Loss
    2. Liquidity Risks
    3. Valuation and Pricing Methods
    4. Investors' Misunderstanding About the Actual Risk of 
Investing in Money Market Funds
    C. Effects on Other Money Market Funds, Investors, and the 
Short-Term Financing Markets
    D. The Financial Crisis
    E. Examination of Money Market Fund Regulation Since the 
Financial Crisis
    1. The 2010 Amendments
    2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 
2011 and 2013
    3. Continuing Consideration of the Need for Additional Reforms
III. Discussion
    A. Liquidity Fees and Redemption Gates
    1. Analysis of Certain Effects of Fees and Gates
    2. Terms of Fees and Gates
    3. Exemptions to Permit Fees and Gates
    4. Amendments to Rule 22e-3
    5. Operational Considerations Relating to Fees and Gates
    6. Tax Implications of Liquidity Fees
    7. Accounting Implications
    B. Floating Net Asset Value
    1. Introduction
    2. Summary of the Floating NAV Reform
    3. Certain Considerations Relating to the Floating NAV Reform
    4. Money Market Fund Pricing
    5. Amortized Cost and Penny Rounding for Stable NAV Funds
    6. Tax and Accounting Implications of Floating NAV Money Market 
Funds
    7. Rule 10b-10 Confirmations
    8. Operational Implications of Floating NAV Money Market Funds
    9. Transition
    C. Effect on Certain Types of Money Market Funds and Other 
Entities
    1. Government Money Market Funds
    2. Retail Money Market Funds
    3. Municipal Money Market Funds
    4. Implications for Local Government Investment Pools
    5. Unregistered Money Market Funds Operating Under Rule 12d1-1
    6. Master/Feeder Funds--Fees and Gates Requirements
    7. Application of Fees and Gates to Other Types of Funds and 
Certain Redemptions
    D. Guidance on the Amortized Cost Method of Valuation and Other 
Valuation Concerns
    1. Use of Amortized Cost Valuation
    2. Other Valuation Matters
    E. Amendments to Disclosure Requirements
    1. Required Disclosure Statement
    2. Disclosure of Tax Consequences and Effect on Fund 
Operations--Floating NAV
    3. Disclosure of Transition to Floating NAV
    4. Disclosure of the Effects of Fees and Gates on Redemptions
    5. Historical Disclosure of Liquidity Fees and Gates
    6. Prospectus Fee Table
    7. Historical Disclosure of Affiliate Financial Support
    8. Economic Analysis
    9. Web site Disclosure
    F. Form N-CR
    1. Introduction
    2. Part B: Defaults and Events of Insolvency
    3. Part C: Financial Support
    4. Part D: Declines in Shadow Price

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    5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees 
and Gates
    6. Part H: Optional Disclosure
    7. Timing of Form N-CR
    8. Economic Analysis
    G. 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. Operational Implications of the N-MFP Amendments
    H. 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
    I. Diversification
    1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's 
Five Percent Issuer Diversification Requirement
    2. ABS--Sponsors Treated as Guarantors
    3. The Twenty-Five Percent Basket
    J. Amendments to Stress Testing Requirements
    1. Overview of Current Stress Testing Requirements and Proposed 
Amendments
    2. Stress Testing Metrics
    3. Hypothetical Events Used in Stress Testing
    4. Board Reporting Requirements
    5. Dodd-Frank Mandated Stress Testing
    6. Economic Analysis
    K. Certain Macroeconomic Consequences of the New Amendments
    1. Effect on Current Investors in Money Market Funds
    2. Efficiency, Competition and Capital Formation Effects on the 
Money Market Fund Industry
    3. Effect of Reforms on Investment Alternatives, and the Short-
Term Financing Markets
    L. Certain Alternatives Considered
    1. Liquidity Fees, Gates, and Floating NAV Alternatives
    2. Alternatives in the FSOC Proposed Recommendations
    3. Alternatives in the PWG Report
    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. Compliance Dates
    1. Compliance Date for Amendments Related to Liquidity Fees and 
Gates
    2. Compliance Date for Amendments Related to Floating NAV
    3. Compliance Date for Rule 30b1-8 and Form N-CR
    4. Compliance Date for Diversification, Stress Testing, 
Disclosure, Form PF, Form N-MFP, and Clarifying Amendments
IV. Paperwork Reduction Act
    A. Rule 2a-7
    1. Asset-Backed Securities
    2. Retail and Government Funds
    3. Board Determinations--Fees and Gates
    4. Notice to the Commission
    5. Stress Testing
    6. Web Site Disclosure
    7. Total Burden for Rule 2a-7
    B. Rule 22e-3
    C. Rule 30b1-7 and Form N-MFP
    1. Discussion of Final Amendments
    2. Current Burden
    3. Change in Burden
    D. Rule 30b1-8 and Form N-CR
    1. Discussion of New Reporting Requirements
    2. Estimated Burden
    E. Rule 34b-1(a)
    F. Rule 482
    G. Form N-1A
    H. Advisers Act Rule 204(b)-1 and Form PF
    1. Discussion of Amendments
    2. Current Burden
    3. Change in Burden
V. Regulatory Flexibility Act Certification
VI. Update to Codification of Financial Reporting Policies
VII. Statutory Authority
Text of Rules and Forms

I. Introduction

    Money market funds are a type of mutual fund registered under the 
Investment Company Act and regulated pursuant to rule 2a-7 under the 
Act.\2\ Money market funds generally pay dividends that reflect 
prevailing short-term interest rates, are redeemable on demand, and, 
unlike other investment companies, seek to maintain a stable 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, 2014, there were approximately 559 money market 
funds registered with the Commission, and these funds collectively held 
over $3.0 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 NAV of $1.00, but 
a few seek to maintain a stable NAV of a different amount, e.g., 
$10.00. For convenience, throughout this Release, the discussion 
will simply refer to the stable NAV 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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    Absent an exemption, as required by the Investment Company Act, all 
registered mutual funds must price and transact in their shares at the 
current NAV, calculated 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 (i.e., use 
a floating NAV).\5\ In 1983, the Commission codified an exemption to 
this requirement allowing money market funds 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 NAV 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 in its portfolio.\9\ 
Other types of mutual funds not regulated by rule 2a-7 generally must 
calculate their daily NAVs using market-based factors and cannot use 
penny rounding.
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    \5\ 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 Accounting Series Release No. 219, Valuation 
of Debt Instruments by Money Market Funds and Certain Other Open-End 
Investment Companies, Financial Reporting Codification (CCH) section 
404.05.a and .b (May 31, 1977) (``ASR 219''). We further discuss the 
use of amortized cost valuation by mutual funds in section III.B.5 
below.
    \6\ See 1983 Adopting Release, supra note 3. Section 6(c) of the 
Investment Company Act provides the Commission with broad authority 
to exempt persons, securities or transactions from any provision of 
the Investment Company Act, or the regulations thereunder, if, and 
to the extent that such exemption is 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. 
See Commission Policy and Guidelines for Filing of Applications for 
Exemption, SEC Release No. IC-14492 (Apr. 30, 1985).
    \7\ See current rule 2a-7(a)(2). See also supra note 5. 
Throughout this Release when we refer to a rule as it exists prior 
to any amendments we are making today it is described as a ``current 
rule'' while references to a rule as amended (or one that is not 
being amended today) are to ``rule.''
    \8\ See current rule 2a-7(a)(20).
    \9\ Today, 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 place like other mutual funds, and use 
the amortized cost method so that they need not strike a daily 
market-based NAV to facilitate intra-day transactions. See infra 
section III.A.1.a.
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    When the Commission initially established the regulatory framework 
allowing money market funds to

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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 focused on minimizing dilution of assets and returns for 
shareholders.\10\ At that time, the Commission was persuaded that 
deviations of a magnitude that would cause material dilution generally 
would not occur given the risk-limiting conditions of the exemptive 
rule.\11\ As discussed throughout this Release, our historical 
experience with these funds, and the events of the 2007-2009 financial 
crisis,\12\ has led us to re-evaluate the exemptive relief provided 
under rule 2a-7, including the exemption from the statutory floating 
NAV for some money market funds.
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    \10\ 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.'').
    \11\ See id., at nn.41-42 and accompanying text (noting that 
witnesses from the original money market fund exemptive order 
hearings testified 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).
    \12\ Throughout this Release, unless indicated otherwise, when 
we use the term ``financial crisis'' we are referring to the 
financial crisis that took place between 2007 and 2009.
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    Under rule 2a-7, 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. In exchange for the ability to rely on the exemptions 
provided by rule 2a-7, money market funds are subject to conditions 
designed to limit deviations between the fund's $1.00 stable share 
price and the market-based NAV of the fund's portfolio.\13\ Rule 2a-7 
requires that money market funds maintain a significant amount of 
liquid assets and invest in securities that meet the rule's credit 
quality, maturity, and diversification requirements.\14\ For example, a 
money market fund's portfolio securities must meet certain credit 
quality standards, such as posing minimal credit risks.\15\ The rule 
also places restrictions 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, 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.\16\ Money market funds also 
must maintain sufficient liquidity to meet reasonably foreseeable 
redemptions, 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, as 
defined under the rule.\17\ 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.\18\
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    \13\ 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.
    \14\ See current rule 2a-7(c)(2), (3), (4), and (5).
    \15\ See current rule 2a-7(a)(12), (c)(3)(i).
    \16\ Current rule 2a-7(c)(2).
    \17\ See current rule 2a-7(c)(5). As we discussed when we 
amended rule 2a-7 in 2010, the 10% daily liquid asset requirement 
does not apply to tax-exempt funds. See Money Market Fund Reform, 
Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 
10060 (Mar. 4, 2010)] (``2010 Adopting Release''). See infra section 
III.E.3.
    \18\ See current rule 2a-7(c)(4). Because of limited 
availability of the securities in which they invest, tax-exempt 
funds have different diversification requirements under rule 2a-7 
than other money market funds.
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    Rule 2a-7 also includes certain procedural standards 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'') \19\ 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 taken 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'').\20\
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    \19\ See current rule 2a-7(c)(8)(ii)(A).
    \20\ See current 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. Current 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 NAV. See rule 2a-7(c)(1).
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    Different types of money market funds have been introduced to meet 
the different needs of money market fund investors. Historically, most 
investors have invested in ``prime money market funds,'' which 
generally hold a variety of taxable short-term obligations issued by 
corporations and banks, as well as repurchase agreements and asset-
backed commercial paper.\21\ ``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 their 
holdings to 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.\22\
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    \21\ See Investment Company Institute, 2014 Investment Company 
Fact Book, at 196, Table 37 (2014), available at http://www.ici.org/pdf/2014_factbook.pdf.
    \22\ Unless the context indicates otherwise, references to 
``prime funds'' throughout this Release include funds that are often 
referred to as ``tax-exempt'' or ``municipal'' funds. We discuss the 
particular features of such tax-exempt funds and why they are 
included in our reforms in detail in section III.C.3.
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    We first 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.\23\ We

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then discuss money market funds' experience during the 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 2011 and 2013 U.S. debt ceiling impasses.
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    \23\ 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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    We used the analyses available to us, including the critically 
important analyses contained in the report responding to certain 
questions posed by Commissioners Aguilar, Paredes, and Gallagher 
(``DERA Study''),\24\ in designing the reform proposals that we issued 
in 2013 for additional regulation of money market funds.\25\ The 2013 
proposal sought to address certain features in money market funds that 
can make them susceptible to heavy redemptions, by providing money 
market funds with better tools to manage and mitigate potential 
contagion from high levels of redemptions, increasing the transparency 
of their risks, and improving risk sharing among investors, and also to 
preserve the ability of money market funds to function as an effective 
and efficient cash management tool for investors.\26\
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    \24\ 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. The Division of Risk, Strategy, and Financial Innovation 
(``RSFI'') is now known as the Division of Economic and Risk 
Analysis (``DERA''), and accordingly we are no longer referring to 
this study as the ``RSFI Study'' as we did in the Proposing Release, 
but instead as the ``DERA Study.''
    \25\ See Money Market Fund Reform; Amendments to Form PF, 
Release Nos. 33-9408; IA-3616; IC-30551 (June 5, 2013) [78 FR 36834, 
(June 19, 2013)] (``Proposing Release'').
    \26\ The 2013 proposal also included amendments that would apply 
under each alternative, with additional changes to money market fund 
disclosure, diversification limits, and stress testing, among other 
reforms. See Proposing Release, supra note 25. We discuss these 
amendments below.
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    We received over 1,400 comments \27\ on the proposal from a variety 
of interested parties including money market funds, investors, banks, 
investment advisers, government representatives, academics, and 
others.\28\ As discussed in greater detail in each section of this 
Release below, these commenters expressed a diversity of views. Many 
commenters expressed concern about the consequences of requiring a 
floating NAV for certain money market funds, suggesting, among other 
reasons, that it was a significant reform that would remove one of the 
most desirable features of these funds, and would impose numerous costs 
and operational burdens. However, others expressed support, noting that 
it was a targeted solution aimed at curbing the risks associated with 
the money market funds most susceptible to destabilizing runs. Most 
commenters supported requiring the imposition of liquidity fees and 
redemption gates in certain circumstances, suggesting that they would 
prevent runs at a minimal cost. However, commenters also noted that 
fees and gates alone would not resolve certain of the features of money 
market funds that can incentivize heavy redemptions. Many commenters 
opposed combining the two alternatives into a single package, arguing 
that requiring money market funds to implement both reforms could 
decrease the utility of money market funds to investors. Commenters 
generally supported many of the other reforms we proposed, such as 
enhanced disclosure, new portfolio reporting requirements for large 
unregistered liquidity funds, and amendments to fund diversification 
requirements.
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    \27\ Of these, more than 230 were individualized letters, and 
the rest were one of several types of form letters.
    \28\ Unless otherwise stated, all references to comment letters 
in this Release are to letters submitted on the Proposing Release in 
File No. S7-03-13 and are available at http://www.sec.gov/comments/s7-03-13/s70313.shtml.
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    Today, after consideration of the comments received, we are 
removing the valuation exemption that permits institutional non-
government money market funds (whose investors have historically made 
the heaviest redemptions in times of market stress) to maintain a 
stable NAV, and are requiring those funds to sell and redeem their 
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'' NAV. We also are adopting 
amendments that will give the boards of directors of money market funds 
new tools to stem heavy redemptions by giving them discretion to impose 
a liquidity fee of no more than 2% if a fund's weekly liquidity level 
falls below the required regulatory amount, and are giving them 
discretion to suspend redemptions temporarily, i.e., to ``gate'' funds, 
under the same circumstances. These amendments will require all non-
government money market funds to impose a liquidity fee of 1% if the 
fund's weekly liquidity level falls below 10% of total assets, unless 
the fund's board determines that imposing such a fee is not in the best 
interests of the fund (or that a higher fee up to 2% or a lower fee is 
in the best interests of the fund). In addition, we are adopting 
amendments designed to make money market funds more resilient by 
increasing the diversification of their portfolios, enhancing their 
stress testing, and increasing transparency by requiring them to report 
additional information to us and to investors. Finally, the amendments 
require investment advisers to certain large unregistered liquidity 
funds, which can have similar economic features as money market funds, 
to provide additional information about those funds to us.\29\
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    \29\ We note that we have consulted and coordinated with the 
Consumer Financial Protection Bureau regarding this final 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

    As we discussed in the Proposing Release, 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.\30\ Money market funds' 
ability to maintain a stable share price contributes to their 
popularity. The funds' stable share price facilitates their 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.\31\ Due to their 
popularity with investors, money market fund assets have grown over 
time, providing them with substantial amounts of cash to invest. As a 
result, money market funds have become an important source of financing 
in certain segments of the short-term financing markets. As a result, 
rule 2a-7, in addition to

[[Page 47740]]

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.\32\
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    \30\ See Proposing Release supra note 25, at section II.A. 
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 money market fund managers' expertise. See infra 
notes 63-64 and accompanying text.
    \31\ See, e.g., Comment Letter of UBS Global Asset Management 
(Sept. 16, 2013) (``UBS Comment Letter'') (``Historically, money 
funds have offered both retail and institutional investors a means 
of achieving a market rate of return on short-term investment 
without having to sacrifice stability of principal. The stable NAV 
per share also allows investors the convenience of not having to 
track immaterial gains and losses, and helps facilitate investment 
processes, such as sweep account arrangements . . .'').
    \32\ See, e.g., Comment Letter of the Investment Company 
Institute (Sept. 17, 2013) (``ICI Comment Letter'') (``Today over 61 
million retail investors, as well as corporations, municipalities, 
and institutional investors rely on the $2.6 trillion money market 
fund industry as a low cost, efficient cash management tool that 
provides a high degree of liquidity, stability of principal value, 
and a market based yield.'').
---------------------------------------------------------------------------

    In order for money market funds to use techniques to value and 
price their shares generally not permitted to other mutual funds, rule 
2a-7 imposes additional protective conditions on money market 
funds.\33\ As discussed in the Proposing Release, these additional 
conditions are designed to make money market funds' use of the 
valuation and 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.
---------------------------------------------------------------------------

    \33\ See, e.g., ICI Comment Letter (``Money market funds owe 
their success, in large part to the stringent regulatory 
requirements to which they are subject under federal securities 
laws, including most notably Rule 2a-7 under the Investment Company 
Act.'').
---------------------------------------------------------------------------

    We understand, and considered when developing the final amendments 
we are adopting 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 
designed these amendments to make the funds more resilient, as 
discussed throughout this Release, while preserving, to the extent 
possible, the benefits of money market funds. But as discussed in 
section III.K.1 below, we recognize that these reforms may make certain 
money market funds less attractive to some investors.

B. Certain Economic Features of Money Market Funds

    As discussed in detail in the Proposing Release, the combination of 
several features of money market funds can create an incentive for 
their shareholders to redeem shares heavily in periods of market 
stress. We discuss these factors below, as well as the harm that can 
result from such heavy redemptions in money market funds.
1. Money Market Fund Investors' Desire To Avoid Loss
    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 less tolerant 
of incurring even small losses, even at the cost of forgoing higher 
expected returns.\34\ Such investors may be loss averse for many 
reasons, including general risk tolerance, legal or investment 
restrictions, or short-term cash needs. These overarching 
considerations may create incentives for money market fund investors to 
redeem and would be expected to persist, even if the other incentives 
discussed below, such as those created by money market fund valuation 
and pricing, are addressed.
---------------------------------------------------------------------------

    \34\ See, e.g., PWG 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 decisions and 64% ranked safety of 
principal as the ``primary driver'' of their money market fund 
investment).
---------------------------------------------------------------------------

    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 DERA 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.\35\
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    \35\ 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/files/Documents/Centers/CFP/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 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'').
---------------------------------------------------------------------------

2. Liquidity Risks
    When investors begin to redeem a substantial amount of shares, a 
fund can experience a loss of liquidity. Money market funds, which 
offer investors the ability to redeem shares upon demand, often will 
first use internal liquidity to satisfy substantial redemptions. 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.\36\ And because the secondary 
market for many portfolio securities is not deeply liquid, funds may 
have to sell securities at a discount from their amortized cost value, 
or even at fire-sale prices,\37\ thereby incurring additional losses 
that may have been avoided if the funds had sufficient internal 
liquidity.\38\ This alone 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 the fund is left with fewer 
liquid assets, necessitating the sale of less liquid assets, 
potentially at a discount, to meet further redemption requests.\39\ 
Knowing that such liquidity costs may occur, money market fund

[[Page 47741]]

investors may have an incentive to redeem quickly in times of stress to 
avoid realizing these potential liquidity costs, leaving remaining 
shareholders to bear these costs.
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    \36\ See, e.g., Comment Letter of Goldman Sachs Asset Management 
L.P. (Sept. 17, 2013) (``Goldman Sachs Comment Letter'') (``A money 
fund faced with heavy redemptions could suffer a loss of liquidity 
that would force the untimely sale of portfolio securities at 
losses.''). We note that, although the Investment Company Act 
permits a money market fund to borrow money from a bank, see section 
18(f) of the Investment Company Act, 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.''
    \37\ Money market funds normally meet redemptions by disposing 
of their more liquid assets, rather than selling a pro rata slice of 
all their holdings. See, e.g., 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'').
    \38\ The DERA 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. DERA Study, supra note 24, 
at 37.
    \39\ See, e.g., Comment Letter of MSCI Inc. (Sept. 17, 2013) 
(``MSCI Comment Letter'') (``The need to provide liquidity provides 
another set of incentives, as early redeemers may exhaust the fund's 
internal sources of liquidity (cash on hand, cash from maturing 
securities, etc.), leaving possibly distressed security sales as the 
only source of liquidity for late redeemers.'').
---------------------------------------------------------------------------

3. 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 for their entire portfolios. 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 in its 
portfolio, and thus to maintain a stable $1.00 share price under most 
market 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 when market conditions shift 
due to changes in interest rates, credit risk, and liquidity.\40\ 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.\41\ Today, unless the fund ``breaks 
the buck,'' market value differences are reflected only in a fund's 
shadow price, and not the share price at which the fund satisfies 
purchase and redemption transactions.
---------------------------------------------------------------------------

    \40\ 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 most portfolio securities 
such as commercial paper, repos, and certificates of deposit are not 
actively traded in a secondary market. Accordingly, most money 
market fund portfolio securities are valued largely through ``mark-
to-model'' or ``matrix pricing'' estimates, which often use market 
inputs, as well as other factors in their pricing models. See 
Proposing Release, supra note 25, at n.27. See also infra section 
III.D.2.
    \41\ 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. But 
if 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 
reversed 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 and the tax 
requirements for these funds.\42\
---------------------------------------------------------------------------

    \42\ In practice, a money market fund cannot use future 
portfolio earnings to restore its shadow price because Subchapter M 
of the Internal Revenue Code requires money market funds to 
distribute virtually all of their earnings to investors. These tax 
requirements can cause permanent reductions in shadow prices to 
persist over time, even if a fund's other portfolio securities are 
otherwise unimpaired.
---------------------------------------------------------------------------

    If a money market fund's shadow price deviates far enough from its 
stable $1.00 share price, investors may have an economic incentive to 
redeem their shares. For example, investors may have an incentive to 
redeem shares when a fund's shadow price is less than $1.00.\43\ 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 the remaining, 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.\44\ In times of stress, this 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.\45\
---------------------------------------------------------------------------

    \43\ See, e.g., Comment Letter of the Systemic Risk Council 
(Sept. 16, 2013) (``Systemic Risk Council Comment Letter'') (``If 
the fund's assets are worth less than a $1.00--and you can redeem at 
$1.00--the remaining shareholders are effectively paying first 
movers to run. This embeds permanent losses in the fund for the 
remaining holders.'').
    \44\ See, e.g., MSCI Comment Letter (``[W]hen a fund's market-
based NAV falls significantly below its stable NAV, an early 
redeemer not only benefits from this price discrepancy, but also 
puts downward pressure on the market-based NAV for the remaining 
investors (as the realized losses on the fund's assets must be 
shared across a smaller investor base).'').
    \45\ For an example illustrating this incentive, see Proposing 
Release, supra note 25, at text following n.31.
---------------------------------------------------------------------------

    We note that although defaults in assets held by money market funds 
are low probability events, the resulting losses can lead to a fund 
breaking the buck 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.\46\ And as discussed further in section III.C.2.a of this 
Release, money market funds hold significant numbers of such larger 
positions.\47\
---------------------------------------------------------------------------

    \46\ For a detailed discussion of the financial crises, see 
generally DERA Study, supra note 24, at section 4.A.
    \47\ The Financial Stability Oversight Council (``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., Comment Letter of Harvard Business School 
Professors Samuel Hanson, David Scharfstein, & Adi Sunderam (Jan. 8, 
2013) (``Harvard Business School FSOC Comment Letter'') (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'').
---------------------------------------------------------------------------

4. Investors' Misunderstanding About the Actual Risk of Investing in 
Money Market Funds
    Lack of investor understanding and lack of complete transparency 
concerning the risks posed by particular money market funds can 
contribute to heavy redemptions during periods of stress. This lack of 
investor understanding and complete transparency can come from several 
different sources.
    First, 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.\48\ 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. Investors may respond by initiating 
redemptions to avoid potential rather than actual losses in a ``flight 
to transparency.\49\''

[[Page 47742]]

Because 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 
the same or highly correlated positions.\50\
---------------------------------------------------------------------------

    \48\ See, e.g., DERA Study, supra note 24, 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''). As discussed in section III.E.9.c, a number of money 
market funds have begun voluntarily disclosing information about 
their portfolio assets, liquidity, and shadow NAV on a more frequent 
basis than required, in part to address investor concerns regarding 
the staleness of information about fund holdings. The final 
amendments we are adopting today include a number of regulatory 
requirements designed to enhance transparency of money market risks, 
including daily disclosure of liquid assets, shareholder flows, 
current NAV and shadow NAV on fund Web sites, and elimination of the 
60 day lag on public disclosure of Form N-MFP data. See infra 
section III.G.1.
    \49\ 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.'').
    \50\ See Comment Letter of Federal Reserve of Boston (Sept. 12, 
2013) (``Boston Federal Reserve Comment Letter'') (``Investors in 
other MMMFs may in turn run if they perceive that their funds are 
similar (e.g. similar portfolio composition, similar maturity 
profile, similar investor concentration) to the fund that 
experienced the initial run.''); see infra notes 58-59 and 
accompanying text. Based on Form N-MFP data as of February 28, 2014, 
there were 27 different issuers whose securities were held by more 
than 100 prime money market funds.
---------------------------------------------------------------------------

    Second, money market funds' sponsors on a number of occasions have 
voluntarily chosen to provide financial support for their money market 
funds.\51\ The reasons that sponsors have done so include keeping a 
fund from re-pricing below its stable value, protecting the sponsors' 
reputations or brands, and increasing a fund's shadow price if its 
sponsor believes investors avoid funds that have low shadow prices. 
Prior to the changes that we are adopting today, funds were not 
required to disclose instances of sponsor support outside of financial 
statements; as a result, sponsor support has not been fully transparent 
to investors and this, in turn, may have lessened some investors' 
understanding of the risk in money market funds.\52\
---------------------------------------------------------------------------

    \51\ In the Proposing Release we requested comment on amending 
rule 17a-9 (which allows for discretionary support of money market 
funds by their sponsors and other affiliates) to potentially 
restrict the practice of sponsor support, but did not propose any 
specific changes. Most commenters who addressed our request for 
comment on amending rule 17a-9 opposed making any changes to rule 
17a-9, arguing that the transactions facilitated by the rule are in 
the best interests of the shareholders. See Comment Letter of the 
Investment Company Institute (Sept 17, 2013) (``ICI Comment 
Letter''); Comment Letter of the Dreyfus Corporation (Sept. 17, 
2013) (``Dreyfus Comment Letter''); Comment Letter of American Bar 
Association Business Law Section (Sept. 30, 2013) (``ABA Business 
Law Comment Letter''). One commenter supported amending rule 17a-9, 
arguing that these transactions can result in shareholders having 
unjustified expectations of future support being provided by 
sponsors. Comment Letter of HSBC Global Asset Management (Sept. 17, 
2013) (``HSBC Comment Letter''). In light of these comments, we are 
not amending rule 17a-9 at this time. See also infra section 
III.E.7.a.
    \52\ See, e.g., HSBC Comment Letter (``[A] level of ambiguity 
about who owns the risk when investing in a MMF has developed 
amongst some investors. Some investors have been encouraged to 
expect sponsors to support their MMFs. Such expectations cannot be 
enforced, since managers are under no obligation to support their 
funds, and consequently leads some investors to misunderstand and 
misprice the risks they are subject to.'') (emphasis in original).
---------------------------------------------------------------------------

    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 support).\53\ 
But the financial crisis is not the only instance in which some money 
market funds have come under strain, although it is unique in the 
number of money market funds that requested or received sponsor 
support.\54\ As noted in the Proposing Release, since 1989, 11 other 
financial events have been sufficiently adverse that certain fund 
sponsors chose to provide support or to seek staff no-action assurances 
in order to provide support, potentially affecting 158 different money 
market funds.\55\
---------------------------------------------------------------------------

    \53\ 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 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. 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. 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 not necessary. See, e.g., Comment 
Letter of the Dreyfus Corporation (Aug. 7, 2012) (available in File 
No. 4 619) (``Dreyfus III Comment Letter'') (stating that no-action 
relief to provide sponsor support ``was sought by many money funds 
as a precautionary measure'').
    \54\ See Moody's Investors Service Special Comment, Sponsor 
Support Key to Money Market Funds (Aug. 9, 2010) (``Moody's Sponsor 
Support Report''). Interest rate changes, issuer defaults, and 
credit rating downgrades can lead to significant valuation losses 
for individual funds.
    \55\ See Proposing Release, supra note 25, at section II.B.3. We 
note, as discussed more fully in the Proposing Release, 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 and because sponsor support 
prevented any funds from breaking the buck.
---------------------------------------------------------------------------

    Finally, the government assistance provided to money market funds 
during the financial crisis may have contributed to investors' 
perceptions that the risk of loss in money market funds is low.\56\ If 
investors perceive that money market funds have an implicit government 
guarantee, they may believe that money market funds are safer 
investments than they in fact are and may underestimate the potential 
risk of loss.\57\
---------------------------------------------------------------------------

    \56\ For a further discussion of issues related to money market 
fund sponsor support and its effect on investors' perception, see 
Proposing Release, supra note 25, at nn.60-61 and accompanying text.
    \57\ See, e.g., HSBC Comment Letter.
---------------------------------------------------------------------------

C. Effects on Other Money Market Funds, Investors, and the Short-Term 
Financing Markets

    In this section, we discuss how stress at one money market fund can 
be positively correlated across money market 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.\58\ Any resulting decline 
in the shadow prices of other funds could, in turn, lead to a contagion 
effect that could spread even further as investors run from money 
market funds in general. For example, some 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 shadow prices.\59\
---------------------------------------------------------------------------

    \58\ 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 37; Markus 
Brunnermeier, et al., The Fundamental Principles of Financial 
Regulation, in Geneva Reports on the World Economy 11 (2009).
    \59\ See, e.g., Boston Federal Reserve Comment Letter 
(discussing the relative homogeneity of money market funds holdings, 
and noting that as of the end of June 2013, the 20 largest corporate 
issuers accounted for approximately 44 percent of prime money market 
funds' assets); Comment Letter of Americans for Financial Reform 
(Sept. 17, 2013) (``Americans for Fin. Reform Comment Letter'') 
(discussing a study estimating that 97 percent of non-governmental 
assets of prime money market funds consists of financial sector 
commercial paper); 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.'').
---------------------------------------------------------------------------

    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 fund that could 
own the security (e.g., redeeming from all prime funds).\60\ A

[[Page 47743]]

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.
---------------------------------------------------------------------------

    \60\ See, e.g., Wermers Study, supra note 35 (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 by money market funds during the financial 
crisis, 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 the short-term financing 
markets.\61\ Indeed, money market funds had experienced steady growth 
before the financial crisis, driven in part by growth in the size of 
institutional cash pools, which grew from under $100 billion in 1990 to 
almost $4 trillion just before the financial crisis.\62\ Money market 
funds' suitability for cash management operations also has made them 
popular among corporate treasurers, municipalities, and other 
institutional investors, some of which 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 the expertise of money market fund managers.\63\ For 
example, according to one survey, approximately 16% of organizations' 
short-term investments were allocated to money market funds (and, 
according to this survey, 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 expired at the end of 2012).\64\
---------------------------------------------------------------------------

    \61\ See infra section III.K.3 for statistics on the types and 
percentages of outstanding short-term debt obligations held by money 
market funds.
    \62\ See Proposing Release supra note 25, at nn.70-71.
    \63\ 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'') (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.''); see also Proposing 
Release supra note 25, at n.72.
    \64\ See 2013 Association for Financial Professionals Liquidity 
Survey, at 15, available at http://www.afponline.org/liquidity 
(subscription required) (``2013 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, almost 30% in the 2011 survey, and 16% in the 2012 
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 50% of organizations' short-term 
investment allocations in the 2013 survey. The 2012 survey noted 
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 in which 
assets have remained despite the expiration of the insurance. See 
2013 AFP Liquidity Survey. As of February 28, 2014, approximately 
67% 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 other markets. 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.\65\ 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 financial crisis illustrates the impact of heavy 
redemptions, as we discuss in more detail below.
---------------------------------------------------------------------------

    \65\ See supra text preceding and accompanying note 36. 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 as a stressed fund 
may be unlikely to be receiving significant investor purchases 
during such a time.
---------------------------------------------------------------------------

    Heavy redemptions in money market funds may disproportionately 
affect slow-moving shareholders because, as discussed further below, 
redemption data from the financial crisis show that some institutional 
investors are likely to redeem from distressed money market funds far 
more quickly than other investors and to redeem a greater percentage of 
their prime fund holdings.\66\ This likely is because some 
institutional investors generally have more capital at stake, along 
with sophisticated tools and professional staffs to monitor risk. 
Because of their proportionally larger investments, just a few 
institutional investors submitting redemption requests may have a 
significant effect on a money market fund's liquidity, while it may 
take many more retail investors, with their typically smaller 
investments sizes, to cause similar negative consequences. 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 to obtain liquidity to satisfy redemption requests. In both 
cases, redemptions leave the fund's portfolio more likely to lose 
value, to the detriment of slower-to-redeem investors.\67\ 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.\68\
---------------------------------------------------------------------------

    \66\ See Money Market Fund Reform, Investment Company Act 
Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] 
(``2009 Proposing Release''), at nn.46-48 and 178 and accompanying 
text.
    \67\ See, e.g., DERA Study, supra note 24, at 10 (``Investor 
redemptions during the 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.'').
    \68\ 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 Department 
of Treasury's (``Treasury Department'') temporary guarantee program 
for money market funds, which may have prevented heavier shareholder 
redemptions among generally slower-to-redeem retail investors. See 
infra note 80.
---------------------------------------------------------------------------

D. The Financial Crisis

    The financial crisis in many respects demonstrates the various 
considerations discussed above in sections B and C, including the 
potential implications and harm associated with heavy redemption

[[Page 47744]]

from money market funds.\69\ On September 16, 2008, the day after 
Lehman Brothers Holdings Inc. announced its bankruptcy, The Reserve 
Fund announced that 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.\70\ At the same time, there was turbulence in the market for 
financial sector securities as a result of other financial company 
stresses, including, for example, the near failure of American 
International Group (``AIG''), whose commercial paper was held by many 
prime money market funds.\71\
---------------------------------------------------------------------------

    \69\ See generally DERA Study, supra note 24, at section 3. See 
also 2009 Proposing Release supra note 66, at section I.D.
    \70\ See also 2009 Proposing Release, supra note 66, 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. See, e.g., 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). A class 
action suit brought on behalf of the Reserve Fund shareholders was 
settled in 2013. See Nate Raymond, Settlement Reached in Reserve 
Primary Fund Lawsuit, Reuters (Sept. 7, 2013) available at http://www.reuters.com/article/2013/09/07/us-reserveprimary-lawsuit-idUSBRE98604Q20130907.
    \71\ In addition to Lehman Brothers and AIG, there were other 
stresses in the market as well, as discussed in greater detail in 
the DERA Study. See generally DERA Study, supra note 24, at section 
3.
---------------------------------------------------------------------------

    Heavy redemptions in the Reserve Primary Fund were followed by 
heavy redemptions from other Reserve money market funds,\72\ and soon 
other institutional prime money market funds also began to experience 
heavy redemptions.\73\ During the week of September 15, 2008 (the week 
that Lehman Brothers announced it was filing for bankruptcy), investors 
withdrew approximately $300 billion from prime money market funds or 
14% of the assets in those funds.\74\ 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.\75\ 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.\76\
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    \72\ See 2009 Proposing Release, supra note 66, at section I.D.
    \73\ See DERA Study, supra note 24, at section 3.
    \74\ See Investment Company Institute, Report of the Money 
Market Working Group, at 62 (Mar. 17, 2009), available athttp://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 financial 
crisis was over 64% of the fund's assets.
    \75\ 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/~/media/
projects/bpea/spring%202009/2009a--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.
    \76\ See 2009 Proposing Release, supra note 66, 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). 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 financial 
crisis. See, e.g., Comment Letter of Investment Company Institute 
(Jan. 24, 2013) (available in File No. FSOC-2012-0003) (``ICI Jan. 
24 FSOC Comment Letter'').
---------------------------------------------------------------------------

    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 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.\77\ The aggregate level of retail 
investor redemption activity, in contrast, was not particularly high 
during September and October 2008, as shown in Figure 1.\78\
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    \77\ As discussed in section III.C.1 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 have lower credit default risk and greater liquidity 
than non-government portfolio securities typically held by money 
market funds.
    \78\ 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, which does not necessarily correlate with how we define 
retail funds in this Release.

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[[Page 47745]]

[GRAPHIC] [TIFF OMITTED] TR14AU14.000

    On September 19, 2008, the U.S. Department of the Treasury 
(``Treasury Department'') 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.\79\ These programs successfully slowed 
redemptions in prime money market funds and provided additional 
liquidity to money market funds. As discussed in the Proposing Release, 
the disruptions to the short-term markets detailed above could have 
continued for a longer period of time but for these programs.\80\
---------------------------------------------------------------------------

    \79\ See 2009 Proposing Release, supra note 66, 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.
    \80\ See Proposing Release supra note 25 at n.91.
---------------------------------------------------------------------------

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

1. The 2010 Amendments
    After the events of the financial crisis, in March 2010, we adopted 
a number of amendments to rule 2a-7.\81\ These amendments were designed 
to make money market funds more resilient by reducing the interest 
rate, credit, and liquidity risks of fund asset portfolios.\82\ More 
specifically, the amendments decreased money market funds' credit risk 
exposure by further restricting the amount of lower quality securities 
that funds can hold.\83\ The amendments, for the first time, also 
required that money market funds maintain liquidity buffers in the form 
of specified levels of daily and weekly liquid assets.\84\ These 
liquidity buffers provide a source of internal liquidity and are 
intended to help funds withstand high levels of redemptions during 
times of market illiquidity. The amendments also reduce money market 
funds' exposure to interest rate risk by decreasing the maximum 
weighted average maturities of fund portfolios from 90 to 60 days.\85\
---------------------------------------------------------------------------

    \81\ 2010 Adopting Release, supra note 17.
    \82\ Commenters have noted the importance of the 2010 reforms in 
enhancing the resiliency of money market funds. See, e.g., Comment 
Letter of Invesco Ltd. (Sept. 17, 2013) (``Invesco Comment Letter'') 
(``In evaluating the reforms contained in the Proposed Rule it is 
also important to take into account the significant impact of the 
reforms implemented by the Commission in 2010, which amounted to a 
comprehensive overhaul of the regulatory framework governing 
MMFs.'').
    \83\ 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 current rule 2a-7(a)(24) (defining ``second tier 
security''); current rule 2a-7(a)(12) (defining ``eligible 
security''); current rule 2a-7(a)(23) (defining ``requisite 
NRSROs''). Today, in a companion release, we are also re-proposing 
to remove NRSRO rating references from rule 2a-7 and Form N-MFP.
    \84\ 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 current 
rule 2a-7(c)(5)(ii) and (iii).
    \85\ 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 
current 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 
Commission monthly information on their portfolio holdings using Form 
N-MFP.\86\ 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 also 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.\87\
---------------------------------------------------------------------------

    \86\ See current rule 30b1-7.
    \87\ See current rule 2a-7(c)(12).
---------------------------------------------------------------------------

    Finally, the 2010 amendments require money market funds to undergo 
stress tests under the direction of the board of

[[Page 47746]]

directors on a periodic basis.\88\ 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.\89\
---------------------------------------------------------------------------

    \88\ See current rule 2a-7(c)(10)(v).
    \89\ See 2009 Proposing Release, supra note 66, at section 
II.C.3.
---------------------------------------------------------------------------

2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and 
2013
    Several significant market events since our 2010 reforms have 
permitted us to evaluate the efficacy of those reforms. Specifically, 
in the summer of 2011, the Eurozone sovereign debt crisis and an 
impasse over the U.S. Government's debt ceiling unfolded, and during 
the fall of 2013 another U.S. Government debt ceiling impasse occurred.
    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 needed to re-price below its stable 
$1.00 share price. As discussed in greater detail in the Proposing 
Release, as a result of concerns about exposure to European financial 
institutions, in the summer of 2011, prime money market funds began 
experiencing substantial redemptions.\90\ But unlike September 2008, 
money market funds did not experience meaningful capital losses in the 
summer of 2011 (or as discussed below, in the fall of 2013), and the 
funds' shadow prices did not deviate significantly from the funds' 
stable share prices. Also unlike in 2008, money market funds had 
sufficient liquidity to satisfy investors' redemption requests, which 
were submitted at a lower rate and over a longer period than in 2008, 
suggesting that the 2010 amendments acted as intended to enhance the 
resiliency of money market funds.\91\
---------------------------------------------------------------------------

    \90\ See Proposing Release supra note 25, at section II.D.2; 
DERA Study, supra note 24, at 32. Assets held by prime money market 
funds declined by approximately $100 billion (or 6%) during a three-
week period beginning June 14, 2011. Some prime money market funds 
had redemptions of almost 20% of their assets in each of June, July, 
and August 2011, and one fund had redemptions of 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. 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. See Proposing Release supra note 25, at section II.D.2.
    \91\ DERA Study, supra note 24, at 33-34. We note that 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 DERA Study, which discusses a number of possible 
explanations for redemptions during the financial crisis. Id. at 7-
13.
---------------------------------------------------------------------------

    In 2013, another debt ceiling impasse took place,\92\ although over 
a longer time period and without the Eurozone crisis as a backdrop. 
During the worst two-week period of the 2013 crisis, October 3rd 
through October 16th, government and treasury money market funds 
experienced combined outflows of $54.4 billion, which was 6.1% of total 
assets, with approximately 1.5% of assets flowing out of these funds on 
October 11th, the single worst day for outflows of the 2013 impasse. 
Importantly, despite these outflows, fund shadow prices were largely 
unaffected during this time period. Once the impasse was resolved, 
assets flowed back into these funds, returning government and treasury 
money market funds to a pre-crisis asset level before the end of the 
year, indicating their resiliency.\93\
---------------------------------------------------------------------------

    \92\ See, e.g., Money-Market Funds Shine During Debt Limit 
Crisis (10/25/2013), available at http://www.imoneynet.com/news/280.aspx.
    \93\ These statistics are based on an analysis of information 
from Crane Data. See also infra section III.C.1.
---------------------------------------------------------------------------

    Although money market funds' experiences differed in 2008 and in 
the Eurozone crisis, the heavy redemptions money market funds 
experienced in both periods appear to have negatively affected the 
markets for short-term financing in similar ways. Academics researching 
these issues have found, as detailed in the DERA 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.'' \94\ 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. Again, despite these similar effects, the 
2010 reforms demonstrated that money market funds are potentially more 
resilient today than in 2008.
---------------------------------------------------------------------------

    \94\ DERA Study, supra note 24, 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. Continuing Consideration of the Need for Additional Reforms
    As discussed in greater detail in the Proposing Release, when we 
adopted the 2010 amendments, we acknowledged that money market funds' 
experience during the financial crisis raised questions of whether more 
fundamental changes to money market funds might be warranted.\95\ The 
DERA Study, discussed throughout this Release, has informed our 
consideration of the risks that may be posed by money market funds and 
our formulation of today's final rules and rule amendments. The DERA 
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 2011 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.\96\
---------------------------------------------------------------------------

    \95\ See 2009 Proposing Release, supra note 66, at section III; 
2010 Adopting Release, supra note 17, at section I.
    \96\ See generally DERA Study, supra note 24, at section 4.

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

[[Page 47747]]

    In particular, the DERA 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.\97\ 
For example, funds in 2011 had sufficient liquidity to withstand 
investors' redemptions during the summer of 2011.\98\ 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 DERA 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%.\99\ The DERA 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.\100\ Based on the DERA Study, we believe that, 
although 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 and the fall of 
2013), these reforms do not sufficiently address the potential future 
situations when credit losses may cause a fund's portfolio to lose 
value or when the short-term financing markets more generally come 
under stress.
---------------------------------------------------------------------------

    \97\ Id. at 30.
    \98\ Id. at 34.
    \99\ 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.
    \100\ To further illustrate the point, the DERA Study noted that 
the Reserve Primary Fund ``would have broken the buck even in the 
presence of the 2010 liquidity requirements.'' Id. at 37.
---------------------------------------------------------------------------

    After consideration of this data, as well as the comments we 
received on the proposal, we believe that the reforms we are adopting 
today should further help 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.

III. Discussion

A. Liquidity Fees and Redemption Gates

    Today, we are adopting amendments to rule 2a-7 that will authorize 
new tools for money market funds to use in times of stress to stem 
heavy redemptions and avoid the type of contagion that occurred during 
the financial crisis. These amendments provide money market funds with 
the ability to impose liquidity fees and redemption gates (generally 
referred to herein as ``fees and gates'') in certain 
circumstances.\101\ Today's amendments will allow a money market fund 
to impose a liquidity fee of up to 2%, or temporarily suspend 
redemptions (also known as ``gate'') for up to 10 business days in a 
90-day period, if the fund's weekly liquid assets fall below 30% of its 
total assets and the fund's board of directors (including a majority of 
its independent directors) determines that imposing a fee or gate is in 
the fund's best interests.\102\ Additionally, under today's amendments, 
a money market fund will be required to impose a liquidity fee of 1% on 
all redemptions if its weekly liquid assets fall below 10% of its total 
assets, 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 interests of the fund.\103\
---------------------------------------------------------------------------

    \101\ Under the amendments we are adopting today, government 
funds are permitted, but not required, to impose fees and gates, as 
discussed below. See infra section III.C.1 of this Release.
    \102\ If, at the end of a business day, a fund has invested 30% 
or more of its total assets in weekly liquid assets, the fund must 
cease charging the liquidity fee or imposing the redemption gate, 
effective as of the beginning of the next business day. See rule 2a-
7(c)(2)(i)(A) and (B), and (ii)(B).
    \103\ The board also may determine that a lower or higher fee 
would be in the best interests of the fund. See rule 2a-
7(c)(2)(ii)(A); see also infra section III.A.2.c.
---------------------------------------------------------------------------

    These amendments differ in some respects from the fees and gates 
that we proposed, which would have required funds to impose a 2% 
liquidity fee on all redemptions, and would have permitted the 
imposition of redemption gates for up to 30 days in a 90-day period, 
after a fund's weekly liquid assets fell below 15% of its total assets. 
In addition, under our proposal, a fund's board (including a majority 
of independent directors) could have determined not to impose the 
liquidity fee or to impose a lower fee. A large number of commenters 
supported, to varying degrees and with varying caveats, our fees and 
gates proposal.\104\ Many other commenters, on the other hand, 
expressed their opposition to fees and gates.\105\ Comments on the 
proposal are discussed in more detail below.
---------------------------------------------------------------------------

    \104\ See, e.g., Form Letter Type A; Comment Letter of Fidelity 
Investments (Sept. 16, 2013) (``Fidelity Comment Letter''); Comment 
Letter of Federated Investors, Inc. (Re: Alternative 2) (Sept. 16, 
2013) (``Federated V Comment Letter''); Comment Letter of Northern 
Trust Corporation (Sept. 16, 2013) (``Northern Trust Comment 
Letter'').
    \105\ See, e.g., Comment Letter of Capital Advisors Group (Sept. 
3, 2013) (``Capital Advisors Comment Letter''); Comment Letter of 
Americans for Financial Reform (Sept. 17, 2013) (``Americans for 
Fin. Reform Comment Letter''); Comment Letter of Edward D. Jones and 
Co., L.P. (Sept. 20, 2013) (``Edward Jones Comment Letter'').
---------------------------------------------------------------------------

1. Analysis of Certain Effects of Fees and Gates \106\
---------------------------------------------------------------------------

    \106\ See infra section III.K (discussing further the economic 
effects of the fees and gates amendments).
---------------------------------------------------------------------------

a. Background
    As discussed previously, shareholders redeem money market fund 
shares for a number of reasons.\107\ Shareholders may redeem shares 
because the current rounding convention in money market fund valuation 
and pricing can create incentives for shareholders to redeem shares 
ahead of other investors when the market-based NAV per share of a fund 
is lower than $1.00 per share.\108\ Shareholders also may flee to 
quality, liquidity, or transparency (or combinations thereof) during 
adverse economic events or financial market conditions.\109\ 
Furthermore, in times of stress, shareholders may simply need or want 
to withdraw funds for unrelated reasons. In any case, money market 
funds may have to absorb quickly high levels of redemptions that exceed 
internal sources of liquidity. In these instances, funds will need to 
sell portfolio securities, perhaps at a loss either because they incur 
transitory liquidity costs or they must sell assets at ``fire sale'' 
prices.\110\ If fund managers deplete their funds' most liquid assets 
first, this may impose future liquidity costs (that are not reflected 
in a $1.00 share price based on current amortized cost valuation) on 
the non-redeeming shareholders because later redemption requests must 
be met by selling less liquid assets. These effects may be heightened 
if many funds sell assets at the same time, lowering asset prices. 
During the financial crisis, for example, securities sales to meet 
heavy redemptions in money market funds and sales of assets by other 
investors

[[Page 47748]]

created downward price pressure in the market.\111\
---------------------------------------------------------------------------

    \107\ See Proposing Release, supra note 25, at 156-172; DERA 
Study, supra note 24, at 2-4.
    \108\ As discussed in section III.B, the floating NAV amendments 
help mitigate this incentive for institutional prime funds by 
causing redeeming shareholders to receive the market value of 
redeemed shares.
    \109\ See Proposing Release, supra note 25, at n.340.
    \110\ See Proposing Release, supra note 25, at n.341.
    \111\ See supra section II.D herein (discussing the financial 
crisis); see also Proposing Release, supra note 25 at 32-33; DERA 
Memorandum Regarding Liquidity Cost During Crisis Periods, dated 
March 17, 2014 (``DERA Liquidity Fee Memo''), available at http://www.sec.gov/comments/s7-03-13/s70313-321.pdf.
---------------------------------------------------------------------------

    Liquidity fees and redemption gates have been used successfully in 
the past by certain non-money market fund cash management pools to stem 
redemptions during times of stress.\112\ Liquidity fees provide 
investors continued access to their liquidity (albeit at a cost) while 
also reducing the incentives for shareholders to redeem shares. 
Liquidity fees, however, will not outright stop redemptions. In 
contrast to fees, redemption gates stop redemptions altogether, but do 
not offer the flexibility of fees.\113\ Because redemption gates 
prevent investors from accessing their investments for a period of 
time, a fund may choose to first impose a liquidity fee and then, if 
needed, impose a redemption gate.
---------------------------------------------------------------------------

    \112\ A Florida local government investment pool experienced 
heavy redemptions in 2007 due to its holdings in SIV securities. The 
pool suspended redemptions and ultimately reopened but only after 
the pool (and each shareholder's interest) had been split into two 
separate pools: one holding the more illiquid securities previously 
held by the pool (``Fund B'') and one holding the remaining 
securities of the pool (``Fund A''). Fund A reopened, but limited 
redemptions to up to 15% of an investor's holdings or $2 million 
without penalty, and imposed a 2% redemption fee on any additional 
redemptions. Fund B remained closed. When Fund A reopened, it 
experienced withdrawals, but according to state officials, the 
withdrawals were manageable. See Dealbook, NY Times, Florida Fund 
Reopens, and $1.1 Billion is Withdrawn; 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); see also infra note 114 (discussing 
the successful use by some European enhanced cash funds of fees or 
gates during the financial crisis).
    \113\ See Institutional Money Market Funds Association, IMMFA 
Recommendations for Redemption Gates and Liquidity Fees, available 
at http://www.immfa.org/publications/policy-positions.html 
(``Redemption gates and/or a liquidity fee are methods by which a 
fund manager, if experiencing difficulty due to extreme market 
circumstances, can control redemptions in order to ensure that all 
investors are treated fairly and that no `first-mover' advantage 
exists.''); 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.
---------------------------------------------------------------------------

    The fees and gates amendments we are adopting today are designed to 
address certain issues highlighted by the financial crisis. In 
particular, the amendments should allow funds to moderate redemption 
requests by allocating liquidity costs to those shareholders who impose 
such costs on funds through their redemptions and, in certain cases, 
stop heavy redemptions in times of market stress by providing fund 
boards with additional tools to manage heavy redemptions and improve 
risk transparency. We understand that based on the level of redemption 
activity that occurred during the financial crisis, many money market 
funds would have faced liquidity pressures sufficient to cross the 
liquidity thresholds we are adopting today that would allow the use of 
fees and gates. Although no one can predict with certainty what would 
have happened if money market funds had operated with fees and gates 
during the financial crisis, we believe that money market funds would 
have been better able to manage the heavy redemptions that occurred and 
limit contagion, regardless of the reason for the redemptions.\114\
---------------------------------------------------------------------------

    \114\ See, e.g., Comment Letter of Mutual Fund Directors Forum 
(Sept. 16, 2013) (``MFDF Comment Letter'') (stating, with respect to 
the proposed fee and gates amendments, ``we concur that this 
approach has the potential to reduce runs during times of stress or 
crisis''); UBS Comment Letter (``We agree that liquidity fees and 
gates would help money funds address heavy redemptions in an 
effective manner and limit the spread of contagion . . .''); Form 
Letter Type D. We also note that some European enhanced cash funds 
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_1.pdf?465916d4816580065dfafb92059615b6.
---------------------------------------------------------------------------

    Fees and gates are just one aspect of the overall package of 
reforms we are adopting today. We recognize that fees and gates do not 
address all of the factors that may lead to heavy redemptions in money 
market funds. For example, fees and gates do not fully eliminate the 
incentive to redeem ahead of other investors in times of stress \115\ 
or fully prevent investors from redeeming shares (except during the 
duration of a temporary gate) to invest in securities with higher 
quality, better liquidity, or increased transparency.\116\ Fees and 
gates also do not address the shareholder dilution that results when a 
shareholder is able to redeem at a stable NAV that is higher than the 
market value of the fund's underlying portfolio securities.\117\ 
Nonetheless, for the reasons discussed in this Release, fees and gates 
provide funds and their boards with additional tools to stem heavy 
redemptions and avoid the type of contagion that occurred during the 
financial crisis by allocating liquidity costs to those shareholders 
who impose such costs on funds and by stopping runs.
---------------------------------------------------------------------------

    \115\ However, as discussed in section III.B herein, under 
today's amendments, institutional prime funds will be required to 
float their NAV. This reform is designed, in part, to address the 
incentive to redeem ahead of other investors in certain money market 
funds because of current money market fund valuation and pricing 
methods.
    \116\ Fees and gates lessen but do not fully eliminate the 
incentive for investors to redeem quickly in times of stress because 
redeeming shareholders will retain an economic advantage over 
shareholders who remain in a fund when liquidity costs are high, but 
before the fund has imposed fees or gates.
    \117\ In contrast, the floating NAV requirement for 
institutional prime funds will address this issue. See infra section 
III.B.1.
---------------------------------------------------------------------------

i. Liquidity Fees
    During the financial crisis, some funds experienced heavy 
redemptions. Shareholders who redeemed shares early bore none of the 
economic consequences of their redemptions. Shareholders who remained 
in the funds, however, faced a declining NAV and an increased 
probability that their funds would ``break the buck.'' As discussed in 
the Proposing Release and suggested by commenters, investors may have 
re-assessed their redemption decisions during the crisis if money 
market funds had imposed liquidity fees because they would have been 
required to pay at least some of the costs of their redemptions.\118\ 
It is possible that some investors would have made the economic 
decision not to redeem because the liquidity fees imposed by the fund 
and incurred by an investor would have been certain, whereas potential 
future losses would have been uncertain.\119\
---------------------------------------------------------------------------

    \118\ See, e.g., Comment Letter of U.S. Chamber of Commerce, 
Center for Capital Markets Competitiveness (Sept. 17, 2013) 
(``Chamber II Comment Letter'') (``[I]f shareholders were to be 
charged a fee when a MMF's liquidity costs are at a premium, they 
may be discouraged from redeeming their shares at that time, which 
would have the effect of slowing redemptions in the MMF.''); Comment 
Letter of Charles Schwab Investment Management, Inc. (Sept. 12, 
2013) (``Schwab Comment Letter'') (``[W]e agree that the proposed 
liquidity fee of 2% would be a strong disincentive to redeem during 
a crisis . . .'').
    \119\ See HSBC Comment Letter; see also infra note 152-153 and 
accompanying text. We acknowledge (as we did in the Proposing 
Release) that liquidity fees may not always effectively stave off 
high levels of redemptions in a crisis; however, liquidity fees, 
once imposed, should help reduce the incentive to redeem shares 
because investors will pay a fee in connection with their 
redemptions. See Proposing Release, supra note 25, at 161.
---------------------------------------------------------------------------

    In addition, liquidity fees would have helped offset the costs of 
the liquidity provided to redeeming shareholders and potentially 
protected the funds' NAVs because the cash raised from liquidity

[[Page 47749]]

fees would create new liquidity for the funds.\120\ Additionally, to 
the extent that liquidity fees imposed during the crisis could have 
reduced redemption requests at the margin, they would have allowed 
funds to generate liquidity internally as assets matured. By imposing 
liquidity costs on redeeming shareholders, liquidity fees, as noted by 
commenters, also treat holding and redeeming shareholders more 
equitably.\121\
---------------------------------------------------------------------------

    \120\ Fees paid by investors that redeem shares should help 
prevent a fund's NAV from becoming impaired based on liquidity 
costs, as long as the liquidity fee imposed reflects the liquidity 
cost of redeeming shares. Fees should also generate additional 
liquidity to help funds meet redemption requests.
    \121\ See, e.g., Invesco Comment Letter (``Liquidity fees would 
provide an appropriate and effective means to ensure that the extra 
costs associated with raising liquidity to meet fund redemptions 
during times of market stress are borne by those responsible for 
them.''); Comment Letter of J.P. Morgan Asset Management (Sept. 17, 
2013) (``J.P. Morgan Comment Letter''); UBS Comment Letter; but see, 
e.g., Comment Letter of U.S. Bancorp Asset Management, Inc. (Sept. 
16, 2013) (``U.S. Bancorp Comment Letter'') (suggesting that 
liquidity fees harm those that redeem after the fees are imposed and 
that gates harm those that remain in the fund after the gate is in 
place).
---------------------------------------------------------------------------

    Liquidity fees, which we believe would rarely be imposed under 
normal market conditions, are designed to preserve the current benefits 
of principal stability, liquidity, and a market yield, but reduce the 
likelihood that, in times of market stress, costs that ought to be 
attributed to a redeeming shareholder are externalized on remaining 
shareholders and on the wider market.\122\ Even if a liquidity fee is 
imposed, fund investors continue to have the flexibility to access 
liquidity (albeit at a cost). The Commission believes, and commenters 
suggested, that if funds could have imposed liquidity fees during the 
crisis, they would likely have been better able to manage redemptions, 
thereby ameliorating their impact and reducing contagion effects.\123\
---------------------------------------------------------------------------

    \122\ See Proposing Release, supra note 25, at n.343.
    \123\ See Proposing Release, supra note 25, at 155; see also, 
e.g., Comment Letter of Wells Fargo Funds Management, LLC (Sept. 16, 
2013) (``Wells Fargo Comment Letter'') (``Prime money market fund 
investors, the short-term markets and businesses that rely on funds 
for financing would each benefit from the ability of [f]ees and 
[g]ates, during distressed market conditions, to reduce the 
susceptibility of subject funds to runs and blunt the spread of 
deleterious contagion effects.''); but see, e.g., U.S. Bancorp 
Comment Letter (suggesting that liquidity fees would not deter 
redemptions in times of market stress or prevent contagion because 
``investors will choose to pay the [fee] now rather than wait for 
the wind-down of a fund to be completed.'').
---------------------------------------------------------------------------

ii. Redemption Gates
    We believe that funds also could have benefitted from the ability 
to impose redemption gates during the crisis.\124\ Like liquidity fees, 
gates are designed to preserve the current benefits of money market 
funds under most market conditions; however, if approved and monitored 
by their boards, funds can use gates to respond to a run by directly 
halting redemptions. If funds had been able to impose redemption gates 
during the crisis, they would have had available to them a tool to stop 
temporarily mounting redemptions,\125\ which if used could have 
generated additional internal liquidity while gates were in place.\126\ 
In addition, gates may have allowed funds to invest the proceeds of 
maturing assets in short-term securities for the duration of the gate, 
protecting the short-term financing market, and supporting capital 
formation for issuers. Gates also would have allowed funds to directly 
and fully control redemptions during the crisis, providing time for 
funds to better communicate the nature of any stresses to shareholders 
and thereby possibly mitigating incentives to redeem shares.\127\
---------------------------------------------------------------------------

    \124\ See Comment Letter of Arnold & Porter LLP on behalf of 
Federated Investors [Overview] (Sept. 11, 2013) (``Federated II 
Comment Letter'') (noting that gates have ``been demonstrated to 
address runs in a crisis. . . .''); Comment Letter of BlackRock, 
Inc. (Sept. 12, 2013) (``BlackRock II Comment Letter'') (``Standby 
liquidity fees and gates would ``stop the run'' in crisis 
scenarios.''); see also supra note 114 (noting that European 
enhanced cash funds successfully used fees or gates during the 
financial crisis to stem redemptions); The Need to Focus a Light on 
Shadow Banking is Nigh, Mark Carney, Financial Times (June 15, 
2014), available at http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (``Money 
market funds are being made less susceptible to runs. . .by 
establishing an ability for funds to use, for example, temporary 
suspensions of withdrawals. . . .''); The Age of Asset Management?, 
Andrew Haldane (Apr. 4, 2014), available at http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf (suggesting gates may be a ``suitable'' tool to 
``tackle market failures''); but see, e.g., Comment Letter of 
Deutsche Investment Management Americas (Sept. 17, 2013) (``Deutsche 
Comment Letter'') (suggesting that gates can exacerbate a run).
    \125\ See, e.g., U.S. Bancorp Comment Letter (suggesting that 
redemption gates would be the ``most effective option in addressing 
run risk''); Chamber II Comment Letter (stating that ``a redemption 
gate would stop a `run' in [its] tracks'').
    \126\ See, e.g., Chamber II Comment Letter (``[A] redemption 
gate also gives [a money market fund] time for issues in the market 
to subside and for securities in the portfolio to mature, which 
would increase the [money market fund's] liquidity levels.''); Form 
Letter Type D (suggesting that redemption gates ``would give funds 
time to stabilize''). Internal liquidity generated while a gate is 
in place could prevent funds from having to immediately sell assets 
at fire sale prices.
    \127\ See, e.g., Invesco Comment Letter (``Redemption gates have 
been proven to be an effective means of preventing runs and 
providing a `cooling off' period to mitigate the effects of short-
term investor panic.'')
---------------------------------------------------------------------------

b. Benefits of Fees and Gates
i. Fees and Gates Address Concerns Related to Heavy Redemptions
    As noted above, a large number of commenters supported our fees and 
gates proposal.\128\ The primary benefit cited by commenters in favor 
of fees and/or gates is that they would address run risk and/or 
systemic contagion risk.\129\ Commenters also argued that fees and 
gates would protect the interests of all fund shareholders, 
particularly non- or late-redeeming shareholders, treating them more 
equitably.\130\ Commenters supported our view that redemption 
restrictions could provide a ``cooling off'' period to temper the 
effects of short-term investor panic,\131\ and that fees or gates could

[[Page 47750]]

preserve and help restore the liquidity levels of a money market fund 
that has come under stress.\132\ Commenters also echoed our view that 
fees and/or gates could reduce or eliminate the likelihood that funds 
would be forced to sell otherwise desirable assets and engage in ``fire 
sales.'' \133\ Additionally, commenters noted that gates would provide 
boards and advisers with crucial additional time to find the best 
solution in a crisis, instead of being forced to make decisions in 
haste.\134\
---------------------------------------------------------------------------

    \128\ We note that many participants in the money market fund 
industry have previously expressed support for imposing some form of 
a liquidity fee or redemption gate when a fund comes under stress as 
a way of reducing, in a targeted fashion, the fund's susceptibility 
to heavy redemptions. See Proposing Release, supra note 25, at 
n.358.
    \129\ See, e.g., Form Letter Type A; U.S. Bancorp Comment 
Letter; Comment Letter of Davenport & Company LLC (Sept. 13, 2013) 
(``Davenport Comment Letter''); MFDF Comment Letter; Comment Letter 
of Treasury Strategies, Inc. (Mar. 31, 2014) (``Treasury Strategies 
III Comment Letter'') (``We found that [f]ees and [g]ates can stop 
and prevent runs. . . . We find that highly effective run prevention 
is attainable within the approaches contemplated by the [Proposing] 
Release, while requiring that fund boards be given discretion to 
take protective action. This is the mechanism by which [f]ees/
[g]ates cause [money market funds] to internalize the cost of 
investor protection, while preserving the utility of current CNAV 
vehicles.''); see also The Need to Focus a Light on Shadow Banking 
is Nigh, Mark Carney, Financial Times (June 15, 2014), available at 
http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (``By establishing 
common policy standards and arrangements for co-operation, the 
reforms [including temporary gates] will help to avoid a 
fragmentation of the global financial system.''); but see, e.g., 
Boston Federal Reserve Comment Letter (suggesting fees or gates do 
not address run risk); Systemic Risk Council Comment Letter; Comment 
Letter of American Bankers Association (Sept. 17, 2013) (``American 
Bankers Ass'n Comment Letter'').
    \130\ See, e.g., Form Letter Type D (noting that gates would 
``give funds time to stabilize or, in the event a fund cannot resume 
redemptions without breaking the buck, ensure that the funds [sic] 
shareholders are treated equally in a distribution of the funds 
[sic] assets upon dissolution''); Invesco Comment Letter 
(``Liquidity fees would provide an appropriate and effective means 
to ensure that the extra costs associated with raising liquidity to 
meet fund redemptions during times of market stress are borne by 
those responsible for them.''); Comment Letter of Independent 
Directors Council (Sept. 17, 2013) (``IDC Comment Letter''); J.P. 
Morgan Comment Letter. We recognize, however, that our fees and 
gates reform does not address other shareholder equity concerns, 
including shareholder dilution, that arise as a result of the 
structural features in current rule 2a-7 that promote a first-mover 
advantage. Our floating NAV reform is designed to address this 
concern for institutional prime money market funds. See infra 
section III.B.
    \131\ See, e.g., Form Letter Type D; Invesco Comment Letter; 
Comment Letter of Reich & Tang Asset Management, LLC (Sept. 17, 
2013) (``Reich & Tang Comment Letter'').
    \132\ See, e.g., HSBC Comment Letter; Deutsche Comment Letter; 
ICI Comment Letter.
    \133\ See, e.g., MSCI Comment Letter; Federated V Comment 
Letter; Comment Letter of Treasury Strategies, Inc. (Sept. 12, 2013) 
(``Treasury Strategies Comment Letter''). We also believe that 
reducing or eliminating the likelihood of fire sales would in turn 
help protect other market participants that need to sell assets in 
the market or perhaps mark asset values to market.
    \134\ See, e.g., ICI Comment Letter; UBS Comment Letter; IDC 
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------

    We are adopting reforms that will give a fund the ability to impose 
either a liquidity fee or a redemption gate because we believe, and 
some commenters suggested, that fees and gates, while both aimed at 
helping funds to better and more systematically manage high levels of 
redemptions, do so in different ways and thus with somewhat different 
tradeoffs.\135\ Accordingly, we believe that both fees and gates should 
be available to funds and their boards to provide maximum flexibility 
for funds to manage heavy redemptions.\136\ Liquidity fees are designed 
to reduce shareholders' incentives to redeem shares when it is 
abnormally costly for funds to provide liquidity by requiring redeeming 
shareholders to bear at least some of the liquidity costs associated 
with their redemption (rather than transferring all of those costs to 
remaining shareholders).\137\ Liquidity fees increase the cost of 
redeeming shares, which may reduce investors' incentives to sell them. 
Likewise, fees help reduce investors' incentives to redeem shares ahead 
of other investors, especially if fund managers deplete their funds' 
most liquid assets first to meet redemptions, leaving later redemption 
requests to be met by selling less liquid assets.
---------------------------------------------------------------------------

    \135\ See, e.g., Invesco Comment Letter (suggesting that gates 
provide ``the most direct, simple and effective method'' to prevent 
runs and contagion as well as ``a `cooling off' period to mitigate 
the effects of short-term investor panic,'' while fees ``mitigate 
the `first-mover advantage' '' and ``provide an appropriate and 
effective means to ensure that the extra costs associated with 
raising liquidity to meet fund redemptions during times of market 
stress are borne by those responsible for them.'')
    \136\ See Treasury Strategies III Comment Letter (``Fees enable 
investors to access their liquidity, but at a price . . . , but that 
is the cost of being able to assure that a stable NAV product will 
not cause contagion or fire sales during such periods. Gates do not 
impose an extra [f]ee on shareholders, which is appealing to many 
shareholders, but have the undesirable effect of restricting access 
to liquidity during critical periods. Together, [f]ees and [g]ates 
provide fund boards with powerful tools to prevent a run from 
materializing, to stop a run in progress, and to assure that a 
stress event does not cause contagion or fire sales.'').
    \137\ See, e.g., Dreyfus Comment Letter (``We also agree that 
liquidity fees can deter net redemption activity while also 
providing an appropriate ``cost of liquidity'' for investors 
choosing to exercise the option to redeem over the option to hold. . 
. .); see also 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 a 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'').
---------------------------------------------------------------------------

    Several commenters noted that liquidity fees could ``re-mutualize'' 
risk-taking among investors and provide a way to recover costs of 
liquidity in times of stress.\138\ This is because liquidity fees 
allocate at least some of the costs of providing liquidity to redeeming 
rather than non-redeeming shareholders and protect fund liquidity by 
requiring redeeming shareholders to repay funds for liquidity costs 
incurred.\139\ To the extent liquidity fees 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.'' \140\ This explicit pricing of liquidity 
costs in money market funds should offer significant benefits to funds 
and the broader short-term financing market in times of potential 
stress because it should lessen both the frequency and effect of 
shareholder redemptions, which might otherwise result in the sale of 
fund securities at ``fire sale'' prices.\141\
---------------------------------------------------------------------------

    \138\ See, e.g., HSBC Comment Letter; Invesco Comment Letter; 
IDC Comment Letter.
    \139\ We note that investors owning securities directly--as 
opposed to through a money market fund--naturally bear liquidity 
costs. They bear these costs both because they bear any losses if 
they have to sell a security at a discount 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.
    \140\ See Proposing Release, supra note 25, at 160 n.352 (citing 
ICI Jan. 24 FSOC Comment Letter).
    \141\ See Chamber II Comment Letter (``[I]f shareholders were to 
be charged a fee when an MMF's liquidity costs are at a premium, 
they may be discouraged from redeeming their shares at that time, 
which would have the effect of slowing redemptions in the MMF.'').
---------------------------------------------------------------------------

    In contrast, redemption gates will provide fund boards with a 
direct and immediate tool for stopping heavy redemptions in times of 
stress.\142\ Unlike liquidity fees, gates are designed to directly stop 
a run by delaying redemptions long enough to allow (1) fund managers 
time to assess the condition of the fund and determine the appropriate 
strategy to meet redemptions, (2) liquidity buffers to grow organically 
as securities in the portfolio (many of which are very short-term) 
mature and produce cash, and (3) shareholders to assess the liquidity 
and value of portfolio holdings in the fund and for any shareholder or 
market panic to subside.\143\ As contemplated by today's amendments, 
gates definitively stop runs for funds that impose them by blocking all 
redemptions for their duration.
---------------------------------------------------------------------------

    \142\ See, e.g., Chamber II Comment Letter (``[A] redemption 
gate would stop a `run' in [its] tracks, because shareholders would 
be prohibited from redeeming their shares while the gate is in 
place.'')
    \143\ See Proposing Release, supra note 25, at n.348.
---------------------------------------------------------------------------

    We recognize that redemption gates, if they are ever imposed, will 
inhibit the full, unfettered redeemability of money market fund shares, 
a principle embodied in section 22(e) of the Investment Company 
Act.\144\ However, as discussed in section III.A.3 below, section 22(e) 
of the Investment Company Act is aimed at preventing funds and their 
advisers from interfering with shareholders' redemption rights for 
improper purposes, such as preservation of management fees. Consistent 
with that aim, redemption gates under today's amendments are designed 
to benefit the fund and its shareholders and may be imposed only when a 
fund's board determines that doing so is in the best interests of the 
fund.\145\ We also note that, in response to commenter concerns 
regarding investor access to their investments and the proposed 
duration of redemption gates, under today's amendments, gates will be 
limited to up to 10 business days in any 90-day period (rather than 30 
days in a 90-day period as proposed).\146\ As such, the extent to which 
today's amendments inhibit the redeemability of money market fund 
shares is limited.
---------------------------------------------------------------------------

    \144\ See section 22(e).
    \145\ See rule 2a-7(c)(2)(i).
    \146\ See rule 2a-7(c)(2)(i)(B); see also, infra section 
III.A.2.d (discussing the duration of redemption gates).
---------------------------------------------------------------------------

    In fact, we note that money market funds are currently permitted to 
delay payments on redemptions for up to

[[Page 47751]]

seven days.\147\ In addition, money market funds currently may suspend 
redemptions after obtaining an exemptive order from the 
Commission,\148\ or in accordance with rule 22e-3, which requires a 
fund's board of directors to determine that the fund is about to 
``break the buck'' (specifically, that the extent of deviation between 
the fund's amortized cost price per share and its current market-based 
NAV per share may result in material dilution or other unfair results 
to investors).\149\ Under today's amendments, money market fund boards 
will be able to temporarily suspend redemptions after a fund falls 
below the same threshold that funds must cross for boards to impose 
liquidity fees.\150\ Accordingly, we believe that the gating allowed by 
today's amendments extends and formalizes the existing gating 
framework, clarifying for investors when a money market fund 
potentially may use a gate as a tool to manage heavy redemptions and 
thus prevents any investor confusion on when gating may apply.
---------------------------------------------------------------------------

    \147\ See section 22(e).
    \148\ 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 or delay payment on redemptions for more than 
seven days, 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 the Commission determines by rule or regulation) 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).
    \149\ Rule 22e-3(a)(1). Unlike under today's amendments, a fund 
that imposes redemptions gates pursuant to rule 22e-3 must do so 
permanently and in anticipation of liquidation.
    \150\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    Fees and gates also may have different levels of effectiveness 
under different stress scenarios.\151\ For example, we expect that the 
imposition of liquidity fees when a fund faces heavy redemptions should 
be able to reduce the harm to non-redeeming shareholders and thus the 
likelihood of additional redemptions that might have been made in 
response to that harm. To the extent that a fund does not need to 
engage in fire sales and depress prices because of the imposition of 
fees, the possibility of broader market contagion is reduced. We also 
note that 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 the option that 
involves only possible losses rather than the option that involves 
certain losses, even when the amount of possible loss is significantly 
higher than the certain loss.\152\ Unlike gates, which temporarily 
prevent shareholders from redeeming shares altogether, once imposed, 
liquidity fees will present investors with an economic decision as to 
whether to redeem or remain in a fund. Investors fearing that a money 
market fund may suffer losses may prefer to stay in the fund and avoid 
paying a liquidity fee (despite the possibility that the fund might 
suffer a future loss) rather than redeem and lock in payment of the 
liquidity fee.\153\
---------------------------------------------------------------------------

    \151\ We note that under today's amendments, a fund's board may 
determine that it is in the best interests of a fund to impose a fee 
and then later determine to lift the fee and impose a gate, or vice 
versa, subject to the limitations on the duration of fees and gates. 
See rule 2a-7(c)(2)(i) and (ii).
    \152\ See, e.g., Proposing Release, supra note 25, at n.355 
(citing Daniel Kahneman, Thinking, Fast and Slow (2011), at 278-
288); see also HSBC Comment Letter; Schwab Comment Letter (``A 
liquidity fee would force early redeemers to pay for the costs of 
their redemption, without knowing whether the fund was actually 
going to experience losses or not. This is a powerful 
disincentive.''); but see Comment Letter of Melanie L. Fein Law 
Offices (Sept. 10, 2013) (``Fein Comment Letter'') (suggesting 
liquidity fees are unlikely to ``prevent institutional [money market 
fund] investors from reallocating their assets in a crisis'').
    \153\ See, e.g., Proposing Release, supra note 25, at n.355 
(citing Daniel Kahneman, Thinking, Fast and Slow (2011), at 278-
288); see also HSBC Comment Letter; Schwab Comment Letter.
---------------------------------------------------------------------------

    It is possible, however, that liquidity fees might not be fully 
effective during a market-wide crisis because, for example, 
shareholders might redeem shares irrespective of the level of their 
fund's true liquidity costs and the imposition of a liquidity fee.\154\ 
In those cases, gates will be able to function as circuit breakers, 
creating time for funds to rebuild their own internal liquidity and 
shareholders to reconsider whether redemptions are still desired or 
warranted.\155\
---------------------------------------------------------------------------

    \154\ See DERA Study, supra note 24, at 7-14 (discussing 
different possible explanations for why shareholders may redeem from 
money market funds in times of stress).
    \155\ See, e.g., Comment Letter of Department of the Treasury, 
Commonwealth of Virginia (Sept. 17, 2013) (``Va. Treasury Comment 
Letter''); Chamber II Comment Letter; Dreyfus Comment Letter.
---------------------------------------------------------------------------

ii. Management-Related Advantages
    We are also mindful that permitting fund boards to impose fees and/
or gates after a fund has fallen below a particular threshold, and 
requiring funds to impose liquidity fees at a lower designated 
threshold (absent a board finding that the fee is not in the best 
interests of the fund), may offer certain benefits to funds with 
respect to management of liquidity and redemption activity. Some 
commenters suggested that, even during non-stress periods, fees and 
gates could provide fund managers with an incentive to carefully 
monitor shareholder concentration and shareholder flow to lessen the 
chance that the fund might have to impose fees or gates (because larger 
redemptions are more likely to cause the fund to breach the 
threshold).\156\ The fees and gates amendments also may have the 
additional effect of encouraging portfolio managers to more closely 
monitor fund liquidity and hold more liquid securities to increase the 
level of daily and weekly liquid assets in the fund, as it would tend 
to lessen the likelihood of a fee or gate being imposed.\157\ Such an 
approach could also lead to greater investor participation in money 
market funds to the extent investors seek to invest in a product with 
low liquidity risk, thereby increasing the supply of capital available 
to invest in commercial paper. We recognize, however, that such an 
approach could perhaps shrink the market for riskier or longer-term 
commercial paper, or have a negative effect on yield.\158\
---------------------------------------------------------------------------

    \156\ See, e.g., Comment Letter of Securities Industry and 
Financial Markets Association (Sept. 17, 2013) (``SIFMA Comment 
Letter'') (stating that some members ``believe the existence of the 
liquidity trigger for the fee and gate will motivate fund managers 
to maintain fund liquidity well in excess of the trigger level, to 
avoid triggering the fee or gate. That is to say, the mere existence 
of the potential for the fee or gate will result in enhanced 
liquidity in money market funds.''); BlackRock II Comment Letter; 
Comment Letter of Hester Peirce and Robert Greene (Sept. 17, 2013) 
(``Peirce & Greene Comment Letter''); see also HSBC Global Asset 
Management, Liquidity Fees; a proposal to reform money market funds 
(Nov. 3, 2011) (``HSBC 2011 Liquidity Fees Letter'') (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); 
Comment Letter of BlackRock, Inc. (Dec. 13, 2012) (available in File 
No. FSOC-2012-0003) (``BlackRock FSOC Comment Letter'') (``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.'').
    \157\ See, e.g., Proposing Release, supra note 25, at n.365.
    \158\ See infra section III.K.
---------------------------------------------------------------------------

    We also note that funds may take alternate approaches to managing 
liquidity and imposing fees and gates,

[[Page 47752]]

which may differentially affect the short-term funding markets. For 
example, a fund that imposes a fee or gate may decide to immediately 
build liquidity by investing all maturing securities in highly liquid 
assets, particularly if the fund wants to remove the fee or gate as 
soon as possible. Another fund may plan to impose a fee or gate for a 
set period of time, in which case, there would be no reason to stop 
investing in less liquid short-term commercial paper provided it 
matured while the fee or gate was in place. The first strategy would 
likely have the capital formation effect of lowering participation in 
short-term funding markets, whereas the second strategy may defer the 
impact until a later time, possibly after market conditions have 
improved.
iii. Transparency
    We recognize, and certain commenters noted,\159\ that the prospect 
of fees and gates being implemented when a fund is under stress should 
help make the risk of investing in money market funds more salient and 
transparent to investors, which may help sensitize them to the risks of 
investing in money market funds. On the other hand, we note that other 
commenters argued that fees and gates would not improve transparency of 
risk for investors.\160\ Having considered these comments, however, we 
believe that there will be an appreciable increase in transparency as a 
result of our fees and gates amendments. The disclosure amendments we 
are adopting today will require funds to provide disclosure to 
investors regarding the possibility of fees and gates being imposed if 
a fund's liquidity is impaired. We believe such disclosure will benefit 
investors by informing them further of the risks associated with money 
market funds, particularly that money market funds' liquidity may, at 
times, be impaired.\161\ In addition, as noted above, fees and gates 
also could encourage shareholders to monitor funds' liquidity levels 
and exert market discipline over the fund to reduce the likelihood that 
the imposition of fees or gates will become necessary in that 
fund.\162\
---------------------------------------------------------------------------

    \159\ See, e.g., ICI Comment Letter; Comment Letter of Myra Page 
(July 19, 2013) (``Page Comment Letter'').
    \160\ See, e.g., Comment Letter of Thrivent Financial for 
Lutherans (Sept. 17, 2013) (``Thrivent Comment Letter) (``The 
imposition of a liquidity fee or gate will always be a surprise to 
the investors that do not redeem quickly enough to avoid it. The 
need to impose such a fee or gate will not be transparent to the 
investor unless redemption activity is disclosed in a timely manner 
providing sufficient time for investors to react.''); Capital 
Advisors Comment Letter. Two commenters also expressed concern that 
the ability to impose fees and gates would perpetuate shareholder 
reliance on sponsor support. See Capital Advisors Comment Letter; 
Thrivent Comment Letter. As discussed herein, we believe fees and 
gates and the disclosure associated with fees and gates will provide 
investors certain benefits, including informing investors further of 
the risks associated with money market funds. We further believe 
that the disclosure requirements adopted today regarding sponsor 
support should help ameliorate concerns regarding shareholder 
reliance on sponsor support. See infra sections III.E.7, III.E.9.g 
and III.F.3.
    \161\ We recognize that the level of board discretion in the 
fees and gates amendments may make it more difficult for investors 
to predict when fees and/or gates will imposed; however, we are 
adopting certain thresholds and maximums that we believe will 
provide investors with notice as to the possible imposition of fees 
and gates. Additionally, today we are adopting a requirement that 
funds disclose their percentage of weekly liquid assets on a daily 
basis on their Web sites and, thus, shareholders should be aware 
when a fund is approaching these thresholds. See rule 2a-
7(h)(10)(ii)(B).
    \162\ See Proposing Release, supra note 25, at n.366. The 
disclosure of fees and gates also could advantage larger funds and 
fund groups if the ability to provide financial support reduces or 
eliminates the need to impose fees and/or gates (whose imposition 
may be perceived to be a competitive detriment).
---------------------------------------------------------------------------

c. Concerns Regarding Fees and Gates
i. Pre-Emptive Runs and Broader Market Concerns
    We acknowledge the possibility that, in market stress scenarios, 
shareholders might pre-emptively redeem shares if they fear the 
imminent imposition of fees or gates (either because of the fund's 
situation or because other money market funds have imposed redemption 
restrictions).\163\ A number of commenters suggested investors would do 
so.\164\ Some commenters also suggested that sophisticated investors in 
particular might be able to predict that fees and gates may be imposed 
and may redeem shares before this occurs.\165\
---------------------------------------------------------------------------

    \163\ See, e.g., Proposing Release, supra note 25, at 163-167, 
n.361.
    \164\ See, e.g., Comment Letter of Novelis (July, 16, 2013) 
(``Novelis Comment Letter''); Comment Letter of State Investment 
Commission, Commonwealth of Kentucky (Sept. 9, 2013) (``Ky. Inv. 
Comm'n Comment Letter''); Boston Federal Reserve Comment Letter; 
Comment Letter of Hester Peirce and Robert Greene, Working Paper: 
Opening the Gate to Money Market Fund Reform (Apr. 8, 2014) 
(``Peirce & Greene II Comment Letter''). Some commenters were 
concerned that news of one money market fund imposing a redemption 
restriction could trigger a system-wide run by investors in other 
money market funds. See, e.g., Samuel Hanson, David Scharfstein, and 
Adi Sunderam (Sept. 16, 2013) (``Hanson et al. Comment Letter''); 
Deutsche Comment Letter; Boston Federal Reserve Comment Letter 
(suggesting further that ``because of the relative homogeneity in 
many [money market funds' holdings], the imposition of a liquidity 
fee or redemption gate on one fund may incite runs on other funds 
which are not subject to such measures'') (citation omitted). In 
addition, one commenter, drawing an analogy to banks prior to the 
adoption of federally insured deposits, noted that although 
withdrawal suspensions were commonly used by banks in response to 
fleeing depositors, the specter of suspensions themselves were often 
the cause of such investor flight. See, e.g., Comment Letter of 
Committee on Capital Markets Regulation (Sept. 17, 2013) (``Comm. 
Cap. Mkt. Reg. Comment Letter'').
    \165\ See, e.g., MFDF Comment Letter; Va. Treasury Comment 
Letter; Goldman Sachs Comment Letter.
---------------------------------------------------------------------------

    While we recognize that there is risk of pre-emptive redemptions, 
the benefits of having effective tools in place to address runs and 
contagion risk leads us to adopt the proposed fees and gates reforms, 
with some modifications. We believe several of the changes we are 
making in our final reforms will mitigate this risk and dampen the 
effects on other money market funds and the broader markets if pre-
emptive redemptions do occur.
    As discussed below, the shorter maximum time period for the 
imposition of gates and the smaller size of the default liquidity fee 
that we are adopting in these final amendments, as compared to what we 
proposed, are expected to lessen further the risk of pre-emptive 
runs.\166\ We understand that the potential for a longer gate or higher 
liquidity fee before a restriction is in place may increase the 
incentive for investors to redeem at the first sign of any potential 
stress at a fund or in the markets.\167\ We believe that by limiting 
the maximum time period that gates may be imposed to 10 business days 
in any 90-day period (down from the proposed 30 days), investor 
concerns regarding an extended loss of access to cash from their 
investment should be mitigated. Indeed, some money market funds today 
retain the right to delay payment on redemption requests for up to 
seven days, as all registered investment companies are permitted to do 
under the Investment Company Act, and we are not aware that this 
possibility has led to any pre-emptive runs historically.\168\ In 
addition, we note that under section 22(e), the Commission also has the 
authority to, by order, suspend the right of redemption or allow the 
postponement of payment of redemption requests for more than seven 
days. The Commission used this authority, for example, with

[[Page 47753]]

respect to the Reserve Primary Fund. To our knowledge, this authority 
also has not historically led to pre-emptive redemptions. We believe 
that the gating allowed by today's amendments extends and formalizes 
this existing gating framework, clarifying for investors when a money 
market fund potentially may use a gate as a tool to manage heavy 
redemptions and thus prevents any investor confusion on when gating may 
apply.
---------------------------------------------------------------------------

    \166\ See Comment Letter of Federated Investors, Inc. (Apr. 25. 
2014) (``Federated XI Comment Letter'').
    \167\ See J.P. Morgan Comment Letter (``The potential of total 
loss of access to liquidity for up to thirty (30) days will be a 
concern for investors, and could exacerbate a pre-emptive run.''); 
Federated V Comment Letter (``Shareholders will find it increasingly 
difficult to compensate for their loss of liquidity the longer the 
suspension of redemptions continues. It is therefore important for 
Alternative 2 to limit the suspension of redemptions to a period in 
which the potential benefits to shareholders of delaying redemptions 
outweigh the potential disruptions caused by the delay.'').
    \168\ See section 22(e).
---------------------------------------------------------------------------

    We believe that the maximum 10 business day gating period we are 
adopting today is a similarly short enough period of time (as compared 
to the seven days a fund may delay payment on redemption requests) that 
many investors may not be unduly burdened by such a temporary loss of 
liquidity.\169\ Thus, these investors may have less incentive to redeem 
their investments pre-emptively before the imposition of a gate. For 
similar reasons, the reduction in the default liquidity fee to 1% (down 
from the proposed 2%), discussed further below, may also lessen 
shareholders' incentives to redeem pre-emptively as fewer investors may 
consider it likely that a liquidity fee will result in an unacceptable 
loss on their investment.\170\
---------------------------------------------------------------------------

    \169\ See, e.g., Federated V Comment Letter (stating that 10 
calendar days ``would be a significantly shorter period than 
proposed by the Commission, while still allowing prime [money market 
funds] more than a week to address whatever problem led to the 
suspension of redemptions. This would also be consistent with the 
comments of some of the investors who indicated to Federated that 
they probably could not go more than two weeks without access to the 
cash held in their [money market fund].''); see also infra section 
III.A.2.d (discussing the maximum duration of temporary redemption 
gates under today's amendments).
    \170\ We note that under our final amendments, the 1% default 
liquidity may be raised by a fund's board (up to 2%) if it is in the 
best interests of the fund. See rule 2a-7(c)(2)(ii)(A). However, 
given the empirical information regarding liquidity costs in money 
market fund eligible securities in the financial crisis, as 
discussed in the DERA Liquidity Fee Memo, which supported the 
reduction in the size of the default liquidity fee to 1%, money 
market fund shareholders may estimate that a fee as high as 2% will 
be unlikely and that depending on the circumstances, a fee of less 
than 1% could be appropriately determined by the board of directors. 
See DERA Liquidity Fee Memo, supra note 111.
---------------------------------------------------------------------------

    In addition, we expect that the additional discretion we are 
granting fund boards to impose a fee or gate at any time after a fund's 
weekly liquid assets have fallen below the 30% required minimum, a much 
higher level of remaining weekly liquid assets than proposed, should 
mitigate the risk of pre-emptive redemptions. This board discretion 
should reduce the incentive of shareholders from trying to pre-
emptively redeem because they will be able to less accurately predict 
specifically when, and under what circumstances, fees and gates will be 
imposed.\171\ Board discretion also should allow boards to act 
decisively if they become concerned liquidity may become impaired and 
to react to expected, as well as actual, declines in liquidity levels, 
given their funds' investor base and other characteristics.
---------------------------------------------------------------------------

    \171\ See Wells Fargo Comment Letter (``The ability for fund 
investors to frequently and aggressively `game' and avoid the 
potential imposition of Fees or Gates is undermined by the element 
of uncertainty inherent in a fund board's discretion to impose a Fee 
or a Gate.''); see also Proposing Release, supra note 25, at n.362. 
Additionally, we believe that requiring investors in institutional 
prime funds to redeem their shares at floating NAV should lower the 
incentive to run pre-emptively when investors anticipate that a gate 
will be imposed as a result of a credit event. See infra section 
III.B for a discussion of the floating NAV requirement.
---------------------------------------------------------------------------

    Likewise, increased board discretion should lessen the likelihood 
that sophisticated investors can preferentially predict when a fee or 
gate is going to be imposed because sophisticated investors, like any 
other investor, will not know what specific circumstances a fund board 
will deem appropriate for the imposition of fees or gates.\172\ We 
recognize that sophisticated investors may monitor the weekly liquid 
assets of funds and seek to redeem before a fund drops below the 30% 
weekly liquid asset threshold. We believe, however, that a 
sophisticated investor may be dissuaded from redeeming in these 
circumstances because the fund still has a substantial amount of 
internal liquidity. In addition, redemptions when the fund still has 
this much internal liquidity would not lead to fire sales or other such 
adverse effects.
---------------------------------------------------------------------------

    \172\ Although funds' Web site disclosure will indicate when a 
fund is approaching the weekly liquid asset thresholds for imposing 
a fee or gate, investors will not know the circumstances under which 
a board will deem such a restriction to be in the best interests of 
the fund. See rule 2a-7(h)(10)(ii)(B).
---------------------------------------------------------------------------

    We also believe that increased board flexibility will reduce the 
occurrence of pre-emptive redemptions by shareholders who seek to 
redeem because another money market fund has imposed a fee or gate. 
Increased board flexibility will likely result in different funds 
imposing different redemption restrictions at different times, 
particularly considering that after crossing the 30% threshold each 
fund's board will be required to make a best interests determination 
with respect to the imposition of a fee or gate.\173\ As such, it will 
be less likely that investors can predict whether any particular fund 
will impose a fee or gate, even if another fund has done so, and thus 
perhaps less likely they will redeem assuming that one fund imposing 
such a restriction means other funds may soon do so.
---------------------------------------------------------------------------

    \173\ Boards will also be required to make a best interests 
determination if they determine to change the level of the default 
liquidity fee or to not impose the default fee. See rule 2a-
7(c)(2)(ii).
---------------------------------------------------------------------------

    Moreover, we believe that funds' ability to impose fees and gates 
once weekly liquid assets drop below 30% will substantially mitigate 
the broader effects of pre-emptive runs, should they occur. A money 
market fund that imposes a fee or gate with substantial remaining 
internal liquidity is in a better position to bear those redemptions 
without a broader market impact because it can satisfy those redemption 
requests through existing or internally generated cash and not through 
asset sales (other than perhaps sales of government securities that 
tend to increase in value and liquidity in times of stress). Thus, pre-
emptive runs, if they were to occur, under these circumstances are less 
likely to generate adverse contagion effects on other money market 
funds or the short-term financing markets.
    We note some commenters suggested that concerns about pre-emptive 
run risks from fees and gates are likely overstated.\174\ One commenter 
noted that the ``element of uncertainty inherent in a board's 
discretion to impose a fee or gate'' would diminish any possible gaming 
by investors.\175\ Another commenter further noted that ``appropriate 
portfolio construction and daily transparency'' would reduce the 
likelihood of anticipatory redemptions.\176\ For example, as discussed 
below, our amendments require that each money market fund disclose 
daily on its Web site its level of weekly liquid assets. This means 
that if one money market fund imposes a fee or gate, investors in other 
money market funds will have the benefit of full transparency on 
whether the money market fund in which they are invested is similarly 
experiencing liquidity stress and thus is likely to impose a fee or 
gate. Pre-emptive redemptions and contagion effects due to a lack of 
transparency

[[Page 47754]]

(which may have occurred in the crisis) may therefore be reduced. Some 
commenters also have previously indicated that a liquidity fee or gate 
should 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.\177\
---------------------------------------------------------------------------

    \174\ See, e.g., SIFMA Comment Letter; Wells Fargo Comment 
Letter; Dreyfus Comment Letter; see also Chamber II Comment Letter 
(stating that ``unlike with the current conditions of [r]ule 22e-3 
under the [Investment Company Act], a redemption gate would allow 
the MMF to remain in operation after the gate is lifted. This, in 
turn, will provide MMF investors with comfort regarding the ultimate 
redemption of their investment and make any large-scale redemptions 
less likely.''); Comment Letter of Artie Green (Aug. 29, 2013) 
(``Green Comment Letter'') (``Fund shareholders would be less likely 
to panic if they know they will have access to their assets when the 
fund reopens after a short suspension of redemptions.'').
    \175\ See Wells Fargo Comment Letter.
    \176\ See Dreyfus Comment Letter.
    \177\ See, e.g., Proposing Release, supra note 25, at n.364.
---------------------------------------------------------------------------

    Additionally, we note that while many European money market funds 
are able to suspend redemptions and/or impose fees on redemptions, we 
are not aware that their ability to do so has historically led to pre-
emptive runs. Most European money market funds are subject to 
legislation governing Undertakings for Collective Investment in 
Transferable Securities (``UCITS''), which also covers other collective 
investments, and which permits them to suspend temporarily redemptions 
of units.\178\ For example, in Ireland, UCITS are permitted to 
temporarily suspend redemptions ``in exceptional cases where 
circumstances so require and suspension is justified having regard to 
the interest of the unit-holders.'' \179\ Similarly, many money market 
funds in Europe are also permitted to impose fees on redemptions.\180\
---------------------------------------------------------------------------

    \178\ 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); see also Coll. 7.2R United Kingdom 
Financial Conduct Authority Handbook (allowing the temporary 
suspension of redemptions ``where due to exceptional circumstances 
it is in the interest of all the unitholders in the authorized 
fund'').
    \179\ See Regulation 104(2)(a) of S.I. No. 352 of 2011.
    \180\ See, e.g., HSBC Comment Letter (``We are in the process of 
rolling out the ability for the Board of Directors to impose trigger 
based liquidity fees in our [money market funds] where current 
regulation allows. At this time we are working on implementation in 
our flagship ``Global Liquidity Fund'' range domiciled in 
Dublin.'').
---------------------------------------------------------------------------

    We also note that a commenter discussed a paper by the staff of the 
Federal Reserve Bank of New York (``FRBNY'') entitled ``Gates, Fees, 
and Preemptive Runs.'' \181\ The FRBNY staff paper constructs a 
theoretical model of fees or gates used by a financial intermediary and 
finds ``that rather than being part of the solution, redemption fees 
and gates can be part of the problem.'' \182\ This commenter argued 
that this paper fails to consider numerous restrictions in bank 
products similar to fees and gates that do not appear to have triggered 
pre-emptive runs on banks.\183\ In particular, the commenter noted that 
all banks are required ``to retain contractual authority as to most 
deposits to postpone withdrawals (gating) or impose early redemption 
fees and to reserve the right to impose restrictions--either gates or 
fees or both--on redemptions of all bank deposits other than demand 
deposit accounts. . . .'' \184\
---------------------------------------------------------------------------

    \181\ See Federated XI Comment Letter.
    \182\ See Gates, Fees and Preemptive Runs, Federal Reserve Bank 
of New York Staff Report No. 670 (Apr. 2014), available at http://www.newyorkfed.org/research/staff_reports/sr670.pdf.
    \183\ See Federated XI Comment Letter.
    \184\ See id. (citations omitted). The commenter states that, 
other than with respect to demand deposit accounts, ``banks (1) are 
required . . . to reserve the right to require seven days' advance 
notice of a withdrawal from [money market deposit accounts], NOW 
accounts and other savings accounts; (2) are not required to allow 
early withdrawal from [certificates of deposit] and other time 
deposits; and (3) are allowed to impose early withdrawal fees on 
time deposits if they choose to permit an early withdrawal from a 
time deposit.''
---------------------------------------------------------------------------

    We note that the model of fees or gates in the FRBNY staff paper 
has a number of features and assumptions different than the reforms we 
are adopting today. For example, the paper's model assumes the fees or 
gates are imposed only when liquid assets are fully depleted. In 
contrast, under our reforms fees or gates may be imposed while the fund 
still has substantial liquid assets and, as discussed above, we believe 
investors may be dissuaded from pre-emptively redeeming from funds with 
substantial internal liquidity because the fund is more likely to be 
able to readily satisfy redemptions without adversely impacting the 
fund's pricing.\185\ Moreover, under our reforms (unlike the model), a 
fund board has discretion in the decision of when to impose fees or 
gates, which as discussed above should reduce the incentive for 
investors to run, because they will be able to less accurately predict 
specifically when, and under what circumstances, fees or gates will be 
imposed.\186\ Another significant difference is that our reforms 
include a floating NAV for institutional prime money market funds, 
which constitute a sizeable portion of all money market funds, but the 
model assumes a stable NAV. As discussed below, we believe the floating 
NAV requirement may encourage those investors who are least able to 
bear risk of loss to redirect their investments to other investment 
opportunities (e.g., government money market funds), and this may have 
the secondary effect of removing from the funds those investors most 
prone to redeem should a liquidity event occur for which fees or gates 
could be imposed. Furthermore, the paper also assumes that no investor 
could foresee the possibility of a shock to a money market fund that 
reduces the fund's value or liquidity despite the events of 2008 that 
should have informed investors that fund NAVs can change over time and 
that liquidity levels may fluctuate. In addition, under our floating 
NAV reforms, price levels of institutional prime money market funds 
likely will fluctuate, and today's reforms will also require additional 
disclosures that will convey important information to investors about 
the fund's value which in turn may help prevent run behavior to the 
extent it is based on uninformed decision-making.
---------------------------------------------------------------------------

    \185\ See supra at text following note 172.
    \186\ See supra notes 171-173 and accompanying text.
---------------------------------------------------------------------------

    These differences in our reforms as compared to the model in the 
FRBNY staff paper, along with the additional disclosures that we are 
adopting today that will convey important information to investors 
about the fund's value, should in our view significantly mitigate any 
potential for substantial investor runs before fees and gates are 
imposed. Accordingly, the FRBNY staff paper's findings regarding the 
risks of pre-emptive redemptions, because they rely on different facts 
and assumptions than are being implemented in today's reforms, are not 
likely to apply to money market funds following today's reforms.
    As noted above, the new daily transparency to shareholders on 
funds' levels of weekly liquid assets should provide additional 
benefits, including helping shareholders to understand if their fund's 
liquidity is at risk and thus a fee or gate more likely and, therefore, 
should lessen the chance of contagion from shareholders redeeming 
indiscriminately in response to another fund imposing a fee or gate. 
Investors will be able to benefit from this disclosure when assessing 
each fund's circumstances, rather than having to infer information 
from, or react to, the problems observed at other funds. Nevertheless, 
investors might mimic other investors' redemption strategies even when 
those other investors' decisions are not necessarily based on superior 
information.\187\ General stress

[[Page 47755]]

in the short-term markets or fear of stress at a particular fund could 
trigger redemptions as shareholders try to avoid a fee or gate. As 
noted above, however, even if investors redeem, their redemptions 
eventually could cause a fee or gate to come down, thereby lessening or 
halting redemptions and mitigating contagion risk.\188\ In sum, we are 
persuaded that fees and gates are important tools that can be used to 
halt redemptions and prevent contagion during periods of market stress.
---------------------------------------------------------------------------

    \187\ See Proposing Release, supra note 25, at n.363; see also 
Hanson et al. Comment Letter (``news that one [money market fund] 
has initiated redemption restrictions could set off a system-wide 
run by investors who are anxious to redeem their shares before other 
funds also initiate such fees or restrictions''); Boston Federal 
Reserve Comment Letter (``[B]ecause of the relative homogeneity in 
many [money market funds'] holdings, the imposition of a liquidity 
fee or redemption gate on one fund may incite runs on other funds 
which are not subject to such measures'' (citation omitted)).
    \188\ See SIFMA Comment Letter (``[Some] members point out that 
if a fund's liquidity breaches the trigger level, the gate and fee, 
themselves, will stem any exodus and damper its effect.'').
---------------------------------------------------------------------------

ii. Impact on a Fund After Imposing a Fee or Gate
    Commenters have suggested that once fees and gates are imposed, 
they may not be easily lifted without triggering a run.\189\ Similarly, 
other commenters warned that imposing a fee or gate would not help a 
fund recover from a crisis but rather force it into liquidation because 
investors would lose trust in the fund and seek to invest in a money 
market fund that has not imposed a fee or gate.\190\ We acknowledge 
that there is a risk that investors may redeem from a fund after a fee 
or gate is lifted. We believe this is less likely following the 
imposition of a fee, however, because investors will continue to have 
the ability to redeem while a fee is in place and, therefore, may 
experience less disruption and potentially less loss in trust. In any 
event, we believe that it is important that money market funds have 
these tools to give funds the ability to obtain additional liquidity in 
an orderly fashion if a liquidity crisis occurs, notwithstanding the 
risk that the imposition of a fee or gate may cause some subsequent 
loss in trust in a fund or may lead to a resumption in heavy 
redemptions once a fee or gate is lifted. Further, we think it is 
important to observe that whenever a fee or gate is imposed, the fund 
may already be under stress from heavy redemptions that are draining 
liquidity, and the purpose of the fees and gates amendments is to give 
the fund's board additional tools to address this external threat when 
the board determines that using one or both of the tools is in the 
fund's best interests.
---------------------------------------------------------------------------

    \189\ See, e.g., Comment Letter of T. Rowe Price Associates, 
Inc. (Sept. 17, 2013) (``T. Rowe Price Comment Letter'').
    \190\ See, e.g., Schwab Comment Letter (``[W]e have a hard time 
seeing how any fund that actually imposed fees and/or redemption 
gates would ever be able to recover and be a viable fund again. 
Investor trust in that fund would be lost.''); Goldman Sachs Comment 
Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

    Further, to the extent that commenters' concerns about potential 
loss in trust or risk of a run when a fee or gate is lifted is tied to 
investor concerns about the sufficiency of the fund's liquidity levels, 
we note that, under today's amendments, funds will be required to 
disclose information regarding their liquidity (e.g., daily and weekly 
liquid assets) on a daily basis. Such disclosure, assuming adequate 
liquidity, may help ameliorate concerns that investors will run or 
shift their investment elsewhere after a fund lifts its redemption 
restrictions because investors will be able to see that a fund is 
sufficiently liquid. To the extent heavy redemptions resume after a 
fund lifts a fee or gate, we also note that a fund board may again 
impose a fee, or gate if the fund has not yet exceeded the 10 business 
day maximum gating period, if it is in the best interests of the 
fund.\191\ Additionally, while we recognize that fees and gates may 
cause some investors to leave a fund once it has lifted a fee or gate 
(or, in the case of a fee, while the fee is in place), which may affect 
efficiency, competition, and capital formation, we believe it is 
possible that some investors, particularly those that were not seeking 
to redeem during the imposition of the fee or gate, may choose to stay 
in the fund. In this regard, we note that, as discussed above, a 
liquidity fee would benefit those investors who were not seeking to 
redeem while a fund's liquidity was under stress by more equitably 
allocating liquidity costs among redeeming and non-redeeming 
shareholders.\192\ In addition, to the extent a fund's drop in weekly 
liquid assets was the result of an external event, if such event 
resolves while a fee or gate is place, some investors may choose to 
stay in the fund after the fee or gate is lifted.
---------------------------------------------------------------------------

    \191\ See rule 2a-7(c)(2)(i)(B) (limiting the imposition of 
gates to 10 business days in any 90-day period).
    \192\ See supra note 121 and accompanying text.
---------------------------------------------------------------------------

    In addition, we recognize that a fund board may determine to close 
a fund and liquidate after the fund has imposed a fee or temporary gate 
(or instead of imposing a fee or temporary gate) pursuant to amended 
rule 22e-3.\193\ We note, however, that even if a fund ultimately 
liquidates, its disposition is likely to be more orderly and efficient 
if it previously imposed a fee or gate. In fact, imposing a fee or gate 
should give a fund more time to generate greater liquidity so that it 
will be able to liquidate with less harm to shareholders. Additionally, 
to the extent a fund's board determines to close the fund and liquidate 
after the fund has imposed a fee or temporary gate, we anticipate that 
this would more commonly occur because the imposition of the fee or 
gate was the result of idiosyncratic stresses on the fund.\194\ In this 
regard, we note that at least one commenter who suggested that a money 
market fund would likely be forced to liquidate after imposing a fee or 
gate, also noted that ``in a systemic crisis'' where many funds may be 
faced with heavy redemptions and thus the possibility of imposing fees 
and gates, money market funds ``may have a greater likelihood of 
avoiding liquidation after the systemic crisis [has] subsided.'' \195\
---------------------------------------------------------------------------

    \193\ See infra section III.A.4 herein discussing amendments to 
rule 22e-3 that will allow a board to close and liquidate a fund if 
the fund's weekly liquid assets have dropped below 10%.
    \194\ See infra note 195 and accompanying text.
    \195\ See J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

iii. Investors' Liquidity Needs
    A number of commenters expressed concern that fees or gates could 
impair money market funds' use as liquid investments, in particular 
because redemption restrictions (especially gates) would limit or deny 
shareholders ready access to their funds.\196\ Commenters noted such a 
lack of liquidity could have detrimental consequences for investors, 
including, for example, corporations and institutions using liquidity 
accounts for cash management,\197\ retail investors needing immediate 
access to cash such as in a medical emergency or when purchasing a 
home,\198\ and state and local governments that need to make payroll or 
service bond payments when due.\199\
---------------------------------------------------------------------------

    \196\ See, e.g., Comment Letter of the Boeing Company (Sept. 9, 
2013) (``Boeing Comment Letter''); Boston Federal Reserve Comment 
Letter; BlackRock II Comment Letter.
    \197\ See, e.g., Boeing Comment Letter; Capital Advisors Comment 
Letter.
    \198\ See, e.g., Comment Letter of the SPARK Institute, Inc. 
(Sept. 16, 2013) (``SPARK Comment Letter''); Comment Letter of 
Vanguard (Sept. 17, 2013) (``Vanguard Comment Letter'').
    \199\ See, e.g., Comment Letter of Chief Financial Officer, 
State of Florida (Sept. 12, 2013) (``Fla. CFO Comment Letter''); 
Comment Letter of Treasurer and Comptroller, St. Louis, Missouri 
(Sept. 17, 2013) (``St. Louis Treasurer Comment Letter'').
---------------------------------------------------------------------------

    We recognize that liquidity fees and redemption gates could affect 
shareholders by potentially limiting, partially or fully (as 
applicable), the redeemability of money market fund shares under 
certain conditions, a principle embodied in the Investment

[[Page 47756]]

Company Act.\200\ In our view, however, these reforms should not 
unreasonably impede the use of money market funds as liquid 
investments. First, under normal circumstances, when a fund's liquidity 
is not under stress, the fees and gates amendments will not affect 
money market funds or their shareholders. Fees and gates are tools for 
funds to use in times of severe market or internal stress. Second, even 
when a fund experiences stress, the fees and gates amendments we are 
adopting today do not require money market funds to impose fees and 
gates when it is not in the best interests of the fund. Accordingly, we 
believe these tools can assist funds facing liquidity shortages during 
periods of unusual stress, while preserving the benefits of money 
market funds for investors and the short-term funding markets by not 
affecting the day-to-day operations of a fund in periods without 
stress. In fact, a number of commenters observed that fees and gates 
would be the most effective option of achieving the Commission's reform 
goals,\201\ and would preserve as much as possible the current benefits 
of money market funds and/or be less onerous day-to-day on funds and 
investors.\202\
---------------------------------------------------------------------------

    \200\ See infra Section III.A.3 (discussing the rationale for 
the exemptions from the Investment Company Act).
    \201\ See, e.g., Fidelity Comment Letter; Deutsche Comment 
Letter; Comment Letter of SunTrust Bank and SunTrust Investment 
Services (Sept. 16, 2013) (``SunTrust Comment Letter'').
    \202\ See, e.g., Comment Letter of Plan Investment Fund, Inc. 
(Sept. 16, 2013) (``Plan Inv. Fund Comment Letter''); IDC Comment 
Letter; HSBC Comment Letter.
---------------------------------------------------------------------------

    With respect to liquidity fees, we also note that investors will 
not be prohibited from redeeming their investments; rather, they may 
access their investments at any time, but their redemptions will be 
subject to a fee that is designed to make them bear at least some of 
the costs associated with their access to liquidity rather than 
externalizing those costs to the remaining fund shareholders. With 
respect to gates, we recognize that they will temporarily prevent 
investors from redeeming their investments when imposed. However, we 
believe gates (as well as fees) will rarely be imposed in normal market 
conditions. In our view, in those likely rare situations where a gate 
would be imposed, investors would (in the absence of the gating 
mechanism) potentially be left in worse shape if the fund were, for 
example, forced to engage in the sale of assets and thus incur 
permanent losses; or worse, if the fund were forced to liquidate 
because of a severe liquidity crisis. Thus, we believe that allowing 
fund boards to impose gates should not be viewed as detrimental to 
funds, but rather should be viewed as an interim measure boards can 
employ in worse case scenarios where the alternative would likely be a 
result potentially more detrimental to investors' overall interests. To 
the extent that some investors may be sufficiently concerned about 
their ability to access their investment to meet certain obligations, 
such as payroll or bills, we believe they may choose to manage their 
money market fund investments so as to be able to meet these 
obligations if a redemption gate should be imposed.\203\
---------------------------------------------------------------------------

    \203\ We recognize that some investors may choose to move their 
money out of affected money market funds due to concern that a fee 
or gate may be imposed in the future. For a discussion of investor 
movement out of money market funds, see infra section III.K.
---------------------------------------------------------------------------

    While we recognize these commenter concerns regarding liquidity, we 
believe that the overall benefits and protections that are provided by 
the fees and gates amendments to all investors in these money market 
funds outweigh these concerns. Furthermore, we note that the final 
amendments have been modified and tailored to mitigate some potentially 
disruptive consequences of fees and gates. For example, under the final 
amendments, gates cannot be imposed for more than 10 business days in 
any 90-day period, so, to the extent an investor's access to his/her 
money is inhibited, it is for a limited period of time, which may allow 
an investor to better prepare for and withstand a possible gate. We 
also note, as discussed above, that funds are currently permitted to 
impose permanent redemption gates in certain circumstances.\204\ 
Therefore, we believe that the gating allowed by today's amendments 
extends and formalizes the existing gating framework, clarifying for 
investors when a money market fund potentially may use a gate as a tool 
to manage heavy redemptions and thus prevents any investor confusion on 
when gating may apply. While we recognize that the permanent redemption 
gates allowed under rule 22e-3 have not yet been used by money market 
funds, we note that investors have widely utilized money market funds 
as cash management vehicles even with the possibility of these 
permanent gates under an existing rule. Moreover, to the extent an 
investor wants to invest in a money market fund without the possibility 
of fees and/or gates, it may choose to invest in a government money 
market fund, which is not subject to the fees and gates 
requirements.\205\
---------------------------------------------------------------------------

    \204\ See rule 22e-3.
    \205\ See infra section III.C.1.
---------------------------------------------------------------------------

iv. Investor Movement Out of Money Market Funds
    Some commenters expressed concern that the possibility of fees and 
gates being imposed could result in diminished investor appeal and/or 
utility of affected money market funds, and could cause investors to 
either abandon or severely restrict use of affected money market 
funds.\206\ For example, commenters suggested that fees and gates would 
drive sweep account money out of money market funds.\207\ Commenters 
warned that fees and gates may cause investors to shift investments 
into other assets, government money market funds, FDIC-insured accounts 
and other bank products, riskier and/or less regulated investments, or 
other alternative stable value products.\208\ Conversely, other 
commenters predicted only minor effects on investor demand and/or that 
investor demand would decrease less under the proposed fees and gates 
alternative than under the proposed floating NAV alternative.\209\
---------------------------------------------------------------------------

    \206\ See, e.g., Ky. Inv. Comm'n Comment Letter; Boeing Comment 
Letter; Schwab Comment Letter; American Bankers Ass'n, Comment 
Letter.
    \207\ See Fin. Info. Forum Comment Letter (``Charging a 
liquidity fee and imposing gates effectively removes money market 
funds as a sweep vehicle since these accounts are designed to be a 
liquidity product and firms will no longer be able to guarantee 
liquidity.''); Comment Letter of M&T Banking Corporation (Oct. 1, 
2013) (``M&T Bank Comment Letter'') (suggesting fees and gates would 
``drive most commercial banking clients from prime money market fund 
sweep accounts''); SIFMA Comment Letter.
    \208\ See, e.g., Northern Trust Comment Letter; M&T Bank Comment 
Letter; Schwab Comment Letter; but see Invesco Comment Letter 
(suggesting that investor opposition to fees and gates could be 
addressed in part by greater education regarding the circumstances 
in which the gates would be imposed); Peirce and Greene Comment 
Letter (suggesting that to the extent gates in particular make money 
market funds less attractive to certain investors, this would be ``a 
positive step toward helping them find appropriate investments for 
their needs.''); see also Comment Letter of Fidelity Investments 
(Apr. 22, 2014) (``Fidelity DERA Comment Letter''); Comment Letter 
of BlackRock, Inc. (Apr. 23, 2014) (``BlackRock DERA Comment 
Letter'').
    \209\ See, e.g., Comment Letter of Cathy Santoro (Sept. 17, 
2013) (``Santoro Comment Letter''); Comment Letter of Arnold & 
Porter LLP on behalf of Federated Investors (Costs of Implementing 
the Proposals) (Sept. 17, 2013) (``Federated X Comment Letter'').
---------------------------------------------------------------------------

    We recognize that, as suggested by certain commenters, our 
amendments could cause some shareholders to redeem their prime money 
market fund shares and move their assets to alternative products that 
do not have the ability to impose fees or gates because the potential 
imposition of a fee or gate could make investment in a money market 
fund less attractive due to less

[[Page 47757]]

certain liquidity.\210\ As noted above, this could affect efficiency, 
competition, and capital formation. We agree with one commenter that 
suggested it is difficult to estimate the extent to which assets might 
shift from prime funds to government funds or other alternatives.\211\ 
As discussed above, some investors may determine they are comfortable 
investing in money market funds that may impose fees and gates, because 
fees and gates will likely be imposed only during times of stress and 
should not affect the daily operations of money market funds during 
normal market conditions.\212\ Other investors, however, may reallocate 
their assets to investment alternatives that are not subject to fees 
and gates, such as government money market funds.\213\
---------------------------------------------------------------------------

    \210\ See Comment Letter of SunGard Institutional Brokerage Inc. 
(Sept. 13, 2013) (``SunGard Comment Letter'') (finding in a survey 
of its corporate, government and pension plan customers that 76% of 
respondents would decrease their use of money market funds 
substantially or entirely, but that only 22% of respondents would 
stop using money market funds entirely); Comment Letter of Fidelity 
(Feb. 3, 2012) (available in File No. 4-619) (``Fidelity Feb. 3 
Comment Letter'') (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); 
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'') (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 Invesco Comment Letter (suggesting 
that investor opposition to fees and gates could be addressed in 
part by greater education regarding the circumstances in which the 
gates would be imposed).
    \211\ See Comment Letter of Federated Investors, Inc. (Demand 
and Supply of Safe Assets) (Apr. 23, 2014) (``Federated DERA I 
Comment Letter'') (suggesting an ``inability to predict how many 
assets might shift from prime and municipal MMFs to government MMFs 
in response to adoption [of] [a]lternative 1 or 2, or a combination 
thereof'' and recommending that the Commission consider a ``range of 
outcomes'' when analyzing a possible shift out of prime money market 
funds and into government money market funds). The commenter also 
noted that it has ``not found any basis for estimating the extent to 
which prime and municipal MMF shareholders would prefer bank 
instruments to government MMFs.'' See id.
    \212\ See, e.g., Invesco Comment Letter (``[W]e believe that 
additional education about the purpose and operation of the proposed 
liquidity fees and redemptions gates and the circumstances in which 
they might be implemented would increase greatly MMF investors' 
willingness to accept them.''); Goldman Sachs Comment Letter 
(``[S]ome of our investors have told us that they could accept the 
prospect of liquidity fees and gates. . . .''); Comment Letter of 
Tom Garst (Aug. 30, 2013) (``Garst Comment Letter'') (suggesting 
that gates would be the ``most acceptable alternative'' out of those 
proposed); Capital Advisors Comment Letter (``[W]e think 
shareholders may accept a cost of liquidity in a stressful 
situation. . . .''). We note that, under today's amendments, 
institutional prime funds will be subject to the fees and gates 
requirements as well as a floating NAV requirement, and that 
investor acceptance of fees and gates for these funds may be 
different. See, e.g., ICI Comment Letter (suggesting a fund that is 
subject to fees and gates and a floating NAV will be ``a fund which 
nobody will want''); see also infra section III.B for a discussion 
of the floating NAV requirement and any investor movement out of 
money market funds as result of such requirement.
    \213\ Government money market funds also will not be subject to 
the floating NAV requirement adopted today. See infra section 
III.C.1. In addition, as noted above, all money market funds today 
have the option to impose a permanent redemption gate and liquidate 
under rule 22e-3 under the Investment Company Act. While we 
recognize that these permanent redemption gates have not yet been 
used by money market funds, we note that they have not led to the 
migration of investors away from money market funds.
---------------------------------------------------------------------------

    One potential issue related to market efficiency that several 
commenters raised was a potential shortage of eligible government 
securities if investors reallocate assets from funds that are subject 
to fees and gates into government funds.\214\ We anticipate that any 
increase in demand for eligible government securities because of the 
fees and gates requirement would likely be accompanied by an additional 
increase in demand arising from investors that reallocate assets from 
institutional prime funds because of the floating NAV requirement. As 
such, we discuss the reforms' joint impact on the demand for eligible 
government securities and possible repercussions on the economy and 
capital formation in section III.K below.
---------------------------------------------------------------------------

    \214\ See, e.g., Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    In addition, a number of commenters noted that a possible shift out 
of affected money market funds could ultimately lead to a decrease in 
the funding of, or other adverse effects on, the short-term financing 
markets.\215\ The Commission recognizes the expected benefits from 
today's amendments may be accompanied by adverse effects on issuers 
that access the short-term financing markets with consequent effects on 
competition and capital formation. As discussed in greater detail in 
section III.K below, the magnitude of these effects, including any 
effects on competition, efficiency, and capital formation, will depend 
on the extent to which investors reallocate their investments within or 
outside the money market fund industry and which alternatives investors 
choose.
---------------------------------------------------------------------------

    \215\ See, e.g., MFDF Comment Letter; Comment Letter of Arizona 
Association of County Treasurers (Sept. 16, 2013) (``Ariz. Ass'n of 
County Treasurers Comment Letter''); Northern Trust Comment Letter.
---------------------------------------------------------------------------

    Some commenters also suggested that fees and gates could motivate 
money market funds to hold securities of even shorter-term duration, 
which could encourage issuers to fund themselves with shorter-term 
debt.\216\ Shortening debt maturity would increase the frequency at 
which issuers would need to refinance, leaving both issuers and the 
broad financial system more vulnerable to refinancing risk.\217\ One 
such commenter further noted that basing the threshold for fees and 
gates on weekly liquid assets will ``discourage[e] prime money market 
funds from drawing down on their buffers of liquid assets [due to fear 
of crossing below the fees and gates thresholds] precisely when they 
should do so from a system-wide perspective, i.e., in a system-wide 
liquidity and funding crisis.'' \218\ In addition, some commenters were 
concerned about a loss of funding or other adverse impacts on state and 
local governments as a result of the fees and gates amendments.\219\ We 
discuss these concerns in section III.K below.
---------------------------------------------------------------------------

    \216\ See Hanson et al. Comment Letter; Deutsche Comment Letter.
    \217\ See generally Hanson et al. Comment Letter; Deutsche 
Comment Letter.
    \218\ See, e.g., Hanson et al. Comment Letter.
    \219\ See, e.g., Comment Letter of Governor, Commonwealth of 
Massachusetts (Deval L. Patrick) (Sept. 17, 2013) (``Mass. Governor 
Comment Letter''); Comment Letter of Office of the Governor, State 
of New Hampshire (Oct. 4, 2013) (``NH Governor Letter''); Comment 
Letter of Treasurer, State of North Carolina (Sept. 19, 2013) (``NC 
Treasurer Comment Letter''); Comment Letter of 42 Members of U.S. 
Congress (Oct. 28, 2013) (``42 Members of U.S. Congress Comment 
Letter''). Some commenters cited the role of municipal money market 
funds as a funding mechanism for state and local governments, 
arguing such role might be endangered by the proposed reforms. See, 
e.g., Fidelity Comment Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

2. Terms of Fees and Gates
    As discussed above, we are adopting provisions that, unlike the 
proposal, will allow a money market fund the flexibility to impose fees 
(up to 2%) \220\ and/or gates (up to 10 business days in a 90-day 
period) \221\ after the fund's weekly liquid assets have crossed below 
30% of its total assets, if the fund's board of directors (including a 
majority of its independent directors) determines that doing so is in 
the best interests of the fund.\222\ We are also adopting amendments 
that will require a money market fund, if its weekly liquid assets fall 
below 10% of its total assets, to impose a 1% liquidity fee on each 
shareholder's redemption, unless the fund's board of directors 
(including a

[[Page 47758]]

majority of its independent directors) determines that such a fee would 
not be in the best interests of the fund, or determines that a lower or 
higher fee (not to exceed 2%) would be in the best interests of the 
fund.\223\ The proposal would have required funds (absent a board 
determination otherwise) to impose a 2% liquidity fee on all 
redemptions, and would have permitted the imposition of redemption 
gates for up to 30 days in a 90-day period, after a fund's weekly 
liquid assets fell below 15% of its total assets. In addition, unlike 
in the proposal, today's amendments will allow a fund to impose a fee 
or gate at any point throughout the day after a fund's weekly liquid 
assets have dropped below 30%.\224\
---------------------------------------------------------------------------

    \220\ See infra notes 300-302 and accompanying text.
    \221\ Rule 2a-7(c)(2)(i)(B).
    \222\ Rule 2a-7(c)(2)(i). The fund must reject any redemption 
requests it receives while the fund is gated. See rule 2a-
7(c)(2)(i)(B).
    \223\ Rule 2a-7(c)(2)(ii). If a fund imposes a liquidity fee, a 
fund's board can later vary the level of the liquidity fee (subject 
to the 2% limit) if the board determines that a different fee level 
is in the best interests of the fund. Rule 2a-7(c)(2)(i)(A) and 
(ii)(B).
    \224\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    As in the proposal, any fee or gate imposed under today's 
amendments must be lifted automatically after the money market fund's 
level of weekly liquid assets rises to or above 30%, and it can be 
lifted at any time by the board of directors (including a majority of 
independent directors) if the board determines to impose a different 
redemption restriction (or, with respect to a liquidity fee, a 
different fee) or if it determines that imposing a redemption 
restriction is no longer in the best interests of the fund.\225\ As 
amended, rule 22e-3 also will permit the permanent suspension of 
redemptions and liquidation of a money market fund if the fund's level 
of weekly liquid assets falls below 10% of its total assets.\226\
---------------------------------------------------------------------------

    \225\ Rule 2a-7(c)(2)(i)(A)-(B) and (ii)(B).
    \226\ See rule 22e-3(a)(1). To mirror the proposed fees and 
gates amendments to rule 2a-7, the proposed amendments to rule 22e-3 
would have set a threshold of below 15% weekly liquid assets for a 
fund to permanently close and liquidate. For a discussion of amended 
rule 22e-3, see infra section III.A.4.
---------------------------------------------------------------------------

a. Thresholds for Fees and Gates
i. Discretionary Versus Mandatory Thresholds
    As proposed, a fund would have been required (unless the board 
determined otherwise) to impose a default liquidity fee, and would have 
been permitted to impose a gate, after the fund's weekly liquid assets 
dropped below 15% of its total assets. In addition, a fund would have 
had to wait to impose a fee or gate until the next business day after 
it crossed below the 15% threshold.
    Commenters ranged widely over whether and to what extent the 
trigger for fees and gates should be an objective test or left to the 
discretion of fund boards. On one hand, a group of commenters expressed 
concern about giving money market fund boards discretion to impose fees 
and gates.\227\ For example, some commenters noted that board 
discretion could create uncertainty among investors,\228\ and that 
boards might be reticent, due to the possible impact of the decision, 
to act in a time of crisis.\229\
---------------------------------------------------------------------------

    \227\ See, e.g., BlackRock II Comment Letter; Capital Advisors 
Comment Letter; Fidelity Comment Letter; HSBC Comment Letter; cf. 
Comment Letter of The Independent Trustees of the Fidelity Fixed-
Income and Asset Allocation Funds (Sept. 10, 2013) (``Fidelity 
Trustees Comment Letter'') (suggesting that the Commission should 
have the ability to impose a fee on prime money market funds when a 
fund's weekly liquid assets fall below 15%).
    \228\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter.
    \229\ See, e.g., Capital Advisors Comment Letter; HSBC Comment 
Letter (``[S]ome commentators have suggested that a fund board may 
be too commercially conflicted to decide whether to impose a 
liquidity fee.'').
---------------------------------------------------------------------------

    On the other hand, a large group of commenters generally argued in 
favor of giving boards more discretion over whether to impose a fee or 
gate.\230\ For example, a number of commenters expressly noted that 
fees should be at the discretion of fund boards instead of being 
automatically triggered at a particular liquidity threshold.\231\ A 
number of other commenters argued more generally that, when heavy 
redemptions are already underway or clearly foreseeable, boards should 
be able to impose fees and gates even before a set liquidity threshold 
or some other objective threshold has been crossed.\232\
---------------------------------------------------------------------------

    \230\ See, e.g., Chamber II Comment Letter; Dreyfus Comment 
Letter; Invesco Comment Letter.
    \231\ See, e.g., Federated V Comment Letter; HSBC Comment 
Letter; T. Rowe Price Comment Letter; Peirce & Green Comment Letter; 
cf., BlackRock Comment Letter (advocating a mandatory gate after 
assets dropped below 15% weekly liquid assets, but also allowing 
money market fund boards ``the ability to impose a gate before 
weekly liquid assets fell below 15% of total assets if the [b]oard 
believed this was in the best interest of the [money market 
fund]'').
    \232\ See., e.g., BlackRock II Comment Letter; Chamber II 
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that a hybrid approach that at some point 
imposes a default fee that boards can opt out of or change best ensures 
that fees and gates will be imposed when it is appropriate. Based on 
commenter feedback, however, we believe that such a hybrid approach 
could benefit from the default fee acting more as a floor for board 
consideration when liquidity has been significantly depleted and from 
additional board discretion to impose fees and gates in advance of that 
point.\233\ Thus, our final approach--while still a hybrid approach--is 
significantly more discretionary than under our proposal. As we 
indicated in the Proposing Release, we believe a hybrid approach offers 
the possibility of achieving many of the benefits of both a purely 
discretionary trigger and a fully automatic trigger. We recognize that 
a discretionary trigger allows a fund board the flexibility to 
determine when a restriction is necessary, and thus allows the board to 
trigger the fee or gate based on current market conditions and the 
specific circumstances of the fund.
---------------------------------------------------------------------------

    \233\ See supra section III.A.1.c.i (discussing the impact of 
board discretion on possible pre-emptive runs); see also Wells Fargo 
Comment Letter.
---------------------------------------------------------------------------

    A purely discretionary trigger, however, 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. As 
commenters indicated,\234\ a board may choose not to impose a fee or 
gate for commercial reasons--for example, out of fear that doing so 
would signal trouble for the individual fund or fund complex (and thus 
may incur significant negative business and reputational effects) or 
could incite redemptions in other money market funds in the fund 
complex in anticipation that fees may be imposed in those funds as 
well. We are also concerned that purely discretionary triggers could 
cause some funds to use fees and gates when they are not under stress 
and in contravention of the principles underlying the Investment 
Company Act. If, for example, a fund's NAV began to fall due to losses 
incurred in the portfolio, a board with full discretion to impose fees 
on fund redemptions could impose a fee solely to recover those losses 
and repair the fund's NAV, even if that fund's liquidity is not being 
stressed.
---------------------------------------------------------------------------

    \234\ See supra note 229.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we recognize that although 
an automatic trigger set by the Commission may mitigate some of the 
potential concerns associated with a fully discretionary trigger, it 
also may create the risk of imposing costs on shareholders, such as 
those related to board meetings or liquidity fees themselves, when 
funds are not truly distressed or when liquidity is not abnormally 
costly. As indicated by a number of commenters and discussed above, an 
automatic trigger also could result in shareholders pre-emptively 
redeeming their shares to avoid a fee or

[[Page 47759]]

gate.\235\ In addition, commenters suggested that a fund's liquidity 
could quickly evaporate once heavy redemptions begin and that a fund 
board should not have to wait until the fund's weekly liquid assets 
breach the default liquidity fee threshold or until the next business 
day in order to act.\236\
---------------------------------------------------------------------------

    \235\ See supra section III.A.1.c.i for a discussion regarding 
pre-emptive run risk and increased board discretion.
    \236\ See, e.g., Federated II Comment Letter; Dreyfus Comment 
Letter.
---------------------------------------------------------------------------

    In light of these risks and in response to the comments discussed 
above, we have determined to increase the amount of board discretion 
under the fees and gates amendments so that funds may impose fees or 
gates before the default liquidity fee threshold is reached and so they 
can better tailor the redemption restrictions to their particular 
circumstances. Additionally, the amendments will allow fund boards to 
impose fees and gates the same day that a fund experiences or foresees 
heavy redemptions and, thus, funds will not have to wait until the next 
day to act.\237\ This increased flexibility should better allow fund 
boards to prevent or stem heavy redemptions before they occur, or as 
soon as possible after they begin or are anticipated.\238\
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    \237\ Although funds will have to wait until a fund's weekly 
liquid assets drop below 30% in order to impose a fee or gate, we 
believe the higher threshold of 30% for discretionary fees and gates 
should assuage concerns about having to wait to impose redemption 
restrictions until a fund's weekly liquid assets breach the default 
liquidity fee threshold.
    \238\ See, e.g., Treasury Strategies III Comment Letter (``We 
found that [f]ees and [g]ates can stop and prevent runs, provided 
that they are implemented effectively through policy and preemptive 
action by fund boards.''). For example, if a fund board believes 
that a fund's weekly liquid assets are likely to fall below the 10% 
weekly liquid asset threshold for a default liquidity fee, it could 
choose to impose a liquidity fee prior to the fund breaching this 
threshold.
---------------------------------------------------------------------------

ii. Threshold Levels
    As discussed above, funds will be permitted to impose fees and 
gates after a fund's weekly liquid assets have dropped below 30%, and 
will be required to impose a liquidity fee after a fund's weekly liquid 
assets drop below 10%, unless the fund's board determines such fee is 
not in the best interests of the fund. As proposed, the threshold for 
the imposition of fees and gates would have been a drop below 15% 
weekly liquid assets and a fund's board could have determined that a 
fee would not be in the best interests of the fund.
    Various commenters proposed modifications or substitutes to the 
proposed 15% weekly liquid assets threshold. For example, one 
commenter, citing a survey of its members, suggested fund boards be 
given discretion to impose a liquidity fee when weekly liquid assets 
fall below a specified threshold, and that a default liquidity fee 
could be imposed at a specified lower level of weekly liquid assets 
(unless the board determines otherwise).\239\ Another commenter 
proposed a blended trigger for the imposition of gates at 30% weekly 
liquid assets or a drop in NAV below $0.995, whichever comes 
first.\240\
---------------------------------------------------------------------------

    \239\ See SIFMA Comment Letter.
    \240\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------

    As discussed in this section, we have been persuaded by commenters 
that boards should be allowed some flexibility to impose a fee or gate 
when heavy redemptions are underway or clearly foreseeable. As was 
suggested by a commenter,\241\ we are adopting a tiered threshold for 
the imposition of fees and gates, with a higher threshold for 
discretionary fees and gates and a lower threshold for default 
liquidity fees. We believe this tiered approach will allow boards to 
determine with greater flexibility the best line of defense against 
heavy redemptions and to tailor that defense to the specific 
circumstances of the fund. We also believe this tiered approach will 
allow boards to act quickly to stem heavy redemptions. This approach 
also recognizes, however, that at a certain point (under the amended 
rule, a drop below 10% weekly liquid assets), boards should be required 
to consider what, if any, action should be taken to address a fund's 
liquidity.
---------------------------------------------------------------------------

    \241\ See SIFMA Comment Letter; but see, e.g., Peirce & Greene 
Comment Letter (suggesting the Commission should adopt entirely 
discretionary gates).
---------------------------------------------------------------------------

    We are adopting a threshold of less than 30% weekly liquid assets 
at which fund boards will be able to impose discretionary fees and 
gates, as was suggested by a commenter.\242\ As 30% weekly liquid 
assets is the minimum required under rule 2a-7, we believe it is an 
appropriate threshold at which fund boards should be able to consider 
fees and gates as measures to stop heavy redemption activity that may 
be building in a fund.\243\ A drop in weekly liquid assets below the 
regulatory minimum could indicate current or future liquidity problems 
or forecast impending heavy redemptions, or it could be the result of 
idiosyncratic stresses that may be resolved without intervention--in 
either case, the money market fund's board, in consultation with the 
fund's investment adviser, is best suited to determine whether fees and 
gates can address the situation.\244\
---------------------------------------------------------------------------

    \242\ See Capital Advisors Comment Letter. As discussed below, 
we have not included an NAV trigger along with the weekly liquid 
assets trigger (as suggested by the commenter) because we do not 
believe that a fund's NAV is an appropriate trigger for liquidity 
fees and redemption gates. See infra note 253 and accompanying text.
    \243\ As was discussed in the Proposing Release, we considered a 
threshold based on the level of daily liquid assets rather than 
weekly liquid assets. We noted in the Proposing Release that 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. Thus, we believe that basing the 
threshold on weekly liquid assets rather than daily liquid assets 
provides a better picture of the fund's overall liquidity position. 
In addition, a fund's levels of daily liquid assets may be more 
volatile because they are typically used first to satisfy day-to-day 
shareholder redemptions, and thus more difficult to use as a gauge 
of fund distress. Commenters did not specifically suggest a 
threshold based on daily liquid assets.
    \244\ For a discussion of the factors a board may wish to 
consider in determining whether to impose fees and gates, see infra 
section III.A.2.b herein. For a discussion of the factors a board 
may wish to consider in determining the level of a liquidity fee, 
see infra section III.A.2.c herein.
---------------------------------------------------------------------------

    Some commenters recommended that the default liquidity fee 
threshold be lowered to 10% weekly liquid assets.\245\ These commenters 
generally argued that a 10% threshold, rather than a 15% threshold, 
would produce fewer ``false positives''--instances when a money market 
fund is, in fact, not experiencing stress on its liquidity but is 
nonetheless required (absent a board finding) to impose a liquidity 
fee--which should prevent unnecessary board meetings that would not be 
in the interest of shareholders or market stability.\246\ As was 
discussed in the Proposing Release, the threshold for a default 
liquidity fee should indicate distress in a fund and be a threshold few 
funds would cross in the ordinary course of business. Commission staff 
analysis shows that from March 2011 through October 2012, there was 
only one month that any funds reported weekly liquid assets below 15% 
and only one month that a fund reported weekly liquid assets below 
10%.\247\
---------------------------------------------------------------------------

    \245\ See, e.g., Federated V Comment Letter; Comment Letter of 
Chairman, Federated Funds Board of Directors (on behalf of 
Independent Trustees of Federated Funds) (Sept. 16, 2013) 
(``Federated Funds Trustees Comment Letter''); HSBC Comment Letter.
    \246\ See Federated II Comment Letter; HSBC Comment Letter.
    \247\ See Proposing Release supra note 25, at 177. Our staff 
conducted an analysis of Form N-MFP data that showed that if the 
default fee 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. The analysis further showed that during the period, there was 
one month in which funds reported weekly liquid assets below 15% 
(four funds in June 2011) and one month in which a fund reported 
weekly liquid assets below 10% (one fund in May 2011). Based on this 
data and industry comment, we proposed a default fee threshold of 
15% weekly liquid assets.

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

[[Page 47760]]

    In light of commenters' concerns and the Commission staff analysis, 
and in recognition of the increased board discretion to impose fees and 
gates that we are adopting in today's amendments, we have determined 
that a threshold of 10% weekly liquid assets (down from the proposed 
15%) is an appropriate threshold for the imposition of a default 
liquidity fee. We believe that the flexibility in today's amendments 
justifies a decrease in the default liquidity fee threshold, 
particularly because fund boards will be allowed to impose 
discretionary fees and gates, if it is in the best interests of a fund, 
at any time after a fund's weekly liquid assets drop below 30%--i.e., 
before the default liquidity fee threshold is reached.\248\ Our 
proposal, which, as noted above, set a higher threshold for the default 
liquidity fee or the imposition of a gate, did not include board 
discretion to use these tools prior to reaching this threshold. Under 
today's amendments, however, the 10% default liquidity fee threshold is 
designed effectively as a floor to require fund boards to focus on a 
fund's liquidity and to consider what action to take, if any, before 
liquidity is further depleted. Additionally, Commission staff analysis 
shows that a 10% threshold for the default liquidity fee is also a 
threshold few funds would cross in the ordinary course of 
business.\249\
---------------------------------------------------------------------------

    \248\ See rule 2a-7(c)(2)(i); cf. Treasury Strategies III 
Comment Letter (suggesting that fees and gates will better prevent a 
run if they are imposed intraday).
    \249\ See Proposing Release supra note 25, at 177 (setting forth 
a chart that show from March 2011 through October 2012, there was 
only one month that any funds reported weekly liquid assets below 
15% and only one month that a fund reported weekly liquid assets 
below 10%). Because liquidity data reported to the Commission is as 
of month end, it could be the case that more than one money market 
fund's level of weekly liquid assets fell below 10% 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 
default liquidity fee because funds may increase their risk 
management around their level of weekly liquid assets in response to 
the default liquidity fee to avoid breaching the default liquidity 
fee threshold, or that many funds may impose fees and/or gates after 
they cross the 30% threshold, allowing them to repair their 
liquidity prior to reaching the 10% threshold.
---------------------------------------------------------------------------

    Some commenters on the fees and gates threshold suggested moving 
away from weekly liquid asset levels as the triggering mechanism.\250\ 
One commenter noted that the most appropriate rules-based threshold 
would be if the shadow price fell to $0.9975 or below.\251\ Another 
commenter also suggested that, to the extent the Commission moved 
forward with a rules-based threshold, ``defaults, acts of insolvency, 
significant downgrades or determinations that a portfolio security no 
longer presents minimum credit risk'' should be added to the situations 
in which a board could impose a fee or gate.\252\
---------------------------------------------------------------------------

    \250\ But see Fidelity Comment Letter (``We also favor using the 
weekly liquid asset level as the measure because it is the best 
indicator of liquidity and is less susceptible to extraneous 
factors. In addition, the weekly liquidity structure reflects daily 
liquidity within its calculation.''). As noted in section 
III.A.2.a.i, a number of commenters argued for giving boards the 
discretion to impose redemption restrictions. See supra note 230.
    \251\ See HSBC Comment Letter; see also Comment Letter of HSBC 
Global Asset Management Ltd (Feb. 15, 2013) (available in File No. 
FSOC-2012-0003) (``HSBC FSOC Comment Letter'') (suggesting setting 
the market-based NAV trigger at $0.9975). 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.
    \252\ See Federated II Comment Letter.
---------------------------------------------------------------------------

    We do not believe a drop in a fund's NAV (or shadow price, to the 
extent the money market fund is a stable value fund), or a default, act 
of insolvency, significant downgrade or determination that a portfolio 
security no longer presents minimum credit risk, would be the 
appropriate threshold for the imposition of fees and gates. First, as 
we discussed in the Proposing Release, we are concerned that a money 
market fund being able to impose a fee only when the fund's NAV or 
shadow price has fallen by some amount may in certain cases come too 
late to mitigate the potential consequences of heavy redemptions on a 
fund's liquidity and to fully protect investors.\253\ 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. Second, the 
thresholds we are adopting today are just that--thresholds. If it is 
not in the best interests of a fund, a board is not required to impose 
a liquidity fee or redemption gate when the fund's weekly liquid assets 
have fallen below 30% or 10%, respectively. Moreover, once a fund has 
crossed below a weekly liquid asset threshold, a board is not prevented 
from taking into account whether the fund's NAV or shadow price has 
deteriorated in considering whether to impose fees or gates. Finally, 
the fees and gates amendments are intended to address the liquidity of 
the fund and its ability to meet redemptions, not to address every 
possible circumstance that may adversely affect a money market fund and 
its holdings. However, if a particular circumstance, such as a default, 
act of insolvency, significant downgrade, or increased credit risk, 
affects the liquidity of a fund such that its weekly liquid assets drop 
below the 30% threshold for imposition of fees and gates, a fund could 
then impose a fee or gate.
---------------------------------------------------------------------------

    \253\ As we also discussed in the Proposing Release, a threshold 
based on shadow price 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.'' See 
Proposing Release supra note 25, at 179-180.
---------------------------------------------------------------------------

    Another commenter suggested basing the threshold for redemption 
gates on the level at which a money market fund's liquidity would force 
it to sell assets.\254\ This particular commenter was concerned that a 
threshold based on 15% weekly liquid assets might otherwise cause funds 
close to the threshold to start selling assets to avoid crossing the 
threshold, which could have a larger destabilizing effect on the 
markets.\255\ We appreciate the commenter's concerns and believe that 
the higher weekly liquid asset threshold for the imposition of fees and 
gates and the increased board flexibility included in today's 
amendments should lessen such a risk. In particular, as discussed above 
in section III.A.1.c.i, we believe that the 30% weekly liquid assets 
threshold will allow a money market fund to impose a fee or gate while 
it still has substantial remaining internal liquidity, thus putting it 
in better position to bear redemptions without a broader market impact 
because it can satisfy redemption requests through internally generated 
cash and not through asset sales (other than perhaps sales of 
government securities that tend to increase in value and liquidity in 
times of stress). In addition, the board flexibility in today's 
amendments could result in funds imposing gates at different times and, 
thus, to the extent funds determine to dispose of their assets to raise 
liquidity, it could also result in funds disposing assets at different 
times, lessening any potential strain on the markets.
---------------------------------------------------------------------------

    \254\ Comment Letter of James Angel (Georgetown/Wharton) (Sept. 
17, 2013) (``Angel Comment Letter'').
    \255\ Angel Comment Letter.

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

[[Page 47761]]

b. Board Determinations
    In the Proposing Release, we discussed a number of factors that a 
fund's board of directors may want to consider in determining whether 
to impose a liquidity fee or redemption gate.\256\ We received a 
variety of comments related to these factors and, more generally, about 
board determinations regarding fees and gates. Some commenters 
suggested that the Commission provide additional guidance on the nature 
and scope of the findings that boards can make.\257\ A commenter asked 
the Commission to provide an expanded list of examples and a non-
exclusive list of factors to be considered by boards with respect to 
imposing a fee or gate.\258\ The commenter added that the Commission 
should clarify that boards need to consider only those factors they 
reasonably believe to be relevant, not all factors or examples that the 
Commission might generally suggest.\259\
---------------------------------------------------------------------------

    \256\ See Proposing Release, supra note 25, at 178-179.
    \257\ See, e.g., ABA Business Law Section Comment Letter; 
Comment Letter of New York City Bar Committee on Investment 
Management Regulation (Sept. 26, 2013) (``NYC Bar Committee Comment 
Letter''); Federated X Comment Letter; but see, e.g., MFDF Comment 
Letter.
    \258\ See NYC Bar Committee Comment Letter.
    \259\ Id.
---------------------------------------------------------------------------

    In contrast, another commenter, an industry group representing fund 
directors, supported the Commission providing only minimal guidance on 
what factors boards might consider.\260\ This commenter argued that 
``providing any guidance on what factors boards should consider (beyond 
the very general and non-exclusive examples in the Proposing Release) 
is likely to be counter-productive.'' \261\ The commenter also 
suggested that the Commission clarify that a ``best interests of the 
fund'' standard would not demand that boards place significant emphasis 
on the broader systemic effects of their decision.\262\
---------------------------------------------------------------------------

    \260\ See MFDF Comment Letter.
    \261\ Id.
    \262\ See id.
---------------------------------------------------------------------------

    The ``best interests'' standard in today's amendments recognizes 
that each fund is different and that, once a fund's weekly liquid 
assets have dropped below the minimum required by rule 2a-07, a fund's 
board is best suited, in consultation with the fund's adviser, to 
determine when and if a fee or gate is in the best interests of the 
fund.\263\ The factors we set forth in the Proposing Release were 
intended only as possible factors a board may consider when making a 
best interests determination. They were not meant to be a one-size-
fits-all or exhaustive list of factors. We agree with the commenter who 
suggested an exclusive list of factors could be counter-productive. We 
recognize that there are differences among funds and that the markets 
are dynamic, particularly in a crisis situation. Accordingly, an 
exhaustive list of factors may not address each fund's particular 
circumstances and could quickly become outdated. Instead, we believe a 
fund board should consider any factors it deems appropriate when 
determining whether fees and/or gates are in the best interests of a 
fund. We note that these factors may include the broader systemic 
effects of a board's decision, but point out that the applicable 
standard for a board's determination under the amended rule is whether 
a fee or gate is in the fund's best interests.
---------------------------------------------------------------------------

    \263\ For a discussion of why the Commission is adopting a 
hybrid approach to the imposition of fees and gates, see supra 
section III.A.2.a.i.
---------------------------------------------------------------------------

    Nonetheless, we believe it is appropriate to provide certain 
guideposts that boards may want to keep in mind, as applicable and 
appropriate, when determining whether a fund should impose fees or 
gates and are providing such guidance in this Release. As recognized in 
the Proposing Release, there are a number of factors a board may want 
to consider. These may include, but are not limited to: relevant 
indicators of liquidity stress in the markets and why the fund's weekly 
liquid assets have fallen (e.g., Have weekly liquid assets fallen 
because the fund is experiencing mounting redemptions during a time of 
market stress or because a few large shareholders unexpectedly redeemed 
shares for idiosyncratic reasons unrelated to current market conditions 
or the fund?); the liquidity profile of the fund and expectations as to 
how the profile might change in the immediate future, including any 
expectations as to how quickly a fund's liquidity may decline and 
whether the drop in weekly liquid assets is likely to be very short-
term (e.g., Will the decline in weekly liquid assets be cured in the 
next day or two when securities currently held in the fund's portfolio 
qualify as weekly liquid assets?); \264\ for retail and government 
money market funds, whether the fall in weekly liquid assets has been 
accompanied by a decline in the fund's shadow price; \265\ the make-up 
of the fund's shareholder base and previous shareholder redemption 
patterns; and/or the fund's experience, if any, with the imposition of 
fees and/or gates in the past.
---------------------------------------------------------------------------

    \264\ As discussed in the Proposing Release, 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. See 
Proposing Release, supra note 25, at 179.
    \265\ Likewise, a floating NAV fund's board may wish to consider 
any drops in the fund's NAV.
---------------------------------------------------------------------------

    Some commenters urged the Commission to affirm that a board's 
deliberations would be protected by the business judgment rule.\266\ 
One commenter was particularly concerned about the threat of litigation 
if boards were not protected by the rule, as it could ``chill the 
board's ability to act in a manner that would be highly 
counterproductive in times of market stress.'' \267\ While sensitive to 
this commenter's concerns, we do not believe it would be appropriate 
for us to address the application of the business judgment rule because 
the business judgment rule is a construct of state law and not the 
federal securities laws.
---------------------------------------------------------------------------

    \266\ See, e.g., Dreyfus Comment Letter; Chamber II Comment 
Letter; MFDF Comment Letter; IDC Comment Letter.
    \267\ See MFDF Comment Letter.
---------------------------------------------------------------------------

    Other commenters proposed that boards should be permitted to 
reasonably determine and commit themselves in advance to a policy to 
not allow a fee or gate to ever be imposed on a fund.\268\ We disagree. 
A blanket decision on the part of a fund board to not impose fees or 
gates, without any knowledge or consideration of the particular 
circumstances of a fund at a given time, would be flatly inconsistent 
with the fees and gates amendments we are adopting today, which, at a 
minimum, require a fund to impose a liquidity fee when its weekly 
liquid assets have dropped below 10%, unless the fund's board 
affirmatively finds that such fee is not in the best interests of the 
fund. As discussed above, we believe that when a fund falls below 10% 
weekly liquid assets, its liquidity is sufficiently stressed that its 
board should be required to consider, based on the facts and 
circumstances at that time, what, if any, action should be taken to 
address a fund's liquidity. We regard fees and gates as additional 
tools for boards to employ when necessary and appropriate to protect 
the fund and its shareholders. We note, however, that our amendments do 
not require funds to impose fees and gates when it is not in a fund's 
best interests.
---------------------------------------------------------------------------

    \268\ See Goldman Sachs Comment Letter; ABA Business Law Section 
Comment Letter. These commenters were concerned that uncertainties 
over a fee or gate could lead to pre-emptive runs. We discuss pre-
emptive runs in section III.A.1.c.i of this Release.
---------------------------------------------------------------------------

    Certain commenters cited operational challenges with respect to 
fees and gates and board quorum requirements, given that in a crisis a 
board's independent

[[Page 47762]]

board members may not be readily available on short notice.\269\ 
Commenters thus proposed that the quorum requirement be relaxed to 
require only the approval of a majority of independent directors 
available rather than of all independent directors.\270\
---------------------------------------------------------------------------

    \269\ See Comment Letter of PFM Asset Management, LLC (Sept. 17, 
2013) (``PFM Asset Mgmt. Comment Letter''); ABA Business Law Section 
Comment Letter; Comment Letter of Ropes & Gray LLP (Sept. 17, 2013) 
(``Ropes & Gray Comment Letter'').
    \270\ See id.
---------------------------------------------------------------------------

    We have not made the requested change. The requirement that a 
majority of independent directors make a determination with respect to 
a fund matter is not unique to today's amendments. This requirement is 
widely used in the Investment Company Act and its rules, including a 
number of other exemptive rules.\271\ As we have emphasized, 
independent directors are the ``independent watchdogs'' of a fund, and 
the Investment Company Act and its rules rely on them to protect 
investor interests.\272\ A determination with respect to fees and gates 
by less than a majority of independent directors would not provide the 
level of independent oversight we are seeking in today's amendments, or 
in carrying out the purposes of the Investment Company Act. The 
decision to impose redemption restrictions on a fund's investors has 
significant ramifications for shareholders, and it is one that we 
believe should be entrusted only to a fund's board, including its 
independent directors. We note, however, that today's amendments do not 
require a best interests determination to be made at an in-person 
meeting and, thus, fund boards, including their independent directors, 
could hold meetings telephonically or through any other technological 
means by which all directors could be heard.\273\
---------------------------------------------------------------------------

    \271\ See, e.g., rule 12b-1 and rule 15a-4.
    \272\ See Role of Independent Directors of Investment Companies, 
Investment Company Act Release No. 24082 (Oct. 15, 1999).
    \273\ The Commission has previously recognized that fund boards 
can hold meetings telephonically or through other technological 
means by which all directors can be heard simultaneously. See, e.g., 
rule 15a-4 (permitting the approval of an interim advisory contract 
by a fund board at a meeting in which directors may participate by 
any means of communication that allows all directors participating 
to hear each other simultaneously during the meeting).
---------------------------------------------------------------------------

    Some commenters asserted that a fund's adviser or sponsor should 
have greater input regarding the imposition of a fee or gate.\274\ For 
example, one commenter urged the Commission to recognize that ``the 
primary role of the board is oversight'' and acknowledge ``both the 
ability and practical necessity of delegating day-to-day decision-
making functions to a fund's officers and investment adviser/
administrator pursuant to procedures approved by the board.'' \275\ A 
few other commenters suggested that the Commission provide guidance 
that an adviser must provide the board certain information, guidance or 
a recommendation on whether to impose a fee or gate.\276\
---------------------------------------------------------------------------

    \274\ See, e.g., NYC Bar Committee Comment Letter; Ropes & Gray 
Comment Letter; PFM Asset Mgmt. Comment Letter.
    \275\ See Ropes & Gray Comment Letter.
    \276\ See NYC Bar Committee Comment Letter; Comment Letter of 
the Independent Trustees of the Wilmington Funds (Sept. 17, 2013) 
(``Wilmington Trustees Comment Letter''); ABA Business Law Section 
Comment Letter.
---------------------------------------------------------------------------

    We believe that a fund's board, and not its adviser, is the 
appropriate entity to determine (within the constructs of the rule) 
when and how a fund will impose liquidity fees and/or redemption gates. 
As discussed above, given the role of independent directors, a fund's 
board is in the best position to determine whether a fee or gate is in 
the best interests of the fund.\277\ The Investment Company Act and its 
rules require many other fund fees and important matters to be approved 
by a fund's board, including a majority of independent directors, and 
we do not believe that liquidity fees and redemption gates should be 
treated differently.\278\
---------------------------------------------------------------------------

    \277\ If a fund's adviser was charged with determining when to 
impose fees and gates, it could choose, irrespective of its 
fiduciary duty, to act in its own interests rather than the 
interests of fund shareholders by, for example, not imposing a fee 
or gate for fear that it would negatively impact the adviser's 
reputation. We note that the role of independent directors on a fund 
board should counteract any similar concerns on the part of 
interested directors.
    \278\ See, e.g., section 15(a)-(c); rule 12b-1 and rule 22c-2.
---------------------------------------------------------------------------

    We note that although the final rule amendments contemplate that 
information from a fund's adviser will inform the board's determination 
involving a fee or gate,\279\ we are not charging a fund's adviser with 
specific duties under today's amendments. As the board is the entity 
charged with overseeing the fund and determining whether a fee or gate 
is in the fund's best interests, we believe the board should dictate 
the information and analysis it needs from the adviser in order to 
inform its decision. Nonetheless, as a matter of course and in light of 
its fiduciary duty to the fund, an adviser should provide the board 
with necessary and relevant information to enable the board to make the 
determinations under the rule.
---------------------------------------------------------------------------

    \279\ Because a fund's adviser is responsible for managing the 
portfolio, it is the entity that will have direct access to 
information on the fund's liquidity. As noted below, a fund's 
adviser should provide the board with all necessary and relevant 
information to make the determinations under the rule.
---------------------------------------------------------------------------

c. Size of Liquidity Fee
    Today's amendments will permit a money market fund to impose a 
discretionary liquidity fee of up to 2% after its weekly liquid assets 
drop below 30% of its total assets. We are also adopting a default 
liquidity fee of 1% that must be imposed if a fund drops below 10% 
weekly liquid assets, unless a fund's board determines not to impose 
such a fee, or to impose a lower or higher fee (not to exceed 2%) 
because it is in the best interests of the fund.\280\ As proposed, the 
amendments would have required funds to impose a default liquidity fee 
of 2% after a fund's weekly liquid assets dropped below 15% of its 
total assets, although (as under our final amendments) fund boards 
could have determined not to impose the fee or to lower the fee.
---------------------------------------------------------------------------

    \280\ See rule 2a-7(c)(2)(ii)(A).
---------------------------------------------------------------------------

    We received a wide range of comments on the size and structure of 
the proposed liquidity fee.\281\ A few commenters expressly supported a 
default fee of 2%.\282\ One commenter expressed concern that a maximum 
2% fee may be insufficient in times of crisis and urged the Commission 
to permit greater flexibility in setting an even higher fee if 
necessary.\283\
---------------------------------------------------------------------------

    \281\ We note that prior to issuing the proposal, commenters had 
suggested liquidity fee levels ranging from 1% to 3% could be 
effective. See, e.g., Comment Letter of Vanguard (Jan. 15, 2013) 
(available in File No. FSOC-2012-0003) (``Vanguard FSOC Comment 
Letter'') (recommending a fee of between 1 and 3%); BlackRock FSOC 
Comment Letter (recommending a standby liquidity fee of 1%); ICI 
Jan. 24 FSOC Comment Letter (recommending a 1% fee).
    \282\ See J.P. Morgan Comment Letter; Ropes & Gray Comment 
Letter; Schwab Comment Letter; Wells Fargo Comment Letter.
    \283\ See Ropes & Gray Comment Letter.
---------------------------------------------------------------------------

    Other commenters explicitly argued against a default fee of 
2%.\284\ One commenter noted that 2% would be excessive ``since it is 
far higher than the actual cost of liquidity paid by money market funds 
even at the height of the financial crisis.'' \285\ Other commenters 
described a 2% fee as punitive \286\ and arbitrary.\287\ A number of 
commenters favored instead a default fee of 1% while also allowing 
boards discretion to set a higher or lower fee.\288\
---------------------------------------------------------------------------

    \284\ See, e.g., Fidelity Trustees Comment Letter; Fidelity 
Comment Letter; Invesco Comment Letter; Comment Letter of Financial 
Services Roundtable (Sept. 17, 2013) (``Fin. Svcs. Roundtable 
Comment Letter'').
    \285\ See Invesco Comment Letter.
    \286\ See, e.g., Fidelity Trustees Comment Letter; Fidelity 
Comment Letter.
    \287\ See, e.g., Fin. Svcs. Roundtable Comment Letter.
    \288\ See Dreyfus Comment Letter; SIFMA Comment Letter; Northern 
Trust Comment Letter; BlackRock II Comment Letter; Fidelity Comment 
Letter.

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[[Page 47763]]

    As suggested by commenters, the amendments we are adopting today 
will impose a default liquidity fee of 1%, that may be raised or 
lowered (or not imposed at all) by a fund's board. As discussed below, 
we are persuaded by commenters that 2% may be higher than most 
liquidity costs experienced when selling money market securities in a 
crisis, and may thus result in a penalty for redeeming shareholders 
over and above paying for the costs of their liquidity.\289\ We are 
also persuaded by commenters that fund boards may be reluctant to 
impose a fee that is lower than the default liquidity fee for fear of 
being second-guessed--by the market, the Commission, or otherwise.\290\ 
Accordingly, commenters supporting the 1% default fee have persuaded us 
that 1% is the correct default fee level.
---------------------------------------------------------------------------

    \289\ See, e.g., SIFMA Comment Letter (``Our members' consensus 
is that a redemption fee of 100 basis points will adequately 
compensate a money market fund for the costs of liquidating assets 
to honor redemptions in times of market stress, and avoid imposing a 
punitive charge on shareholders.''); Fidelity Comment Letter (``We 
have examined the liquidation costs for our money market funds that 
sold securities during the period immediately following the 
bankruptcy of Lehman Brothers and determined that the highest 
liquidation cost was less than 50 basis points of face value. 
Recognizing that liquidation costs in a future market stress 
scenario may be greater, we think it is reasonable to set a 
liquidation fee at 100 basis points or one percent.'').
    \290\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    Furthermore, analysis by Commission staff of liquidity costs of 
certain corporate bonds during the financial crisis further confirms 
that a reduced default fee of 1% is appropriate.\291\ DERA staff 
estimated increases in transaction spreads for certain corporate bonds 
that occurred during the financial crisis.\292\ Relative to transaction 
spreads observed during the pre-crisis period from January 2, 2008 to 
September 11, 2008, average transaction spreads increased by 54.1 bps 
for Tier 1 eligible securities and by 104.4 bps for Tier 2 eligible 
securities during the period from September 12, 2008 to October 20, 
2008. These estimates indicate that market stress increases the average 
cost of obtaining liquidity by an amount closer to 1% than 2%.\293\
---------------------------------------------------------------------------

    \291\ See DERA Liquidity Fee Memo, supra note 111.
    \292\ See id.
    \293\ DERA obtained information on trades in Tier 1 and Tier 2 
eligible securities, as defined in rule 2a-7 from TRACE (Trade 
Reporting and Compliance Engine) between January 2, 2008 through 
December 31, 2009, and formed a Tier 1 and a Tier 2 sample. TRACE 
provides transaction records for TRACE eligible securities that have 
a maturity of more than a year at issuance. Money market 
instruments, sovereign debt, and debt securities that have a 
maturity of less than a year at issuance are not reported in TRACE 
and hence DERA's sample differs from what money market funds hold. 
Nevertheless, the samples constructed from TRACE provide estimates 
for costs of liquidity during market stress since the selected 
securities have similar time-to-maturity and credit risk 
characteristics as those permitted under rule 2a-7. DERA included in 
the samples only trades of bonds with fewer than 120 days to 
maturity and with a trade size of at least $100,000. DERA classified 
bonds with credit ratings equal to AAA, AA+, AA, or AA- as Tier 1 
eligible securities. The average days to maturity for Tier 1 
securities in the sample is 67 days, which roughly reflects the 60-
day weighted average maturity limit specified in rule 2a-7. Bonds 
with credit ratings equal to A+, A, or A- represent Tier 2 eligible 
securities. The average days to maturity for Tier 2 securities in 
the sample is 28 days, which is somewhat lower than the 45-day 
weighted average maturity limit required by rule 2a-7.
---------------------------------------------------------------------------

    We received a number of comments on DERA's analysis of liquidity 
costs.\294\ Some commenters agreed that DERA's analysis supports a 
default liquidity fee of 1% and that 1% is the appropriate level for 
the fee.\295\ Other commenters, however, took issue with DERA's 
methodology in examining liquidity costs and, one commenter suggested a 
default fee ``as low as'' 0.50% may be appropriate.\296\
---------------------------------------------------------------------------

    \294\ See, e.g., Comment Letter of SIFMA (Apr. 23, 2014) 
(``SIFMA II Comment Letter''); Comment Letter of Dreyfus Corporation 
(Apr. 23, 2014) (``Dreyfus DERA Comment Letter''); Comment Letter of 
Invesco (Apr. 23, 2014) (``Invesco DERA Comment Letter'').
    \295\ See SIFMA II Comment Letter (``Data in the [DERA] 
Liquidity [Fee Memo] support that a lower default level [from the 
level proposed] will effectively compensate money market funds for 
the cost of liquidity during market turmoil. . . . A 100 basis point 
(1%) default level for the liquidity fee will more closely 
approximate the fund's cost of providing liquidity during a crisis 
period for a portfolio comprised largely of Tier 1 securities.''); 
Dreyfus DERA Comment Letter (``We read [DERA's analysis] and 
interpret the average spread calculations contained [in the DERA 
Liquidity Fee Memo] to support a [default liquidity fee] of 1% and 
not 2%, as proposed.''); Fidelity DERA Comment Letter (supporting a 
1% liquidity fee and suggesting the empirical market data examined 
by DERA in its Liquidity Fee Memo is ``critical in order for the SEC 
to determine the size of a liquidity fee,'' but noting that the 
methodology in DERA's analysis ``overstates the estimates of 
absolute spreads.'')
    \296\ See Invesco DERA Comment Letter (suggesting concerns with 
the data and methodology used in DERA's analysis); BlackRock DERA 
Comment Letter (suggesting the methodology used in DERA's analysis 
was not ``the appropriate methodology to measure the true cost of 
liquidity in MMFs,'' particularly the use of TRACE data); Comment 
Letter of Federated Investors Inc. (Liquidity Fee) (Apr. 23, 2014) 
(``Federated DERA II Comment Letter'') (suggesting it generally 
agrees with DERA's methodology, but believes that a more appropriate 
default liquidity fee may be ``as low as'' 0.50% because ``use of 
[TRACE] bond data as the basis for spread analysis led DERA to find 
significantly larger spreads than it would have found had it based 
its analysis on the short-term instruments in which MMFs actually 
invest''); see also Fidelity DERA Comment Letter (supporting a 1% 
default liquidity fee, but suggesting that the spreads cited in 
DERA's analysis are higher than those it has seen it its experience 
and that its independent analysis reflects average spreads between 
0.12% and 0.57% during the week immediately following the Lehman 
Brothers bankruptcy).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we have attempted to set the 
default liquidity fee high enough to deter shareholder redemptions so 
that funds can recoup costs of providing liquidity to redeeming 
shareholders in a crisis and so that the fund's liquidity is not 
depleted, but low enough to permit investors who wish to redeem despite 
the cost to receive their proceeds without bearing disproportionate 
costs.\297\ Based on the comments we received on the proposal, we 
believe that a default fee of 1% strikes this balance. Although we have 
looked to the DERA study as confirming our decision based on comments 
we received supporting the 1% fee, we recognize commenters' critiques 
of the methodology used in the DERA analysis. We also note, however, 
that DERA acknowledged in its memorandum that its samples were not 
perfectly analogous to money market fund holdings, but that the samples 
nevertheless ``provide estimates for costs of liquidity during market 
stress since the selected securities have similar time-to-maturity and 
credit risk characteristics as those permitted under Rule 2a-7.'' \298\ 
Moreover, at least one commenter who took issue with DERA's samples 
agreed, based on its own independent analysis, that a default liquidity 
fee of 1% is appropriate.\299\ Furthermore, because we recognize that 
establishing any fixed fee level may not precisely address the 
circumstances of a particular fund in a crisis, we are permitting (as 
in the proposal) fund boards to alter the level of the default 
liquidity fee and to tailor it to the specific circumstances of a fund. 
As amended, rule 2a-7 will permit fund boards to increase (up to 2%), 
decrease (to, for example, 0.50% as suggested by a commenter), or not 
impose the default

[[Page 47764]]

1% liquidity fee if it is in the best interests of the fund.
---------------------------------------------------------------------------

    \297\ See, e.g., SIFMA Comment Letter; Fidelity Trustees Comment 
Letter; Fidelity Comment Letter (suggesting a 2% fee would be 
punitive); see also supra note 281.
    \298\ See DERA Liquidity Fee Memo, supra note 111. Some 
commenters suggested we should analyze liquidity spreads in actual 
money market fund portfolios. See Federated DERA II Comment Letter; 
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter. 
However, as one commenter acknowledged, this information is not 
publicly available, and we note that only one commenter on the DERA 
Liquidity Fee Memo provided specific information in this area. See 
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter 
(providing specific information on spreads during the financial 
crisis and stating that a 1% default liquidity fee is appropriate). 
We believe one data point is not adequate for us to draw conclusions 
on liquidity costs in money market funds during the crisis.
    \299\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    As proposed and supported by commenters,\300\ we are limiting the 
maximum liquidity fee that may be imposed by a fund to 2%. As with the 
default fee, we seek to balance the need for liquidity costs to be 
allocated to redemptions with shareholders' need to redeem absent 
disproportionate costs. We also believe setting a limit on the level of 
a liquidity fee provides notice to investors about the extent to which 
a liquidity fee could impact their investment. In addition, as 
recognized by at least one commenter,\301\ the staff has noted in the 
past that fees greater than 2% raise questions regarding whether a 
fund's securities remain ``redeemable.'' \302\ We note that if a fund 
continues to be under stress even with a 2% liquidity fee, the fund 
board may consider imposing a temporary redemption gate under amended 
rule 2a-7 or liquidating the fund pursuant to amended rule 22e-3.
---------------------------------------------------------------------------

    \300\ See, e.g., SIFMA Comment Letter.
    \301\ See NYC Bar Assoc. Comment Letter.
    \302\ Section 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 rule 23c-3(b)(1), which 
permits a maximum 2% repurchase fee for interval funds and rule 22c-
2(a)(1)(i),which similarly permits a maximum 2% redemption fee to 
deter frequent trading in mutual funds.
---------------------------------------------------------------------------

    As recognized in the Proposing Release, there are a number of 
factors a board may want to consider in determining the level of a 
liquidity fee. These may include, but are not limited to: changes in 
spreads for portfolio securities (whether based on actual sales, dealer 
quotes, pricing vendor mark-to-model or matrix pricing, or otherwise); 
the maturity of the fund's portfolio securities; changes in the 
liquidity profile of the fund in response to redemptions and 
expectations regarding that profile in the immediate future; whether 
the fund and its intermediaries are capable of rapidly putting in place 
a fee of a different amount from a previously set liquidity fee or the 
default liquidity fee; if the fund is a floating NAV fund, the extent 
to which liquidity costs are already built into the NAV of the fund; 
and the fund's experience, if any, with the imposition of fees in the 
past. We note that fund boards should not consider our 1% default 
liquidity fee as creating the presumption that a liquidity fee should 
be 1%. If a fund board believes based on market liquidity costs at the 
time or otherwise that a liquidity fee is more appropriately set at a 
lower or higher (up to 2%) level, it should consider doing so. Once a 
liquidity fee has been imposed, the fund's board would likely need to 
monitor the imposition of such fee, including the size of the fee, and 
whether it continues to be in the best interests of the fund.\303\
---------------------------------------------------------------------------

    \303\ A board may change the level of a liquidity fee at any 
time if it determines it is in the best interests of the fund to do 
so. Similarly, once a gate is imposed, the fund's board would likely 
monitor the imposition of the gate and whether it remains in the 
best interests of the fund to continue imposing the gate.
---------------------------------------------------------------------------

    Other commenters argued for even more flexible approaches and/or 
entirely different standards for setting a fee.\304\ For example, a 
commenter argued against having any default fee and instead supported 
allowing the board to tailor the fee to encompass the cost of liquidity 
to the fund.\305\ Different commenters similarly argued that liquidity 
fees should be carefully calibrated in relation to a fund's actual cost 
of liquidity.\306\ A commenter noted this calibration could be achieved 
by, rather than setting a fixed fee in advance, delaying redemptions 
for up to seven days to allow the fund to determine the size of the fee 
based on actual transaction costs incurred on each day's 
redemptions.\307\ Finally, a commenter proposed a flexible redemption 
fee whereby redemptions would occur at basis point NAV (i.e., NAV to 
the fourth decimal place) plus 1%.\308\
---------------------------------------------------------------------------

    \304\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab 
Comment Letter; Santoro Comment Letter; Invesco Comment Letter.
    \305\ See Fin. Svcs. Roundtable Comment Letter.
    \306\ See Invesco Comment Letter; Ropes & Gray Comment Letter.
    \307\ See Ropes & Gray Comment Letter.
    \308\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the amendments we are adopting today 
incorporate substantial flexibility for a fund board to determine when 
and how it imposes liquidity fees. We believe that including in the 
amended rule a 1% default fee that may be modified by the board is the 
best means of directing fund boards to a liquidity fee that may be 
appropriate in stressed market conditions, while at the same time 
providing flexibility to boards to lower or raise the liquidity fee if 
a board determines that a different fee would better and more fairly 
allocate liquidity costs to redeeming shareholders. We would encourage 
a fund board, if practicable given any timing concerns, to consider the 
actual cost of providing liquidity when determining if the default 
liquidity fee is in the fund's best interests. In addition, we note 
that under today's amendments, a fund board also could, as suggested by 
a commenter, determine that the default fee is not in the best 
interests of the fund and instead gate the fund for a period of time, 
possibly later imposing a liquidity fee.
    Furthermore, we have determined not to explicitly tie the default 
liquidity fee to market indicators. As discussed in the Proposing 
Release, we believe there are certain drawbacks to such a ``market-
sized'' liquidity fee.\309\ First, it may be difficult for money market 
funds to rapidly determine precise liquidity costs in times of stress 
when the short-term financing markets may generally be illiquid.\310\ 
Similarly, the additional burdens associated with computing a market-
sized liquidity fee could make it more difficult for funds and their 
boards to act quickly and proactively to stem heavy redemptions. 
Second, a market-sized liquidity fee does not signal in advance the 
size of the liquidity fee shareholders may have to pay if the fund's 
liquidity is significantly stressed.\311\ This lack of transparency may 
hinder shareholders' ability to make well-informed investment decisions 
because investors may invest funds without realizing the extent of the 
costs they could incur on their redemptions.
---------------------------------------------------------------------------

    \309\ See Proposing Release, supra note 25, at 183; see also 
HSBC FSOC Comment Letter (suggesting 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).
    \310\ Our staff gave no-action assurances to money market funds 
relating to valuation during the financial crisis because 
determining pricing in the then-illiquid markets was so difficult. 
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.'').
    \311\ A liquidity fee based on market indicators would not 
provide notice to shareholders of the potential level of a liquidity 
fee like our maximum 2% fee and default fee level of 1% provide.
---------------------------------------------------------------------------

    Finally, commenters proposed various potential exemptions from the 
default

[[Page 47765]]

liquidity fee. For example, a commenter suggested an exemption for all 
shareholders to redeem up to $1 million for incidental expenditures 
without a fee.\312\ Other commenters argued that a fee should not be 
imposed on newly purchased shares.\313\ For several independent 
reasons, we do not currently believe that there should be exemptions to 
the default liquidity fee. First, because the circumstances under which 
liquidity becomes expensive historically have been infrequent, we 
believe the imposition of fees and gates will also be infrequent. As 
long as funds' weekly liquid assets are above the regulatory threshold 
(i.e. 30%), fund shareholders should continue to enjoy unfettered 
liquidity for money market fund shares.\314\ The likely limited and 
infrequent use of liquidity fees leads us to believe exemptions are 
generally unnecessary. Second, liquidity fees are meant to impose at 
least some of the cost of liquidity on those investors who are seeking 
liquidity by redeeming their shares. Allowing exemptions to the default 
liquidity fee would run counter to this purpose and permit some 
investors to avoid bearing at least some of their own costs of 
obtaining liquidity and could serve to further harm the liquidity of 
the fund, potentially requiring the imposition of a liquidity fee for 
longer than would otherwise be necessary. Third, as suggested by 
commenters and discussed in section III.C.7.a below, exemptions to the 
default liquidity fee would increase the cost and complexity of the 
amendments for funds and intermediaries because funds would have to 
develop the systems and policies to track, for example, the amount of 
each shareholder's redemption, and could facilitate gaming on the part 
of investors because investors could attempt to fit their redemptions 
within the scope of an exemption.\315\
---------------------------------------------------------------------------

    \312\ See Capital Advisors Comment Letter.
    \313\ See ABA Business Law Section Comment Letter; Wilmington 
Trustees Comment Letter; Federated V Comment Letter.
    \314\ See Proposing Release, supra note 25, at n.342.
    \315\ See, e.g., Federated V Comment Letter (``Any attempt to 
create exceptions, such as allowing redemptions free of any 
liquidity fee up to a set dollar amount or percentage of the 
shareholder's account balance, would add significant operational 
hurdles to the proposed reform. In order to be applied equitably, 
prime [money market funds] would have to take steps to assure that 
intermediaries were implementing the exceptions on a consistent 
basis.''); Fidelity Comment Letter (urging the Commission not to 
adopt partial gates, which like an exception to a liquidity fee, 
would, for example, except a certain amount of redemptions (e.g., up 
to $250,000 per shareholder) from a gate that has been imposed). The 
commenter stated ``that the challenges and costs associated with 
[partial gates] outweigh the benefits. The systems enhancements 
necessary to track holdings for purposes of determining each 
shareholder's redemption limit would be more complicated, 
cumbersome, and costly than the changes required to implement the 
full gate, [and] that this complicated structure lends itself to 
arbitrary or inconsistent application across the industry and 
potential inequitable treatment among shareholders.'' Id.
---------------------------------------------------------------------------

d. Duration of Fees and Gates
    We are adopting, as proposed, a requirement that any fee or gate be 
lifted automatically once the fund's weekly liquid assets have risen to 
or above 30% of the fund's total assets. We are also adopting, with 
certain modifications from the proposal as discussed below, a 
requirement that a money market fund must lift any gate it imposes 
within 10 business days and that a fund cannot impose a gate for more 
than 10 business days in any 90-day period. As proposed, the amendments 
would have allowed funds to impose a gate for up to 30 days in any 90-
day period.
    Several commenters noted positive aspects of the Commission's 
proposed duration for fees and gates.\316\ Some commenters, however, 
suggested that the duration of liquidity fees, like the duration of 
redemption gates, should be limited to a number of days.\317\ We 
continue to believe that the appropriate duration limit on a liquidity 
fee is the point at which a fund's assets rise to or above 30% weekly 
liquid assets. Thirty percent weekly liquid assets is the minimum 
required under rule 2a-7 and thus a fee (or gate) would appear to no 
longer be justified once a fund's level of weekly liquid assets has 
risen to this level. If we were to limit the imposition of liquidity 
fees to a number of days, a fund might have to remove a liquidity fee 
while it is still under stress and thus it would not gain the full 
benefits of imposing the fee.\318\ Additionally, if a fund was required 
to remove the fee while it was still under stress, it may have to re-
impose the fee shortly thereafter, which could cause investor 
confusion.\319\ We note that a fund's board can always determine that 
it is in the best interests of the fund to lift a fee before the fund's 
level of weekly liquid assets is restored to 30% of its total assets.
---------------------------------------------------------------------------

    \316\ See, e.g., HSBC Comment Letter; Dreyfus Comment Letter; 
SIFMA Comment Letter; UBS Comment Letter.
    \317\ See BlackRock II Comment Letter (``We would also recommend 
that a MMF not be open with a liquidity fee for more than 30 
days.''); Federated V Comment Letter (suggesting that liquidity fees 
should be subject to the same duration limits as redemption gates 
and proposing a limit of 10 calendar days); J.P. Morgan Comment 
Letter; see also UBS Comment Letter (noting that ``there should be a 
maximum time period during which the liquidity fee . . . could be 
imposed'').
    \318\ We note that, unlike a redemption gate, a liquidity fee 
does not prohibit a shareholder from accessing its investment; this 
distinction, in our view, justifies imposing a limited duration on 
the imposition of a gate while not doing so for the imposition of 
fees. We also note that, once a fund's weekly liquid assets drop 
below the regulatory minimum (30%), it is limited to purchasing only 
weekly liquid assets, which should increase the fund's liquidity and 
potentially bring it back above the weekly liquid asset threshold. 
See rule 2a-7(d)(4)(iii).
    \319\ As discussed in the Proposing Release, we considered 
whether a fee or gate should be lifted automatically before a fund's 
weekly liquid assets were completely restored to their required 
minimum--for example, after they had risen to 25%. However, we 
believe that such a requirement would be inappropriate for the same 
reasons we are not limiting the length of time the fee is imposed.
---------------------------------------------------------------------------

    We also received a number of comments on the duration of redemption 
gates.\320\ For example, some commenters described the maximum 30-day 
term for gating as reasonable,\321\ including a commenter that noted it 
would not be in favor of a shorter time period.\322\ Another commenter 
stated its support for the Commission's proposed 30-day time limit for 
redemption gates.\323\ In addition, an industry group commented that 
although its members had varying views, some stressed the importance of 
the maximum 30-day period to allow the fund adequate time to replenish 
its liquidity as securities mature.\324\
---------------------------------------------------------------------------

    \320\ See, e.g., UBS Comment Letter (supporting a maximum time 
period that would require a gated fund to reopen or liquidate 
thereafter).
    \321\ See, e.g., Dreyfus Comment Letter; Page Comment Letter.
    \322\ See Dreyfus Comment Letter (noting that shortening the 
maximum gating period might not be enough time for a fund's 
liquidity levels to adequately recover).
    \323\ See HSBC Comment Letter.
    \324\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    On the other hand, in response to our request for comment on the 
appropriate duration of redemption gates, including our request for 
comment on a 10-day maximum gating period, some commenters raised 
concerns with the proposed 30-day maximum gating period.\325\ For 
example, one commenter noted that ``denying investors access to their 
cash for more than a brief period'' would ``create serious hardships.'' 
\326\ This commenter expressed doubt that it would take boards ``much 
more than a week to resolve what course of action would best serve the 
interest of their shareholders'' and suggested an alternate maximum 
gating period of up to 10 calendar days.\327\ A second

[[Page 47766]]

commenter added that the potential total loss of liquidity for up to 30 
days could further exacerbate pre-emptive runs and even be 
destabilizing to the short-term liquidity markets, and suggested an 
alternative maximum gating period of up to 10 calendar days.\328\ 
Additionally, some members of an industry group suggested that gating 
for a shorter period of time would be more consistent with investors' 
liquidity needs and the requirements of the Investment Company 
Act.\329\
---------------------------------------------------------------------------

    \325\ See, e.g., SIFMA Comment Letter; J.P. Morgan Comment 
Letter; Fla. CFO Comment Letter; Federated V Comment Letter.
    \326\ See Federated II Comment Letter; Federated V Comment 
Letter.
    \327\ See Federated II Comment Letter (``Federated had 
previously proposed limiting any suspension of redemptions to five 
or ten business days. Alternative 2, on the other hand, would set 
the limit in terms of calendar days. Federated therefore recommends 
limiting a temporary suspension of redemptions to not more than ten 
calendar days.''); Federated V Comment Letter; Federated X Comment 
Letter; see also Federated Funds Trustees Comment Letter; J.P. 
Morgan Comment Letter (suggesting a 10-day gating period).
    \328\ See J.P. Morgan Comment Letter.
    \329\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    We have carefully considered the comments we received, both on the 
duration of gates and on the possibility of pre-emptive runs as a 
result of potential gates, and have been persuaded that gates should be 
limited to a shorter time period of up to 10 business days.\330\ As 
discussed in the Proposing Release and reiterated by commenters,\331\ 
we recognize the strong preference embodied in the Investment Company 
Act for the redeemability of open-end investment company shares.\332\ 
Additionally, as was echoed by a number of commenters,\333\ we 
understand that investors use money market funds for cash management 
and a lack of access to their investment for a long period of time can 
impose substantial costs and hardships. Indeed, many shareholders in 
the Reserve Primary Fund informed us about these costs and hardships 
during that fund's lengthy liquidation.\334\ As discussed above, it 
remains one of our goals to preserve the benefits of money market funds 
for investors. Accordingly, upon consideration of the comments 
received, we have modified the final rules to limit the redeemability 
of money market fund shares for a shorter period of time.\335\
---------------------------------------------------------------------------

    \330\ In a change from the proposal, the maximum gating period 
in the final amendments uses business days rather than calendar days 
to better reflect typical fund operations and to mitigate potential 
gaming of the application of gates during weekends or periods during 
which a fund might not already typically accept redemption requests. 
If a fund imposes a gate, it is not required to impose the gate for 
10 business days. Rather, a fund can lift a gate before 10 business 
days have passed and we would expect a board would promptly do so if 
it determines that it is in the best interests of the fund. We note 
that a money market fund board would likely meet regularly during 
any period in which a redemption gate is in place. See supra note 
303. Additionally, a fund's board may also consider permanently 
suspending redemptions in preparation for fund liquidation under 
rule 22e-3 if the fund approaches the 10 business day gating limit.
    \331\ See, e.g., SIFMA Comment Letter.
    \332\ 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); see also 
section 22(e) (limiting delays in payments on redemptions to up to 
seven days).
    \333\ See, e.g., Federated II Comment Letter; Federated V 
Comment Letter; SIFMA Comment Letter.
    \334\ 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 purchases 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.'').
    \335\ We recognize that rule 22e-3 does not limit gates to a 
short period of time, but under that rule, a gate is permanent and a 
fund must liquidate thereafter. See rule 22e-3.
---------------------------------------------------------------------------

    Some commenters suggested that the longer a potential redemption 
gate may be imposed, the greater the possibility that investors may try 
to pre-emptively redeem from a fund before the gate is in place.\336\ 
We recognize this concern and believe that if gates are limited to 10 
business days, investors may be less inclined to try to redeem before a 
gate is imposed because 10 business days is a relatively short period 
of time and after that time investors will have access to their 
investment.\337\
---------------------------------------------------------------------------

    \336\ See, e.g., J.P. Morgan Comment Letter; Federated XI 
Comment Letter.
    \337\ See, e.g., Federated V Comment Letter (``[A 10-day maximum 
gating period] would also be consistent with the comments of some of 
the investors who indicated to Federated that they probably could 
not go more than two weeks without access to the cash held in their 
[money market fund].'') In addition, we note that 10 business days 
is not significantly longer than funds are statutorily permitted to 
delay payment on redemptions. See section 22(e).
---------------------------------------------------------------------------

    We also believe that by limiting gates to 10 business days, 
investors may be better able to account for the possibility of 
redemption gates when determining their investment allocations and cash 
management policies. For example, an employer may determine that money 
market funds continue to be a viable cash management tool because even 
if a fund imposes a gate, the employer could potentially still meet its 
payroll obligations, depending on its payroll cycle. Similarly, a 
retail investor may determine to invest in a money market fund for cash 
management purposes because a money market fund's potential for yield 
as compared to the interest on a savings or checking account outweighs 
the possibility of a money market fund imposing a gate and delaying 
payment of the investor's bills for up to 10 business days.
    While we believe temporary gates should be limited to a short 
period of time, we also recognize that gates may be the most effective, 
and probably only, way for a fund to stop a run for the duration of the 
gating period. As one commenter stated, ``[s]uspending redemptions 
would allow a [b]oard to deal with large-scale redemptions directly, by 
effectively calling a `time out' until the [b]oard can decide how to 
deal with the circumstances prompting the redemptions.'' \338\ 
Accordingly, we believe gates, even those that are limited to up to 10 
business days, will be a valuable tool for funds to limit heavy 
redemptions in times of stressed liquidity.\339\
---------------------------------------------------------------------------

    \338\ See Federated V Comment Letter.
    \339\ As discussed in supra note 148, as necessary, the 
Commission also has previously granted orders allowing funds to 
suspend redemptions to address exigent circumstances. See, e.g., In 
the Matter of: Centurion Growth Fund, Inc., Investment Company Act 
Release Nos. 20204 (Apr. 7, 1994) (notice) and 20210 (Apr. 11, 1994) 
(order); In the Matter of Suspension of Redemption of Open-End 
Investment Company Shares Because of the Current Weather Emergency, 
Investment Company Act Release No. 10113 (Feb. 7, 1978).
---------------------------------------------------------------------------

    We also recognize, as suggested by some commenters,\340\ that 
temporary gates should provide a period of time for funds to gain 
internal liquidity. In this regard, we note that weekly liquid assets 
generally consist of government securities, cash, and assets that will 
mature in five business days,\341\ and that once a fund has dropped 
below 30% weekly liquid assets (the required regulatory minimum, and 
the threshold for the imposition of gates), the fund can purchase only 
weekly liquid assets.\342\ Accordingly, because the securities a fund 
may purchase once it has imposed a gate will mature, in large part, in 
five business days, we believe a limit of 10 business days for the 
imposition of a gate should provide a fund with an adequate period of 
time in which to generate internal liquidity.\343\
---------------------------------------------------------------------------

    \340\ See, e.g., SIFMA Comment Letter; Dreyfus Comment Letter.
    \341\ See rule 2a-7(a)(34).
    \342\ See rule 2a-7(d)(4)(iii).
    \343\ See J.P. Morgan Comment Letter (``Ten (10) calendar days 
should provide [money market funds] an opportunity to rebuild 
significant amounts of liquidity since the 2010 amendments to Rule 
2a-7 require [money market funds] to invest at least 30% of their 
portfolios in assets that can provide weekly liquidity.'').

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

[[Page 47767]]

    We further recognize that 10 business days is not significantly 
longer than the seven days funds are already permitted to delay payment 
of redemption proceeds under section 22(e) of the Investment Company 
Act. We note, however, that while section 22(e) allows funds to delay 
payment on redemption requests, it does not prevent shareholders from 
redeeming shares. Even if a fund delays payment on redemptions pursuant 
to section 22(e), redemptions can continue to mount at the fund.\344\ 
Unlike payment delays under section 22(e), the temporary gates we are 
adopting today will allow a fund a cooling off period during which 
redemption pressures do not continue to mount while the fund builds 
additional liquidity, and the fund's board can continue to evaluate the 
best path forward. Additionally, temporary gates may also provide a 
cooling off period for shareholders during which they may gather more 
information about a fund, allowing them to make more well-informed 
investment decisions after a gate is lifted.
---------------------------------------------------------------------------

    \344\ For example, if on day one, fifty shareholders place 
redemptions requests with a fund, there is nothing to stop another 
fifty shareholders from placing redemption requests on day two. The 
fund's liquidity may continue to be strained because it is required 
to pay out redemption proceeds to all fifty shareholders from day 
one within seven days (and the next day, to all fifty shareholders 
from day two) and it must do so at day one's NAV (and the next day, 
at day two's NAV).
---------------------------------------------------------------------------

    Finally, one commenter asked the Commission to clarify that the 
time limit for redemption gates may ``occur in multiple separate 
periods within any ninety-day period (as well as consecutively), and if 
so, whether the ninety-day period is a rolling period which is 
recalculated on a daily basis.'' \345\ As indicated in the Proposing 
Release, the intent of the 90-day limit on redemption gates is to 
ensure that funds do not circumvent the time limit on redemption gates 
\346\--for example, by reopening on the 9th business day for one 
business day before re-imposing a gate for potentially another 10 
business day period. Accordingly, when determining whether a fund has 
been gated for more than 10 business days in a 90-day period, the fund 
should account for any multiple separate gating periods and assess 
compliance with the 90-day limit on rolling basis, calculated daily.
---------------------------------------------------------------------------

    \345\ See Comment Letter of Stradley Ronon Stevens & Young, LLP 
(Sept. 17, 2013) (``Stradley Ronon Comment Letter'').
    \346\ See Proposing Release, supra note 25, at 189.
---------------------------------------------------------------------------

3. Exemptions to Permit Fees and Gates
    The Commission is adopting, as proposed, exemptions from various 
provisions of the Investment Company Act to permit a fund to institute 
liquidity fees and redemption gates.\347\ 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 exercising 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 redemption gates notwithstanding these 
restrictions.\348\ As discussed in the Proposing Release and 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.
---------------------------------------------------------------------------

    \347\ See rule 2a-7(c)(2).
    \348\ Section 6(c). To clarify the application of liquidity fees 
and redemption gates to variable contracts, we are also amending 
rule 2a-7 to provide that, notwithstanding section 27(i) of the Act, 
a variable insurance contract issued by a registered separate 
account funding variable insurance contracts or the sponsoring 
insurance company of such separate account may apply a liquidity fee 
or redemption 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 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 the temporary gates we are allowing in 
today's amendments will 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.\349\ Rather, under today's amendments, the board of a money 
market fund can impose gates to benefit the fund and its shareholders 
by making the fund better able to protect against redemption activity 
that would harm remaining shareholders, and to allow time for any 
market distress to subside and liquidity to build organically.
---------------------------------------------------------------------------

    \349\ See 2009 Proposing Release, supra note 66, at n.281 and 
accompanying text.
---------------------------------------------------------------------------

    In addition, gates will be limited in that they can be imposed only 
for limited periods of time and only when a fund's weekly liquid assets 
are stressed. 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 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.\350\
---------------------------------------------------------------------------

    \350\ See 2010 Adopting Release, supra note 17, at text 
following n.379.
---------------------------------------------------------------------------

    We are also providing exemptions from rule 22c-1 to permit a money 
market fund to impose liquidity fees because such fees can benefit the 
fund and its shareholders by providing a more systematic and equitable 
allocation of liquidity costs.\351\ In addition, based on the level of 
the liquidity fee imposed, a fee may secondarily benefit a fund by 
helping to repair its market-based NAV.
---------------------------------------------------------------------------

    \351\ See rule 2a-7(c)(2) (providing that, notwithstanding rule 
22c-1, among other provisions, a money market fund may impose a 
liquidity fee under the circumstances specified in the rule).
---------------------------------------------------------------------------

    We are permitting money market funds to impose fees and gates in 
limited situations because they may provide substantial benefits to 
money market funds, the short-term financing markets for issuers, and 
the financial system, as discussed above. However, we are adopting 
limitations on when and for how long money market funds can impose 
these restrictions 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).\352\ We did not 
receive comments suggesting changes to the proposed exemptions and, 
thus, we are adopting them as proposed.\353\
---------------------------------------------------------------------------

    \352\ See rule 2a-7(c)(2)(i) and (ii); cf. 2010 Adopting 
Release, supra note 17, 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.'')
    \353\ But see NYC Bar Committee Comment Letter (discussing 
section 22(e) and the Commission's authority to allow gates under 
that section). As discussed above, we are adopting the proposed 
amendments to rule 22e-3 pursuant to section 6(c).
---------------------------------------------------------------------------

4. Amendments to Rule 22e-3
    Currently, rule 22e-3 allows a money market fund to permanently 
suspend redemptions and liquidate if the fund's board determines that 
the deviation between the fund's amortized cost price per share and its 
market-based NAV per

[[Page 47768]]

share may result in material dilution or unfair results to investors or 
existing shareholders.\354\ Today, we are amending rule 22e-3 to also 
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 10% of its total assets.\355\ As proposed, the 
amendments would have allowed for permanent suspension of redemptions 
and liquidation after a money market fund's level of weekly liquid 
assets fell below 15%.\356\
---------------------------------------------------------------------------

    \354\ See rule 22e-3(a)(1).
    \355\ See id.
    \356\ The proposed weekly liquid asset threshold corresponded 
with the proposed threshold for the imposition of a default fee and/
or redemption gates.
---------------------------------------------------------------------------

    Commenters generally supported our proposed retention of rule 22e-3 
\357\ and did not suggest changes to our proposed amendments. We are 
making a conforming change in the proposed weekly liquid asset 
threshold below which a fund may permanently gate and liquidate, 
however, in order to correspond to other changes in the proposal 
related to weekly liquid asset thresholds for fees and gates. For the 
reasons discussed above, we have determined to raise the initial 
threshold below which a fund board may impose fees and gates, but lower 
the threshold for imposition of a default liquidity fee. Due to the 
absolute and significant nature of a permanent suspension of 
redemptions and liquidation, we believe the lower default fee threshold 
would also be the appropriate threshold for board action under rule 
22e-3.\358\ 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. Therefore, we do not believe that the 30% weekly liquid 
asset threshold for discretionary fees and gates, which is designed to 
provide boards with significant flexibility to restore a fund's 
liquidity in times of stress, would be an appropriate threshold under 
which fund boards could permanently close a fund.
---------------------------------------------------------------------------

    \357\ See, e.g., ICI Comment Letter (supporting the retention of 
rule 22e-3); Stradley Ronon Comment Letter, (discussing rule 22e-3 
and master/feeder funds); Dreyfus Comment Letter; but see Peirce & 
Green Comment Letter (suggesting that the requirement in rule 22e-3 
that ``a fund's board have made an irrevocable decision to liquidate 
the fund . . . unnecessarily dissuades boards from using redemption 
suspensions'').
    \358\ Cf. Proposing Release supra note 25, at 195-196.
---------------------------------------------------------------------------

    Amended rule 22e-3 will allow all money market funds, not just 
those that maintain a stable NAV as currently contemplated by rule 22e-
3, to rely on the rule when the fund's liquidity is significantly 
stressed. A money market fund whose weekly liquid assets have fallen 
below 10% of its total assets (whether that fund has previously imposed 
a fee or gate, or not) may rely on the rule to permanently suspend 
redemptions and liquidate.\359\ Under amended rule 22e-3, stable value 
funds also will continue to be able to suspend redemptions and 
liquidate if the board determines that the deviation between its 
amortized cost price per share and its market-based NAV per share may 
result in material dilution or other unfair results to investors or 
existing shareholders.\360\ Thus, a stable value money market fund that 
suffers a default will still be able to suspend redemptions and 
liquidate before a credit loss leads to redemptions and a fall in its 
weekly liquid assets.
---------------------------------------------------------------------------

    \359\ We note that a money market fund would not have to impose 
a fee or a gate before relying on rule 22e-3. For example, if the 
fund drops below the 10% weekly liquid asset threshold, its board 
may determine that a liquidity fee is not in the best interests of 
the fund and instead decide to suspend redemptions and liquidate.
    \360\ See rule 22e-3(a)(1).
---------------------------------------------------------------------------

5. Operational Considerations Relating to Fees and Gates
a. Operational Costs
    As discussed in the Proposing Release, we recognize that money 
market funds and others in the distribution chain (depending on the 
structure) will incur some operational costs in establishing or 
modifying systems to administer a liquidity fee or temporary gate.\361\ 
These costs may relate to the development of procedures and controls 
for the imposition of liquidity fees or updating systems for 
confirmations and account statements to reflect the deduction of a 
liquidity fee from redemption proceeds.\362\ Additionally, these costs 
may relate to the establishment of new or modified systems or 
procedures that will allow funds to administer temporary gates.\363\ We 
also recognize that money market funds may incur costs in connection 
with board meetings held to determine if fees and/or gates are in the 
best interests of a fund.
---------------------------------------------------------------------------

    \361\ Some commenters also suggested that affected money market 
funds may have to examine whether shareholder approval is required 
to amend organizational documents, investment objectives or 
policies. See, e.g., Ropes & Gray Comment Letter; Fidelity Comment 
Letter.
    \362\ See, e.g., ICI Comment Letter (``[T]he nature of the 
liquidity fee would entail changes to support a separate fee type, 
appropriate tax treatment, and investor reporting, including 
transaction confirmation statements that reference fees charged and 
applicable tax information for customers.'').
    \363\ See ICI Comment Letter (``Temporary gating also would 
require fund transfer agent and intermediary system providers to 
ensure that their systems can suppress redemption activity while 
supporting all other transaction types.'').
---------------------------------------------------------------------------

    In addition, operational costs may be incurred by, or spread among, 
a fund's transfer agents, sub-transfer agents, recordkeepers, 
accountants, portfolio accounting departments, and custodian.\364\ 
Funds also may seek to modify contracts with financial intermediaries 
or seek certifications from intermediaries that they will apply a 
liquidity fee on underlying investors' redemptions. Money market fund 
shareholders also may be required to modify their own systems to 
prepare for possible future liquidity fees, or to manage gates, 
although we expect that only some shareholders will be required to make 
these changes.\365\
---------------------------------------------------------------------------

    \364\ See ICI Comment Letter; see also Comment Letter of State 
Street Corporation (Sept. 17, 2013) (``State Street Comment 
Letter'') (suggesting that transfer agents and intermediaries will 
need to modify their systems to accommodate fees and gates).
    \365\ Many shareholders use common third party-created systems 
and thus would not each need to modify their systems.
---------------------------------------------------------------------------

    A number of commenters suggested that the operational costs and 
burdens of implementing and administrating fees and gates would be 
manageable.\366\ Some commenters noted that liquidity fees and 
redemption gates would be more practicable, and less costly and 
burdensome to implement and maintain than the other proposed reform 
alternative (floating NAV).\367\ Another commenter added that the 
systems modifications for fees and gates, especially absent a 
requirement to net each shareholder's redemptions each day, would be 
``far less costly and onerous'' than the operational challenges posed 
by the floating NAV reform alternative.\368\ One commenter estimated 
that implementing fees and gates would require only ``minimal 
enhancements'' to its core custody/fund accounting systems at ``minimal 
costs.'' \369\ This commenter further noted that most systems 
enhancements would likely be required with respect to the systems of 
transfer agents and

[[Page 47769]]

intermediaries, although their systems would likely already include 
``basic functionality to accommodate liquidity fees and gates.'' \370\ 
Similarly, another commenter noted that the operational issues of fees 
and gates could be solved if the industry and all its stakeholders were 
given sufficient implementation time.\371\ This commenter cited its 
ongoing efforts to implement liquidity fees at its Dublin-domiciled 
money market fund complex as an example that the operational challenges 
and costs would not be prohibitive.\372\
---------------------------------------------------------------------------

    \366\ See, e.g., ICI Comment Letter; HSBC Comment Letter, 
Federated X Comment Letter; Invesco Comment Letter.
    \367\ See, e.g., SunTrust Comment Letter; Federated X Comment 
Letter; Angel Comment Letter. One commenter argued that for 
investors, intermediaries and fund complexes alike, the estimated 
costs of fees and gates ``are dramatically lower'' than under the 
proposed floating NAV alternative. See Federated X Comment Letter.
    \368\ See, e.g., ICI Comment Letter (``System modifications for 
liquidity fees and gates, especially absent the net redemption 
requirement, are far less onerous and costly, however, than the 
extensive programming and other system changes necessary to 
implement a floating NAV as contemplated by the SEC's proposal.'')
    \369\ See State Street Comment Letter.
    \370\ See id.
    \371\ See HSBC Comment Letter. The commenter also noted that a 
variable liquidity fee, if available in a timely manner, should not 
create any operational impediments.
    \372\ See id.
---------------------------------------------------------------------------

    Conversely, a number of commenters expressed concern over the 
operational burdens and related administrative costs with the fees and 
gates requirements.\373\ Some commenters argued that the implementation 
and administration of fees and gates would present significant 
operational challenges, in particular with respect to omnibus accounts, 
sweep accounts, intermediaries and the investors that use them.\374\ 
One commenter argued that, to reduce operational burdens, a liquidity 
fee should be applied to each redemption separately--rather than net 
redemptions--in an affected money market fund.\375\ This commenter also 
expressed concern that intermediaries would not know whether their 
sweeps would be subject to a liquidity fee or temporary gate until 
after the daily investment is made.\376\ For example, the possibility 
of a liquidity fee would require intermediaries to develop trading 
systems to ensure that for each transaction ``the investor has 
sufficient funds to cover the trade itself plus the possibility of a 
liquidity fee.'' \377\ Commenters also suggested that a fee or gate 
could not be uniformly applied within omnibus accounts,\378\ and 
certain commenters expressed concern over transparency with respect to 
fees and gates for shareholders investing through omnibus 
accounts.\379\
---------------------------------------------------------------------------

    \373\ See, e.g., Comment Letter of TIAA-CREF (Sept. 17, 2013) 
(``TIAA-CREF Comment Letter''); J.P. Morgan Comment Letter; Fin. 
Svcs. Roundtable Comment Letter; Goldman Sachs Comment Letter.
    \374\ See, e.g., SunTrust Comment Letter; Comment Letter of 
Coalition of Mutual Fund Investors (Sept. 17, 2013) (``Coal. of 
Mutual Fund Invs. Comment Letter''); Schwab Comment Letter.
    \375\ See ICI Comment Letter (expressing concern that funds, 
record keepers and intermediaries would have to develop complex 
operational systems that could apply a fee with respect to a 
shareholder's net redemptions for a particular day and tracking the 
``shareholder of record'' to whom such a fee would apply).
    \376\ See id.
    \377\ See Fin. Svcs. Roundtable Comment Letter; see also Fin. 
Info. Forum Comment Letter (suggesting liquidity fees could cause 
investors [to] over-trade their account by settling an amount 
greater than their balance due to a liquidity fee not known at the 
time of order entry).
    \378\ See Coal. of Mutual Fund Invs. Comment Letter; SunTrust 
Comment Letter.
    \379\ See Coal. of Mutual Fund Invs. Comment Letter; Goldman 
Sachs Comment Letter.
---------------------------------------------------------------------------

    We understand that the implementation of fees and gates (as with 
any new regulatory requirement) is not without its operational 
challenges; however, we have sought to minimize those challenges in the 
amendments we are adopting today. Based on the comments discussed 
above, we now recognize that a liquidity fee could either be applied to 
each redemption separately or on a net basis. As indicated by the 
relevant commenter, our proposal contemplated net redemptions as an 
investor-friendly manner of applying a liquidity fee.\380\ However, in 
light of the comments, we are persuaded that such an approach may be 
too operationally difficult and costly for funds to apply and, thus, we 
are not requiring funds to apply a liquidity fee on a net basis.\381\
---------------------------------------------------------------------------

    \380\ See Proposing Release, supra note 25, at n.373 (discussing 
the application of a liquidity fee and stating that ``[i]f 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 redemption for the day.''); see also ICI 
Comment Letter (``Currently, systems used to process money market 
fund transactions do not have the ability to assess a fee by netting 
one or more purchases against one or more redemptions. This process 
would be highly complex and require a significant and costly 
redesign of the processing functionality used by funds and 
intermediaries today.'' (footnote omitted)).
    \381\ See ICI Comment Letter (noting that ``[a]bsent further 
definition, it would be challenging for funds (and intermediaries 
assessing the fee) to determine how a shareholder of record 
requirement applies to multiple accounts of a given beneficial 
owner. . . .'').
---------------------------------------------------------------------------

    We also recognize commenters' concerns regarding the application of 
fees and gates in the context of sweep accounts. We note that during 
normal market conditions, fees and gates should not impact sweep 
accounts' (or any other investor's) investment in a money market 
fund.\382\ We also note that, unlike our proposal, the amendments we 
are adopting today will allow fund boards to institute a fee or gate at 
any time during the day.\383\ To the extent a sweep account's daily 
investment is made at the end of the day, we believe this change should 
reduce concerns that the sweep account holder will find out about a 
redemption restriction only after it has made its daily investment and 
may lessen the difficulty and costs related to developing a trading 
system that can ensure an account has sufficient funds to cover the 
trade itself plus the possibility of a liquidity fee.
---------------------------------------------------------------------------

    \382\ As discussed herein, however, we recognize that sweep 
accounts may be unwilling to invest in a money market fund that 
could impose a gate. See supra section III.A.1.c.iv and infra note 
641.
    \383\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    With respect to omnibus accounts, we continue to believe that 
liquidity fees should be handled in a manner similar to redemption 
fees, which currently may be imposed to deter market timing of mutual 
fund shares.\384\ As discussed in the Proposing Release, we understand 
that financial intermediaries themselves generally impose redemption 
fees to record or beneficial owners holding through that 
intermediary.\385\ We recognize commenters' concerns regarding the 
uniform application of liquidity fees through omnibus accounts. We 
believe, however, that the benefits and protections afforded to funds 
and their investors by the fees and gates amendments justify the 
application of these amendments in the context of omnibus accounts. In 
this regard, we note, as we did in the Proposing Release, that funds or 
their transfer agents may contract with intermediaries to have them 
impose liquidity fees. As we also noted in the Proposing Release, we 
understand that some money market fund sponsors may want to review 
their contractual arrangements with their funds' financial 
intermediaries and service providers to determine whether any 
contractual modifications are necessary or advisable to ensure that 
liquidity fees are appropriately applied to beneficial owners of money 
market fund shares. We further 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 
may need to engage in certain communications regarding a liquidity fee.
---------------------------------------------------------------------------

    \384\ 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.
    \385\ See Proposing Release, supra note 25, at 191.
---------------------------------------------------------------------------

    With respect to those commenters who expressed concern over the 
transparency of fees and gates for omnibus investors, we note that fees 
and gates will be equally transparent for all investors. Investors, 
both those that invest directly and those that invest through omnibus 
accounts, should have access to information about a fund's weekly 
liquid assets, which will be

[[Page 47770]]

posted on the fund's Web site. All money market fund investors also 
should receive copies of a fund's prospectus, which will include 
disclosure on fees and gates.
    We note that some commenters expressed concern about the costs and 
burdens associated with the combination of fees and gates and a 
floating NAV requirement for institutional prime funds.\386\ As we 
stated in the Proposing Release, we do not expect that there will be 
any significant additional costs from combining the two approaches that 
are not otherwise discussed separately with respect to each of the fees 
and gates and floating NAV reforms.\387\ As we discussed in the 
Proposing Release, it is likely that implementing a combined approach 
will 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 will create any new costs as a result of the 
combination itself.\388\ Accordingly, we estimate, as we did in the 
proposal, 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.
---------------------------------------------------------------------------

    \386\ See, e.g., Dreyfus Comment Letter (suggesting the 
combination of both proposed reform options would be ``excessive and 
unduly harmful to the utility of [money market funds] without 
offering any additional benefit''); Northern Trust Comment Letter 
(suggesting the combination of both proposed reform options would 
``be very costly to implement''). For a discussion of the possible 
movement out of money market funds as result of today's reforms, see 
infra section III.K. But see State Street Comment Letter (``State 
Street does not believe there would be any new costs other than 
those listed by the staff from a fund accounting, custody or fund 
administrator point of view by combining the two alternatives.'').
    \387\ See Proposing Release, supra note 25, at 249; see also 
infra section III.B.8 for a discussion of the costs associated with 
the floating NAV requirement.
    \388\ See State Street Comment Letter.
---------------------------------------------------------------------------

b. Cost Estimates
    As we indicated in the Proposing Release, the costs associated with 
the fees and gates amendments will vary depending on how a fee or gate 
is structured, including its triggering event and the level of a fee, 
as well as on the capabilities, functions and sophistication of the 
systems and operations of the funds and others involved in the 
distribution chain, including transfer agents, accountants, custodians 
and intermediaries. These costs relate to the development of procedures 
and controls, systems' modifications, training programs and shareholder 
communications and may vary among funds, shareholders and their service 
providers.
    In the Proposing Release, we estimated a range of hours and costs 
that may be required to perform activities typically involved in making 
systems modifications, such as those described above. We estimated that 
a money market fund (or others in the distribution chain) would incur 
one-time systems modification costs that range from $1,100,000 to 
$2,200,000.\389\ We further estimated that the one-time costs for 
entities to communicate with shareholders about the liquidity fee or 
gate would range from $200,500 to $340,000.\390\ In addition, we 
estimated that the costs for a shareholder mailing would range between 
$1.00 and $3.00 per shareholder.\391\
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    \389\ We estimated 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 
Proposing Release, supra note 25, at n.245 (discussing the bases of 
our estimates of operational and related costs in Proposing 
Release).
    \390\ We estimated 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 Proposing Release, supra note 25, at n.245 
(discussing the bases of our estimates of operational and related 
costs in Proposing Release).
    \391\ Total costs of the mailing for individual funds would vary 
significantly depending on the number of shareholders who receive 
information from the fund by mail (as opposed to electronically).
---------------------------------------------------------------------------

    We also recognized in our proposal that depending on how a 
liquidity fee or gate is structured, mutual fund groups and other 
affected entities already may have systems that can be adapted to 
administer a fee or gate at minimal cost, in which case the costs may 
be less than the range we estimated above. For example, some money 
market funds may be part of mutual fund groups in which one or more 
funds impose deferred sales loads under rule 6c-10 or redemption fees 
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. We estimated that a money market fund 
shareholder whose systems required modifications to account for a 
liquidity fee or gate would incur one-time costs ranging from $220,000 
to $450,000.\392\
---------------------------------------------------------------------------

    \392\ We estimated 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 Proposing Release, supra note 25, at n.245 (discussing the 
bases of our estimates of operational and related costs in Proposing 
Release).
---------------------------------------------------------------------------

    Some of the comments we received regarding the costs of fees and 
gates included alternate estimates of implementation costs.\393\ For 
example, one commenter indicated that its costs for implementing fees 
and gates would likely be in the range of $400,000 to $500,000.\394\ 
This commenter further explained that cost of the fees and gates 
alternative ``reflects the ability of the affected entity to custom-
design its own approach to implementation, as well as the fact that the 
necessary changes would not be for use in day-to-day operations, but 
only for rare occasions.'' \395\
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    \393\ We note that some commenters provided industry-wide 
estimates of approximately $800 million to $1.75 billion for initial 
implementation of fees and gates, and estimates of approximately $80 
to $350 million for annual ongoing costs. See ICI Comment Letter; 
Invesco Comment Letter. As discussed herein, we have analyzed a 
variety of commenter estimates and provided cost estimates on a per-
fund basis (including a fund's distribution chain). We are unable, 
however, to verify the accuracy or make a relevant comparison 
between our per-fund cost estimates and the broad range of costs 
provided by these commenters that apply to all U.S. prime money 
market fund investors and/or the entire industry because we are 
unable to estimate how many intermediaries will be affected by the 
fees and gates amendments.
    \394\ See Federated X Comment Letter.
    \395\ See id. As discussed above, another commenter indicated 
that implementing fees and gates would only require ``minimal 
enhancements'' to its core custody/fund accounting systems at 
``minimal costs,'' and that most transfer agency and intermediary 
systems would likely already include ``basic functionality to 
accommodate liquidity fees and gates.'' See State Street Comment 
Letter. Also as discussed above, an additional commenter noted that, 
with respect to its Dublin-domiciled money market fund complex that 
is currently implementing the ability to impose liquidity fees, the 
implementation process has created costs but that these costs have 
not been prohibitive. See HSBC Comment Letter.
---------------------------------------------------------------------------

    A number of other commenters, however, expressed concern that the 
fees and gates amendments would impose significant costs and burdens, 
higher than those estimated in the Proposing Release.\396\ For example, 
one commenter estimated that it would cost it a total of approximately 
$11 million in largely one-time costs, reflecting costs of $9 million 
to implement fees and gates as well as $2 million for the related 
modifications in disclosure.\397\ Another commenter indicated that the 
implementation costs of fees and gates would be an estimated 
$1,697,000.\398\ Similarly, an industry group conducting a survey of 
its members found that the

[[Page 47771]]

implementation costs relating to liquidity fees would likely be $2 
million or more, according to 36% of survey respondents.\399\ The group 
also noted that initial costs would be particularly significant for 
distributors and intermediaries, with 60% of respondents estimating 
initial costs at $2 million or more.\400\ In addition, the survey found 
initial costs associated with gates to range from $1 million to $10 
million.\401\
---------------------------------------------------------------------------

    \396\ See, e.g., IDC Comment Letter; Comment Letter of Dechert 
LLP (Sept. 17, 2013) (``Dechert Comment Letter''); SPARK Comment 
Letter.
    \397\ See Fidelity Comment Letter.
    \398\ See Comment Letter of Financial Information Forum (Sept. 
17, 2013) (``Fin. Info. Forum Comment Letter'') (``Based on the 
available information, one back office processing service provider 
estimates the implementation cost of . . . Alternative 2 at 
$1,697,000.'')
    \399\ SIFMA Comment Letter. The survey also included the 
following results for implementation costs: 24% in the $2 million to 
$5 million range, 8% in the $5 million to $10 million range, and 4% 
in the $10 million to $15 million range.
    \400\ Id. The commenter's survey indicated that 40% of asset 
managers would incur $2 to $5 million in initial costs.
    \401\ Id. The survey indicated costs of $1 million to $2 million 
according to 17% of respondents, $2 million to $5 million according 
to another 17% of respondents, and $5 million to $10 million 
according to 8% of respondents.
---------------------------------------------------------------------------

    Based on the information provided by commenters, as well as the 
operational changes in the final rule, we are increasing our estimates 
for implementation costs for fees and gates. Three of the four 
commenters who provided estimates suggested that the implementation 
costs would be around $2,000,000 or more.\402\ In addition, we estimate 
that a fund's ability to impose a fee or gate intra-day (as opposed to 
the end of the day, as contemplated by the proposal) may result in 
increased operational costs related to the implementation of fees and 
gates. Accordingly, we have increased our original estimate of 
$1,100,000 to $2,200,000 \403\ for one-time systems modification costs 
to a higher estimate of $1,750,000 to $3,000,000.\404\ We continue to 
estimate that the one-time costs for entities to communicate with 
shareholders (including systems costs related to communications) about 
fees and gates would range from $200,500 to $340,000. In addition, we 
are increasing the estimated cost for a shareholder mailing from 
between $1.00 and $3.00 per shareholder to between $2.00 and $3.00 per 
shareholder, recognizing that it is unlikely such a mailing would cost 
$1.00. We continue to estimate one-time costs of $220,000 to $450,000 
for a money market fund shareholder whose systems (including related 
procedures and controls) required modifications to account for a 
liquidity fee or redemption gate.
---------------------------------------------------------------------------

    \402\ See supra notes 394-401 and accompanying text.
    \403\ We note that, in the Proposing Release, our estimate was 
based on a money market fund that determined it would only impose a 
flat liquidity fee of a fixed percentage known in advance and have 
the ability to impose a gate. This estimate was based on our 
proposal, which included less flexibility than today's amendments. 
Accordingly, our revised estimates account for a money market fund 
that has the ability to vary the level of a fee at imposition or 
thereafter, or impose a gate.
    \404\ As with our estimate in the Proposing Release, these 
amounts reflect the costs of one-time systems modifications for a 
money market fund and/or others in its distribution chain.
---------------------------------------------------------------------------

    We recognized in our proposal that adding new capabilities or 
capacity to a system will entail ongoing annual maintenance costs and 
understand these costs generally are estimated as a percentage of 
initial costs of building or expanding a system. We also recognized 
that ongoing costs related to fees and gates may include training 
costs. In the proposal, we estimated that the costs to maintain and 
modify the systems required to administer a fee or gate (to accommodate 
future programming changes), to provide ongoing training, and to 
administer the fee or gate on an ongoing basis would range from 5% to 
15% of the one-time costs. We understand that funds may impose varying 
liquidity fees and that the cost of varying liquidity fees could exceed 
this range, but because such costs depend on to what extent the fees 
might vary, we do not have the information necessary to provide a 
reasonable estimate of how much more (if any) varying fees might cost 
to implement.
    One commenter indicated a lower estimate of approximately $164,000 
for annual ongoing costs.\405\ Another commenter, an industry group 
that surveyed its members, indicated that ongoing annual costs of 
implementing a liquidity fee are likely to range from 10% to 20% of 
initial costs.\406\ The same commenter indicated that ongoing annual 
costs related to redemption gates were estimated as 10% to 20% of 
initial cost by 33% of survey respondents.\407\ Based on these 
estimates, which are largely similar to our estimates of 5-15% in the 
Proposing Release, we continue to believe our estimates in the 
Proposing Release are appropriate.
---------------------------------------------------------------------------

    \405\ See Federated X Comment Letter.
    \406\ See SIFMA Comment Letter. The survey indicated 10% to 15% 
of initial costs for 17% of respondents, 15% to 20% of initial costs 
for 12% of respondents, and 20+% of initial costs for 8% of 
respondents. With respect to distributor/intermediary respondents, 
the commenter indicated that ongoing annual costs for a liquidity 
fee are estimated as 10% to 20% of initial costs by 29% of 
distributor/intermediary respondents (evenly split between those who 
estimate 10% to 15% of initial cost and those who estimate 15% to 
20%). For asset managers, the commenter indicated that ongoing 
annual costs for a liquidity fee are estimated to be 10% to 15% of 
initial costs by 20% of respondents, 15% to 20% of initial costs by 
10% of respondents and 20+% of initial costs by 20% of respondents.
    \407\ See SIFMA Comment Letter. The commenter note that the 33% 
of survey respondents were evenly split between those who estimated 
10% to 15% of initial cost and those who estimated 15% to 20% of 
initial cost.
---------------------------------------------------------------------------

    We also recognize that funds may incur costs in connection with 
board meetings held to determine if fees and/or gates are in the best 
interests of the fund. In the Proposing Release, we estimated an 
average annual time cost of approximately $9,895 per fund in connection 
with each such board meeting.\408\ We did not receive comments on this 
estimate. As discussed in section IV.A.3 herein, we are revising our 
estimate from $9,895 per fund to $10,700 as result of updated industry 
data.\409\
---------------------------------------------------------------------------

    \408\ See Proposing Release, supra note 25, at 549.
    \409\ See infra section IV.A.3 (discussing the PRA estimates for 
board determinations under the fees and gates amendments and noting 
that certain estimates have increased from those in the proposal as 
a result of the increased number of funds that may cross the higher 
weekly liquid assets threshold of 30% (as compared to 15%) for the 
imposition of fees and gates).
---------------------------------------------------------------------------

    Although we have 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.
6. Tax Implications of Liquidity Fees
    As discussed in the Proposing Release, we understand that liquidity 
fees may have certain tax implications for money market funds and their 
shareholders.\410\ We understand that for federal income tax purposes, 
shareholders of mutual funds that impose a redemption fee pursuant to 
rule 22c-2 under the Investment Company Act 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).\411\

[[Page 47772]]

Consistent with this characterization, funds generally treat the 
redemption fee as having no associated tax effect for the fund.\412\ We 
understand that a liquidity fee will be treated for federal income tax 
purposes consistently with the way that funds and shareholders treat 
redemption fees under rule 22c-2.
---------------------------------------------------------------------------

    \410\ As discussed above, the liquidity fee we are adopting 
today is analogous to a redemption fee under rule 22c-2, which 
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.
    \411\ 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.
    \412\ See ICI Comment Letter (``Pursuant to section 311(a)(2) of 
the Internal Revenue Code, corporations (including investment 
companies) do not recognize gain or loss upon a redemption of their 
shares.'').
---------------------------------------------------------------------------

    If, as described above, a liquidity fee has no direct federal 
income tax consequences for the money market fund, that tax treatment 
will allow the fund to use 100% of the fee to help repair a market-
based NAV per share that was below $1.00. If redemptions involving 
liquidity fees cause a stable value 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 on the upside (i.e., by rounding up to $1.01 in 
pricing its shares).\413\ 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.
---------------------------------------------------------------------------

    \413\ See 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). Thus, in the event of any return of 
capital distributions, as we noted in the Proposing Release, there is a 
possibility that the fund, other intermediaries, and the shareholders 
might become subject to tax-reporting or tax-payment obligations that 
do not affect stable value money market funds currently operating under 
rule 2a-7.\414\
---------------------------------------------------------------------------

    \414\ See Proposing Release, supra note 25, at 207. Funds that 
strive to maintain a stable NAV per share currently are not subject 
to these transaction reporting requirements. We have been informed 
that, today, the Department of the Treasury and the IRS are 
proposing new regulations to exempt all money market funds from 
transaction reporting obligations. As we describe below, funds and 
brokers may rely on this exemption immediately. We note that at 
least one commenter indicated that funds and intermediaries may want 
to provide certain tax information to their investors even if it is 
not required. See ICI Comment Letter.
---------------------------------------------------------------------------

    Commenters were concerned with this possibility--that investors may 
have to recognize capital gains or reduced losses if a fund makes a 
distribution to shareholders in order to avoid ``breaking the buck'' on 
the upside as a result of excessive fees.\415\ Commenters noted that 
such distributions and the resulting capital gains or losses upon 
disposition of investors' shares would require funds and intermediaries 
to start tracking investors' basis in shares of a fund.\416\ In order 
to avoid such basis tracking, commenters suggested that the Treasury 
Department and the Internal Revenue Service (``IRS'') issue guidance 
stating that when a money market fund is required to make a payment of 
excess fees in order to avoid breaking the buck, the fund should be 
deemed to have sufficient earnings and profits to treat the 
distribution as a taxable dividend.\417\
---------------------------------------------------------------------------

    \415\ See, e.g., Fidelity Comment Letter; BlackRock II Comment 
Letter; Wells Fargo Comment Letter.
    \416\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
BlackRock II Comment Letter; SIFMA Comment Letter; but see, e.g., 
State Street [Appendix 4] (suggesting that a liquidity fee causing 
the shadow price to exceed $1.0049 would not result in special 
distribution to shareholders but most likely be recorded as income 
to the fund and paid out to shareholders as an ordinary income 
distribution).
    \417\ See, e.g., BlackRock II Comment Letter; ICI Comment 
Letter; Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Although these events are hypothetically possible, the scenario 
that would lead to a payment of excess fees to fund shareholders 
without sufficient earnings and profits is subject to many 
contingencies that make it unlikely to occur. First, as we discussed 
above, under normal market conditions, we believe funds will rarely 
impose liquidity fees. Second, we believe it is highly unlikely that 
shareholders would redeem with such speed and in such volume that the 
redemptions would create a danger of breaking the buck on the upside 
before a fund could remove a fee. Third, the distributions to avoid 
breaking the buck might not exceed the fund's earnings and profits. For 
this purpose, we understand that the fund's earnings and profits take 
into account the fund's income through the end of the taxable year. 
Thus, unless the additional distribution occurs very close to the end 
of the taxable year, some of the money market fund's subsequent income 
during the year will operate to qualify these distributions as 
dividends.\418\
---------------------------------------------------------------------------

    \418\ A portion of this subsequent income may also have to be 
distributed to avoid breaking the buck on the upside. However, if 
the fund attracts new shareholders, we understand that some of the 
subsequent income can be retained, with its associated earnings and 
profits qualifying the earlier distributions as dividends.
---------------------------------------------------------------------------

    Finally, as discussed in the Proposing Release, 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. However, we have been informed that the Treasury 
Department and the IRS today will propose new regulations exempting all 
money market funds from certain transaction reporting 
requirements.\419\ This exemption is to be formally applicable for 
calendar years beginning on or after the date of publication in the 
Federal Register of a Treasury Decision adopting those proposed 
regulations as final regulations. The Treasury Department and the IRS 
have informed us, however, that the text of the proposed regulations 
will state that persons subject to transaction reporting may rely on 
the proposed exemption for all calendar years prior to the final 
regulations' formal date of applicability. Therefore, the Treasury 
Department and IRS relief described above is available immediately.
---------------------------------------------------------------------------

    \419\ See infra section III.B.6.a.
---------------------------------------------------------------------------

    Thus, even in the unlikely event that some shareholders' bases in 
their shares change due to non-dividend distributions, neither fund 
groups nor their intermediaries will need to track the tax bases of 
money market fund shares. On the other hand, if there are any non-
dividend distributions by money market funds, the affected shareholders 
will need to report in their annual tax filings any resulting gains 
\420\ or reduced losses upon the sale of affected money market fund 
shares. We are unable to quantify with any specificity 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

[[Page 47773]]

subject to liquidity fees would cause the funds to make returns of 
capital distributions to the remaining shareholders (although, as noted 
above, we believe such returns of capital distributions are unlikely). 
Commenters did not provide any such estimates.
---------------------------------------------------------------------------

    \420\ Redemptions subject to a liquidity fee would almost always 
result in losses, but gains are possible in the unlikely event that 
a shareholder received a return of capital distribution with respect 
to some shares. Because a later redemption of the shares by the 
shareholder would be for $1.00 each, there would be small gains with 
respect to those redemptions. If the money market fund making such a 
non-dividend distribution is a floating NAV money market fund and if 
a shareholder uses the simplified aggregate method discussed below 
in section III.B.6.a, then the shareholder would be able to report 
the gain or loss without having to track the basis of individual 
shares.
---------------------------------------------------------------------------

7. Accounting Implications
    A number of commenters questioned whether an investment in a money 
market fund subject to a possible fee or gate, or in a money market 
fund that in fact imposes a fee or gate, would continue to qualify as a 
``cash equivalent'' for purposes of U.S. Generally Accepted Accounting 
Principles (``U.S. GAAP'').\421\ 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.\422\ To remove any uncertainty, 
several commenters requested that the Commission, the Financial 
Accounting Standards Board (``FASB'') and/or Government Accounting 
Standards Board (``GASB'') issue guidance to clarify whether 
investments in money market funds will continue to qualify as cash 
equivalents under U.S. GAAP.\423\ Various commenters on our proposal, 
including the American Institute of Certified Public Accountants 
(``AICPA'') and each of the ``Big Four'' accounting firms, stated that 
a money market fund's ability to impose fees and gates should not 
preclude an investment in the fund from being classified as a ``cash 
equivalent'' under U.S. GAAP.\424\
---------------------------------------------------------------------------

    \421\ See, e.g., Invesco Comment Letter; BlackRock II Comment 
Letter; Wells Fargo Comment Letter; see also Proposing Release, 
supra note 25, at 246 (stated that ``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.''); ICI Comment Letter (suggesting that any such Commission 
guidance should also ``discuss whether a money market fund that 
imposes a liquidity fee and/or gate would continue to be considered 
a cash equivalent investment and whether the amount of the fee or 
the length of the gate would affect the analysis.'')
    \422\ In addition, some corporate investors may perceive cash 
and cash equivalents on a company's balance sheet as a measure of 
financial strength.
    \423\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Fin. Svcs. Roundtable Comment Letter; see also Proposing Release, 
supra note 25, at 246 (suggesting that funds with the ability to 
impose fees and gates should still be considered cash equivalents). 
As discussed in section III.C.4 herein, we do not have authority 
over the actions that GASB may or may not take with respect to 
LGIPs.
    \424\ See Comment Letter of American Institute of Certified 
Public Accountants, Financial Reporting Executive Committee (Sept. 
16, 2013) (``AICPA Comment Letter); Comment Letter of Ernst & Young 
LLP (Sept. 12, 2013) (``Ernst & Young Comment Letter''); Comment 
Letter of Deloitte & Touche LLP (Sept. 17, 2013) (``Deloitte Comment 
Letter''); Comment Letter of KPMG LLP (Sept. 17, 2013) (``KPMG 
Comment Letter''); Comment Letter of PricewaterhouseCoopers LLP 
(Sept. 16, 2013) (``PWC Comment Letter'').
---------------------------------------------------------------------------

    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.'' \425\ U.S. GAAP includes an investment in a money market fund 
as an example of a cash equivalent.\426\ The Commission's position 
continues to be that, under normal circumstances, an investment in a 
money market fund that has the ability to impose a fee or gate under 
rule 2a-7(c)(2) qualifies as a ``cash equivalent'' for purposes of U.S. 
GAAP.\427\ However, as is currently the case, events may occur that 
give rise to credit and liquidity issues for money market funds. If 
such events occur, including the imposition of a fee or gate by a money 
market fund under rule 2a-7(c)(2), shareholders would need to reassess 
if their investments in that money market fund continue to meet the 
definition of a cash equivalent. A more formal pronouncement (as 
requested by some commenters) to confirm this position is not required 
because the federal securities laws provide the Commission with plenary 
authority to set accounting standards, and we are doing so here.\428\
---------------------------------------------------------------------------

    \425\ See FASB Accounting Standards Codification (``FASB ASC'') 
paragraph 305-10-20.
    \426\ Id.
    \427\ We are also amending the Codification of Financial 
Reporting Policies to reflect our interpretation under U.S. GAAP, as 
discussed below. See infra section VI.
    \428\ The federal securities laws provide the Commission with 
authority to set accounting and reporting standards for public 
companies and other entities that file financial statements with the 
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15 
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 30(e), section 
31, and section 38(a) of the Investment Company Act.
---------------------------------------------------------------------------

    If events occur that cause shareholders to determine that their 
money market fund 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.\429\ For example, during the financial crisis, 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.
---------------------------------------------------------------------------

    \429\ See FASB ASC paragraph 320-10-25-1. This accounting 
treatment would not apply to entities to which the guidance in FASB 
ASC Topic 320 does not apply. See FASB ASC paragraph 320-10-15-3.
---------------------------------------------------------------------------

B. Floating Net Asset Value

1. Introduction
    As discussed earlier in this Release, absent an exemption 
specifically provided by the Commission from various provisions of the 
Investment Company Act, all registered mutual funds must price and 
transact in their shares at the current NAV, calculated by valuing 
portfolio instruments at market value, in the case of securities for 
which market quotations are readily available, or, at fair value, as 
determined in good faith by the fund's board of directors, in the case 
of other securities and assets (i.e., use a floating NAV).\430\ Under 
rule 2a-7, the Commission has exempted money market funds from this 
floating NAV requirement, allowing them to price and transact at a 
stable NAV per share (using the amortized cost and penny rounding 
methods), provided that they follow certain risk-limiting 
conditions.\431\ In doing so, the Commission was statutorily required 
to find that such an exemption was 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.\432\ Accordingly, when providing this exemption in 1983, the 
Commission considered the benefits of a stable value product as a cash 
management vehicle for investors, but also imposed a number of 
conditions designed to minimize the risk inherent in a stable value 
fund that some shareholders may redeem and receive more than their 
shares are actually worth, thus diluting the holdings of remaining 
shareholders.\433\ At the time, the Commission was persuaded that 
deviations in value that could cause material dilution to investors 
generally would not occur, given the risk-limiting

[[Page 47774]]

conditions of the rule.\434\ Experience, however, has shown that 
deviations in value do occur, and at times, can be significant.
---------------------------------------------------------------------------

    \430\ See supra section I.
    \431\ Id.
    \432\ Section 6(c) of the Investment Company Act provides the 
Commission with broad authority to exempt persons, securities or 
transactions from any provision of the Investment Company Act, or 
the regulations thereunder, if and to the extent that such exemption 
is 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. See Commission Policy and 
Guidelines for Filing of Applications for Exemption, SEC Release No. 
IC-14492 (Apr. 30, 1985).
    \433\ See Proposing Release, supra note 25, at n.9. The 
Commission was similarly concerned with the risk that redeeming 
shareholders may receive less than their shares were worth and that 
purchasing shareholders may pay too little for their shares, 
diluting remaining shareholders.
    \434\ Id.
---------------------------------------------------------------------------

    As discussed above, money market funds' sponsors on a number of 
occasions have voluntarily chosen to provide financial support for 
their money market funds for various reasons, including to keep a fund 
from re-pricing below its stable value, suggesting that material 
deviations in the value in money market funds have not been a rare 
occurrence.\435\ This historical experience, combined with the events 
of the financial crisis, has caused us to reconsider the exemption from 
the statutory floating NAV requirement for money market funds in light 
of our responsibilities under the Act in providing this exemption. In 
doing so, we again took into account the benefits of money market funds 
as a stable value cash management product for investors, but also 
considered all of the historical and empirical information discussed in 
section I above, the Investment Company Act's general obligation for 
funds to price and transact in their shares at the current NAV, and 
developments since 1983.
---------------------------------------------------------------------------

    \435\ See supra section II.B.4
---------------------------------------------------------------------------

    We considered the many reasons shareholders may engage in heavy 
redemptions from money market funds--potentially resulting in the 
dilution of share value that the Investment Company Act's provisions 
are designed to avoid--and have tailored today's final rules 
accordingly. In particular, while many investors may redeem because of 
concerns about liquidity, quality, or lack of transparency--and our 
fees and gates, disclosure, and reporting reforms are primarily 
intended to address those incentives--an incremental incentive to 
redeem is created by money market funds' current valuation and pricing 
methods. As discussed below, this incremental incentive to redeem 
exacerbates shareholder dilution in a stable NAV product because non-
redeeming shareholders are forced to absorb losses equal to the 
difference between the market-based value of the fund's shares and the 
price at which redeeming shareholders transact. For the reasons 
discussed below, we believe that this incentive exists largely in prime 
money market funds because these funds exhibit higher credit risk that 
make declines in value more likely (compared to government money market 
funds).\436\ We further believe history shows that, to date, 
institutional investors have been significantly more likely than retail 
investors to act on this incentive.\437\ Thus, given the tradeoffs 
involved in requiring that any money market fund transact at a floating 
NAV, we are limiting this reform (and thus the repeal of the special 
exemptive relief allowing these funds to price other than as required 
under the Investment Company Act) to institutional prime funds.
---------------------------------------------------------------------------

    \436\ See infra section III.C.1; see also, e.g., Fidelity 
Comment Letter; ICI Comment Letter; Comm. Cap. Mkt. Reg. Comment 
Letter.
    \437\ See infra section III.C.2 and DERA Study, supra note 24; 
see also, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable Comment 
Letter; Vanguard Comment Letter.
---------------------------------------------------------------------------

    As discussed previously, the first investors to redeem from a 
stable value money market fund that is experiencing a decline in its 
NAV benefit from a ``first mover advantage'' as a result of rule 2a-7's 
current valuation and pricing methods, which allows them to receive the 
full stable value of their shares even if the fund's portfolio value is 
less.\438\ One possible reason that institutional prime funds may be 
more susceptible to rapid heavy redemptions than retail funds is that 
their investors are often more sophisticated, have more significant 
money at stake, and may have a lower risk tolerance due to legal or 
other restrictions on their investment practices.\439\ Institutional 
investors may also have more resources to carefully monitor their 
investments in money market funds. Accordingly, when they become aware 
of potential problems with a fund, institutional investors may quickly 
redeem their shares among other reasons, to benefit from the first 
mover advantage.\440\ When many investors try to redeem quickly, 
whether to benefit from the first mover advantage or otherwise, money 
market funds may experience significant stress. As discussed above, 
even a few high-dollar redemptions by institutional investors (because 
of their greater capital at stake) may have a significant adverse 
effect on a fund as compared with retail investors whose investments 
are typically smaller and would therefore require a greater number of 
redemptions to have a similar effect.\441\ This can lead to the very 
dilution of fund shares that we were concerned about when we first 
provided the exemptions in rule 2a-7 permitting funds to use different 
valuation and pricing methods than other mutual funds to facilitate 
maintaining a stable value.\442\
---------------------------------------------------------------------------

    \438\ See supra section II.B.3. This first mover advantage does 
not have the same degree of value in other mutual funds that do not 
have a stable value because investors receive the market value of 
their shares when redeeming from a floating NAV fund.
    \439\ See, e.g., Systemic Risk Council Comment Letter.
    \440\ Id.; see, e.g. TIAA-CREF Comment Letter; Systemic Risk 
Council Comment Letter.
    \441\ See supra text following note 66.
    \442\ See infra section III.B.3.b; see, e.g., Schwab Comment 
Letter.
---------------------------------------------------------------------------

    As discussed in the previous section, our fee and gate reform is 
designed to address some of the risks associated with money market 
funds that we have identified in this Release, but does not address 
them all. In particular, fees and gates are intended to enhance money 
market funds' ability to manage and mitigate potential contagion from 
high levels of redemptions and make redeeming investors pay their share 
of the costs of the liquidity that they receive. But those reforms do 
not address the incremental incentive to redeem from a fund with a 
shadow price below $1.00 that is at risk of breaking the buck. As a 
result of their sophistication, risk tolerance, and large investments, 
institutional investors are more likely to redeem at least in part due 
to this first mover advantage.\443\
---------------------------------------------------------------------------

    \443\ See, e.g. Comment Letter of United Services Automobile 
Association (Feb. 15, 2013) (available in File No. FSOC-2012 0003) 
(``USAA FSOC Comment Letter''); see, e.g., Systemic Risk Council 
Comment Letter; but see, e.g., HSBC Comment Letter (arguing that 
first mover advantage that results from the valuation and pricing 
methods in rule 2a-7 is overstated in light of the real world issues 
with information and time to act, and that other motivations are the 
primary driver of redemptions); Dreyfus Comment Letter.
---------------------------------------------------------------------------

    This has led to us re-evaluate our decision to provide an exemption 
allowing amortized cost valuation and penny rounding pricing for money 
market funds with these specific kinds of investors.\444\ As discussed 
above, this exemption was originally premised on our expectation that 
funds that followed the requirements of rule 2a-7 would be unlikely to 
experience material deviations from their stable value. With respect to 
prime funds in particular, this expectation has proven inaccurate with 
enough regularity to cause concern, especially given the potentially 
serious consequences to investors and the markets that can and has 
resulted at times. Accordingly, for the reasons discussed above and in 
other sections of this Release,\445\ we no longer believe that 
exempting institutional prime

[[Page 47775]]

money market funds under section 6(c) of the Act is appropriate--i.e., 
we find that such an exemption is no longer 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.\446\ As discussed in detail in the sections that follow, we are 
now rescinding the exemption that allows institutional prime funds to 
maintain a stable NAV and are requiring them to price and transact in 
their shares at market-based value, like all other mutual funds.\447\
---------------------------------------------------------------------------

    \444\ A number of commenters agreed with our proposed approach 
of only targeting the funds most susceptible to runs (institutional 
prime) with the floating NAV requirement. See, e.g., Fin. Svcs. 
Roundtable Comment Letter (``. . . a floating NAV confined to 
institutional prime funds represents a reasonable targeting of 
reform efforts at the segment of the market that has shown the most 
proclivity to runs.''); Vanguard Comment Letter.
    \445\ See supra section II; infra sections III.B.3.a and 
III.B.3.b.
    \446\ See supra note 432.
    \447\ See, e.g., Systemic Risk Council Comment Letter (``A 
floating NAV (for all funds) is the same simple regulatory framework 
that applies to all other mutual funds . . .'').
---------------------------------------------------------------------------

    This reform is intended to work in concert with the liquidity fees 
and gates reforms discussed above (as well as other reforms discussed 
in section III.K.3). The floating NAV requirement, applicable only to 
institutional prime funds, balances concerns about the risks of heavy 
redemptions from these funds in times of stress and the resulting 
negative impacts on short-term funding markets and potential dilution 
of investor shares, with the desire to preserve, as much as possible, 
the benefits of money market funds for investors.\448\ Consistent with 
a core objective of the Investment Company Act, the floating NAV reform 
may also lessen the risk of unfairness and potential wealth transfers 
between holding and redeeming shareholders by mutualizing any potential 
losses among all investors, including redeeming shareholders. We do not 
intend, and the floating NAV reform does not seek, to deter redemptions 
that constitute rational risk management by shareholders or that 
reflect a general incentive to avoid loss.\449\ Instead, as discussed 
below, the requirement is designed to achieve two independent 
objectives: (1) To reduce the first mover advantage inherent in a 
stable NAV fund due to rule 2a-7's current valuation and pricing 
methods by dis-incentivizing redemption activity that can result from 
investors attempting to exploit the possibility of redeeming shares at 
the stable share price even if the portfolio has suffered a loss; and 
(2) to reduce the chance of unfair investor dilution, which would be 
inconsistent with a core principle of the Investment Company Act. An 
additional motivation for this reform is that the floating NAV may make 
it more transparent to certain of the impacted investors that they, not 
the fund sponsors or the federal government, bear the risk of loss. 
Many commenters suggested that, among the reform alternatives proposed, 
the floating NAV reform is the most meaningful.\450\
---------------------------------------------------------------------------

    \448\ See infra section III.B.3 (discussing the benefits of a 
floating NAV requirement).
    \449\ A number of commenters agreed with this goal. See, e.g., 
Schwab Comment Letter; Systemic Risk Council Comment Letter.
    \450\ See, e.g., Boston Federal Reserve Comment Letter; Systemic 
Risk Council Comment Letter; Thrivent Comment Letter.
---------------------------------------------------------------------------

2. Summary of the Floating NAV Reform
    The liquidity fees and gates amendments apply to all money market 
funds (with the exception of government money market funds). Today we 
are also adopting a targeted reform designed to address the specific 
risks associated with institutional prime money market funds.\451\ We 
are doing so by amending rule 2a-7 to rescind certain exemptions that 
have permitted these funds to maintain a stable price by use of 
amortized cost valuation and/or penny-rounding pricing--as a result, 
institutional prime money market funds will transact at a floating 
NAV.\452\
---------------------------------------------------------------------------

    \451\ The floating NAV reform will not apply to government and 
retail money market funds. See rule 2a-7(a)(16) (defining 
``government money market fund''); rule 2a-7(a)(25) (defining 
``retail money market fund''). Government and retail money market 
funds are discussed infra in sections III.C.1 and III.C.2.
    \452\ Rule 2a-7(c)(1) (Share price calculation). As discussed 
below, an institutional prime money market fund may continue to call 
itself a ``money market fund'' provided that it follows the other 
conditions in rule 2a-7. But it may not use the amortized cost and 
penny rounding methods to maintain a stable NAV. See rule 2a-7(b); 
infra note 629 and accompanying text (discussing rule 35d-1, the 
``names rule'').
---------------------------------------------------------------------------

    Under our reform, institutional prime money market funds will value 
their portfolio securities using market-based factors and will sell and 
redeem shares based on a floating NAV.\453\ Under the final rules, and 
as we proposed, institutional prime funds will round prices and 
transact in fund shares to four decimal places in the case of a fund 
with a $1.00 target share price (i.e., $1.0000) or an equivalent or 
more precise level of accuracy for money market funds with a different 
share price (e.g., a money market fund with a $10 target share price 
could price its shares at $10.000). Institutional prime money market 
funds will still be subject to the risk-limiting conditions of rule 2a-
7.\454\ Accordingly, they will continue to be limited to investing in 
short-term, high-quality, dollar-denominated instruments, but will not 
be able to use the amortized cost or penny rounding methods to maintain 
a stable value. Finally, funds subject to the floating NAV reform will 
be subject to the other reforms discussed in this Release.
---------------------------------------------------------------------------

    \453\ See rule 2a-7(c)(1). We discuss floating NAV money market 
fund share pricing in section III.B.4. A money market fund that 
currently chooses to use amortized cost valuation typically also 
uses a penny-rounding convention to price fund shares. See 1983 
Adopting Release, supra note 3. Although not generally used, a money 
market fund may also currently choose to maintain a stable NAV 
solely by using penny-rounding pricing. As discussed below, these 
money market funds would be able to use amortized cost valuation 
only to the same 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. See ASR 219, supra note 5; we discuss the use of 
amortized cost below. See infra section III.B.5.
    \454\ See rule 2a-7(d) (risk-limiting conditions).
---------------------------------------------------------------------------

    As discussed in section III.B.9 below, institutional prime money 
market funds will have two years to comply with the floating NAV 
reform. Although some commenters, including some sponsors of money 
market funds, expressed general support for the floating NAV reform as 
it was proposed,\455\ the majority of commenters generally opposed 
requiring institutional prime money market funds to implement a 
floating NAV.\456\ Below, we address the principal considerations and 
requirements of the floating NAV reform, discuss comments received, and 
how if applicable, the amendments have been revised to address 
commenter concerns.
---------------------------------------------------------------------------

    \455\ See, e.g., Goldman Sachs Comment Letter; Schwab Comment 
Letter; T. Rowe Price Comment Letter; Vanguard Comment Letter; 
Comment Letter of CFA Institute (Sept. 19, 2013) (``CFA Institute 
Comment Letter'').
    \456\ See, e.g., Federated II Comment Letter; Comment Letter of 
Arnold & Porter LLP on behalf of Federated Investors (Floating NAV) 
(Sept. 13, 2013) (``Federated IV Comment Letter''); Federated X 
Comment Letter; J.P. Morgan Comment Letter; Comment Letter of U.S. 
Chamber of Commerce, Center for Capital Markets Competitiveness 
(Aug. 1, 2013) (``Chamber I Comment Letter''); Chamber II Comment 
Letter.
---------------------------------------------------------------------------

3. Certain Considerations Relating to the Floating NAV Reform
a. A Reduction in the Incentive To Redeem Shares
    When a money market fund's shadow price is less than the fund's 
$1.00 share price, shareholders have an economic incentive to redeem 
shares ahead of other investors. In the Proposing Release, we noted 
that the size of institutional investors' holdings and their resources 
for monitoring funds provide the motivation and means to act on this 
incentive, and observed that institutional investors redeemed shares at 
a much higher rate than retail investors from prime money market funds 
in both September 2008 and June 2011.\457\ We also noted, as some 
market

[[Page 47776]]

observers had suggested, that the valuation and pricing techniques 
currently permitted by rule 2a-7 may underlie this incentive to redeem 
ahead of other shareholders and to obtain $1.00 per share when 
investors become aware (or expect) that the actual value of the fund's 
shares is below (or will fall below) $1.00.\458\ As discussed below, to 
address this incentive, the floating NAV reform mandates that 
institutional prime funds transact at share prices that reflect current 
market-based factors (not amortized cost or penny rounding, as 
currently permitted) and therefore remove investors' incentives to 
redeem early to take advantage of transacting at a stable value.
---------------------------------------------------------------------------

    \457\ But see supra note 68.
    \458\ See Proposing Release, supra note 25, at n.139.
---------------------------------------------------------------------------

    Some commenters agreed that a floating NAV mitigates the first 
mover incentive to redeem ahead of other shareholders that results from 
current rule 2a-7's valuation and pricing methods.\459\ Two commenters 
also noted that requiring institutional prime funds to adopt a floating 
NAV would force investors who cannot tolerate any share price movement 
into other products that better match their risk tolerances.\460\ 
According to these commenters, investors who remain in floating NAV 
funds may have a greater tolerance for loss and may be less likely to 
redeem quickly in times of market stress.\461\
---------------------------------------------------------------------------

    \459\ See, e.g., Thrivent Comment Letter; TIAA-CREF Comment 
Letter; Fin. Svcs. Roundtable Comment Letter; SIFMA Comment Letter; 
Systemic Risk Council Comment Letter.
    \460\ See Thrivent Comment Letter; Vanguard Comment Letter; see 
infra section III.B.3.c.
    \461\ See Vanguard Comment Letter.
---------------------------------------------------------------------------

    Several commenters generally objected to our reasoning that our 
floating NAV reform (by addressing the economic incentive inherent in 
rule 2a-7) would reduce the incentive for shareholders to redeem ahead 
of other investors in times of market stress, observing that a floating 
NAV may not eliminate investors' incentive to redeem to the extent that 
it results from the desire to move to investments of higher quality or 
greater liquidity.\462\ Both the DERA Study and Proposing Release 
discussed this concern.\463\ As the DERA Study noted, the incentive for 
investors to redeem ahead of other investors may be heightened by 
liquidity concerns--when cash levels are insufficient to meet 
redemption requests, funds may be forced to sell portfolio securities 
into illiquid secondary markets at discounted or even fire-sale 
prices.\464\ The floating NAV reform may not fully address the 
incentive to redeem because market-based pricing may 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.\465\
---------------------------------------------------------------------------

    \462\ See, e.g., Dreyfus Comment Letter; Federated IV Comment 
Letter; Chamber II Comment Letter; Comment Letter of The Squam Lake 
Group (Sept. 17, 2013) (``Squam Lake Comment Letter''); Ropes & Gray 
Comment Letter.
    \463\ See Proposing Release, supra note 25, at section 
III.A.1.c.
    \464\ See DERA Study, supra note 24, at 4 (noting that most 
money market fund portfolio securities are held to maturity, and 
secondary markets in these securities are not deeply liquid).
    \465\ Id.
---------------------------------------------------------------------------

    We acknowledge that a floating NAV does not eliminate the incentive 
to redeem in pursuit of higher quality or greater liquidity--indeed, we 
intend to address the risks associated with these incentives primarily 
through our fees and gates reform. However, we continue to believe that 
a floating NAV should mitigate the incentive to redeem due to the 
mismatch between the stable NAV price and the actual value of fund 
shares because shareholders will receive a market value for their 
shares rather than a fixed price when they redeem. Importantly, the 
complementary liquidity fees and gates aspect of our money market 
reforms would also apply to institutional prime funds that are subject 
to a floating NAV. As discussed previously, while not intended to stem 
investors' desire to move to more liquid or higher quality investments, 
liquidity fees are specifically designed to ensure that redeeming 
investors pay the costs of the liquidity they receive, and redemption 
gates are designed as a tool to allow funds to manage heavy redemptions 
in times of stress and thus reduce the chance of harm to the fund and 
investors. In this way, we believe that the totality of our money 
market fund reforms addresses comprehensively many features of money 
market funds, including the characteristics of their investor base that 
can make them susceptible to heavy redemptions, and gives fund boards 
new tools for addressing a loss of liquidity that may develop in 
funds.\466\
---------------------------------------------------------------------------

    \466\ Some commenters agreed that a floating NAV alone is not 
enough to address these incentives. See, e.g., Americans for Fin. 
Reform Comment Letter (``[w]hile the floating NAV has clear benefits 
in making clear that investor assets are at risk of loss, we are 
concerned that a floating NAV alone will not create a sufficient 
disincentive for investors to engage in `runs' on MMFs.'').
---------------------------------------------------------------------------

    One commenter submitted a white paper concluding that (i) liquidity 
fees and gates, if implemented effectively, could stop and prevent 
runs; and (ii) although a variable NAV would not stop a run, it could 
mitigate the first mover advantage associated with the motivation to 
run that results from small shadow price departures from $1.00.\467\ 
The authors of the paper concluded further that the ability of a 
variable NAV to mitigate this first mover advantage is overstated when 
viewed in light of the real-world costs of moving between investments 
that investors will face and, in a significant stress event, such 
effect is a minor determinant of behavior.\468\ We acknowledge this 
view and agree, as discussed above, that a floating NAV cannot stop 
redemptions when (as assumed in the paper) investors are redeeming in a 
flight to quality due to a continuing deterioration of the credit risk 
in a fund's portfolio. However, the floating NAV reform reduces the 
benefit from redeeming ahead of others to at most one half of a 
hundredth of a cent per share \469\--100 times less than it is 
currently--which investors would weigh against the cost of switching to 
an alternative investment.\470\ As we discuss above, the floating NAV 
reform is designed to supplement the fees and gates reform only for 
those funds that are more vulnerable to credit events (compared to 
government funds) and that have an investor base more likely to engage 
in heavy redemptions (compared to retail investors) because of, among 
other reasons, the first mover advantage created by the funds' current 
valuation and pricing practices. Specifically, compared to the current 
stable NAV environment, a variable NAV will significantly limit the 
value of the first mover advantage. Although this first mover advantage 
may not be the main driver of investor decisions to redeem, it 
strengthens the incentive to redeem for those investors with the most 
at stake from a decline in a fund's value, which increases the chance 
of unfair investor dilution in contravention of a core principle of the 
Investment Company Act. We continue to believe that a floating NAV 
will, for institutional prime funds, reduce the impact of the first 
mover advantage associated with money market funds' current valuation 
and pricing practices and thus is consistent with our

[[Page 47777]]

obligation to seek to prevent investor dilution of fund shares (as 
discussed in more detail in the section below).
---------------------------------------------------------------------------

    \467\ See Treasury Strategies III Comment Letter (submitting a 
white paper: Carfang, et al., Proposed Money Market Mutual Fund 
Regulations: A Game Theory Assessment (using ``game theory'' 
analysis to evaluate whether a variable NAV and/or a constant NAV, 
with or without the ability to impose a liquidity fee or gate, can 
prevent or stop a run on money market fund assets).
    \468\ Id.
    \469\ For example, the floating NAV at 4 decimals will adjust 
from $1.0000 to $0.9999 as soon as the value reaches $0.99995. 
Hence, the most an investor can benefit from redeeming ahead of 
others and switching to an alternative investment is $1.0000-
$0.99995 = $0.00005.
    \470\ We discuss the costs associated with institutional 
investors transferring between investment alternatives in section 
III.K.3.
---------------------------------------------------------------------------

    A few commenters also suggested that shareholders in a floating NAV 
fund would have the same incentive to redeem if a floating NAV fund 
deviates far enough from the typical historical range for market-based 
pricing, particularly if they believe the fund may continue to drop in 
value.\471\ We note, however, that the floating NAV reform, one part of 
our broader reforms to money market funds, is designed to address a 
particular structural incentive that exists as a result of existing 
valuation and pricing methodologies under rule 2a-7. As we stated in 
our proposal and in this Release, the floating NAV reform is not 
intended to deter redemptions that constitute rational risk management 
by shareholders or that reflect a general incentive to avoid loss.
---------------------------------------------------------------------------

    \471\ See, e.g., Federated IV Comment Letter (arguing that, 
unlike a stable NAV fund, shareholders may have a greater incentive 
to redeem from a declining floating NAV fund because shareholders 
would ``realize'' the small declines in value); Chamber II Comment 
Letter.
---------------------------------------------------------------------------

    Several commenters argued that shareholders may choose not to 
redeem from a stable NAV money market fund during times of stress to 
avoid contributing to the likelihood that their fund breaks the 
buck.\472\ Although this may be the case for some shareholders, as 
shown during the financial crisis, other shareholders do redeem from 
stable value money market funds, regardless of the impact on the 
fund.\473\ It is the actions of those shareholders that have led to our 
re-evaluation of the appropriateness of exempting all money market 
funds from the valuation and pricing provisions that apply to all other 
mutual funds.
---------------------------------------------------------------------------

    \472\ See, e.g., Wells Fargo Comment Letter; Ropes & Gray 
Comment Letter; ICI Comment Letter.
    \473\ See supra section II.
---------------------------------------------------------------------------

    One commenter also argued that rule 2a-7 already places a number of 
detailed remedial obligations on the board of a money market fund, in 
the event a credit event occurs, that are designed to prevent any first 
mover advantage related to money market funds' current valuation and 
pricing methods.\474\ This commenter discussed, for example, the 
existing requirement that fund boards periodically calculate the fund's 
shadow price and take action in the event it deviates from the market-
based NAV per share by more than 50 basis points. We note, however, 
that the floating NAV reform is designed to proactively address a 
structural feature of money market funds that may incentivize heavy 
redemptions in times of market stress (and the resulting shareholder 
inequities) before a significant credit event occurs or the fund re-
prices its shares using market-based values (i.e., breaks the buck). 
Under current rule 2a-7, there remains a first mover advantage until 
the fund breaks the buck and re-prices its shares using market-based 
valuations. One commenter also noted that any reduction in the 
incentive to redeem early from the fund's stable pricing would be 
marginal and contingent upon the type of stress experienced.\475\ We 
note that the floating NAV reform is targeted towards the funds that 
have been most susceptible to heavy redemptions in the past. We believe 
that the risks associated with these funds have shown that the first 
mover advantage that results from current rule 2a-7's valuation and 
pricing methods needs to be addressed. This is particularly true in 
light of the Investment Company Act mandate to ensure that investors 
are treated fairly and the impact that the first mover advantage has on 
investor dilution.
---------------------------------------------------------------------------

    \474\ See Federated IV Comment Letter.
    \475\ See ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------

    Finally, a number of commenters suggested that the evidence of 
heavy redemptions in European floating NAV money market funds and U.S. 
ultra-short bond funds during 2008, taken together, may be the best 
means available to predict whether a floating NAV will reduce 
shareholder incentives to redeem shares in times of stress.\476\ These 
commenters suggest, therefore, that a floating NAV alone likely would 
not stop investors from redeeming shares.\477\ We recognize that many 
European floating NAV money market funds and U.S. ultra short bond 
funds experienced heavy redemptions during the financial crisis.\478\ 
We note that, as discussed above, the floating NAV reform is not 
intended to wholly prevent heightened redemptions or deter redemptions 
that constitute rational risk management by shareholders or that 
reflect a general incentive to avoid loss. Instead, our floating NAV 
reform is intended to address the incremental incentive to redeem 
created by money market funds' current valuation and pricing methods 
(and not incentives to redeem that relate to flights to quality and 
liquidity) and that exacerbates shareholder dilution.
---------------------------------------------------------------------------

    \476\ See, e.g., Federated IV Comment Letter; HSBC Comment 
Letter.
    \477\ See supra note 475 and accompanying text.
    \478\ As we discussed in the Proposing Release, we understand 
that many European floating NAV money market funds are priced and 
managed differently than floating NAV funds (as we proposed, and as 
adopted today). We also noted that Europe 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. Finally, we noted in the Proposing Release that empirical 
analysis yields different opinions on whether floating NAV funds, as 
compared with stable NAV funds, are less susceptible to run-like 
behavior. See Proposing Release, supra note 25, at section 
III.A.1.d. Accordingly, we note that the fact that some ultra-short 
bond funds and European floating NAV funds experienced heavy 
redemptions during the financial crisis does not necessarily suggest 
that investors in floating NAV money market funds (as adopted today) 
also would redeem heavily in a financial crisis.
---------------------------------------------------------------------------

b. Risks of Investor Dilution
    As discussed earlier, one of the Commission's most significant 
concerns when originally providing the exemption permitting the use of 
amortized cost valuation and penny rounding pricing for money market 
funds was to minimize the risks of investor dilution.\479\ A primary 
principle underlying the Investment Company Act is that sales and 
redemptions of redeemable securities should be effected at prices that 
are fair and do not result in dilution of shareholder interests or 
other harm to shareholders.\480\ Absent an exemption, a mutual fund 
must sell and redeem its redeemable securities only at a price based on 
its current net asset value, which equals the value of the fund's total 
assets minus the amount of the fund's total liabilities.\481\ A mutual 
fund generally must value its assets at their market value, in the case 
of securities for which market quotations are readily available, or at 
fair value, as determined in good faith by the fund's board of

[[Page 47778]]

directors, in the case of other securities and assets.\482\
---------------------------------------------------------------------------

    \479\ See Proposing Release, supra note 25.
    \480\ See Investment Trusts and Investment Companies: Hearings 
on S. 3580 before a Subcommittee of the Senate Committee on Banking 
and Currency, 76th Cong., 3d Sess. 136-38 (1940) (hearings that 
preceded the enactment of the Company Act). In addition, all funds 
must accurately calculate their net asset values to ensure the 
accuracy of their payment of asset-based fees, such as investment 
advisory fees, as well as the accuracy of their reported 
performance. Statement Regarding ``Restricted Securities,'' 
Investment Company Act Release No. 5847 (Oct. 21, 1969).
    \481\ Rule 22c-1. When calculating its net asset value for 
purposes of rule 22c-1: (i) An open-end fund adds up the current 
values of all of its assets (using their market values or fair 
values, as appropriate), which reflect any unrealized gains; and 
(ii) subtracts all of its liabilities, which include any federal 
income tax liability on any unrealized gains. If the open-end fund 
understates a liability, among other consequences, the price at 
which the fund's redeemable securities are redeemed will be higher, 
so that redeeming shareholders will receive too much for their 
shares while the net asset value of shares held by the remaining 
shareholders may be reduced correspondingly when the full amount of 
the liability must be paid.
    \482\ Rule 2a-4; see also section 2(a)(41) defining the term 
``value.''
---------------------------------------------------------------------------

    A fund that prices and transacts in fund shares valued at amortized 
cost value and rounded to the nearest penny poses a risk of dilution of 
investor shares because investors may redeem for the stable value of 
their shares even where the underlying market value of the fund's 
portfolio may be less. If such a redemption occurs, the value of the 
remaining shareholders' shares can be diluted, as remaining 
shareholders effectively end up paying redeeming shareholders the 
difference between the stable value and the underlying market value of 
the fund's assets.\483\ This result is illustrated in the example 
provided in the Proposing Release, where we discussed how redeeming 
shareholders can concentrate losses in a money market fund.\484\
---------------------------------------------------------------------------

    \483\ See TIAA-CREF Comment Letter (``Allowing investors to 
transact at daily using amortized pricing in times of stress could 
lead to dilution of the remaining investors' shares as the first 
redeemers in a run on a money market fund would get a higher 
valuation for their shares based on amortized cost than would 
subsequent redeemers.'').
    \484\ See Proposing Release, supra note 25, at section II.B.1.
---------------------------------------------------------------------------

    This risk of dilution is magnified by the ``cliff effect'' that can 
occur if a stable value fund is required to re-price its shares. If, 
due to heavy redemptions, losses embedded in a fund's portfolio cause 
it to re-price its shares from its stable value, remaining money market 
fund investors will receive at most 99 cents for every share remaining, 
while redeeming investors received the full $1.00, even if the market 
value of the fund's portfolio had not changed. In a mutual fund that 
transacts using a floating NAV, this cliff effect is minimized because 
(assuming pricing to four decimal places) the ``cliff'' is a 1/100th 
the size compared to when a money market fund is priced using penny 
rounding. In other words, in a floating NAV fund the risk of investor 
dilution is far less, in part, because the cliff occurs earlier and is 
significantly smaller (at $0.9999 cents, or one hundred times sooner 
and smaller than a stable value fund that drops from $1.00 to 99 
cents). Thus, the ``cliff effect'' is significantly mitigated in a 
floating NAV fund that prices and rounds share prices to four decimal 
places.
    As we discuss in more detail below, applying a floating NAV only to 
institutional investors investing in prime funds and allowing retail 
investors to continue to invest in a stable value product recognizes 
the historical differences between these types of investors, and 
cordons off some of the risks, reducing the chance that heavy 
redemptions by institutions will result in disruption or material 
dilution of retail investors' shares.\485\ We also recognize that 
institutional investors are not always similarly situated, with some 
institutions having more or less investment at risk, resources to 
monitor their investments, tolerance for losses, or proclivity to 
redeem, which makes certain institutional investors less likely to be 
among the first movers.\486\ A floating NAV should also help reduce the 
risks of material dilution to this subset of institutional investors, 
as it will reduce the first mover advantage associated with current 
rule 2a-7's valuation and pricing methods, which can prompt heavy 
redemptions and can have the effect of diluting the shares of slower-
to-redeem institutional investors.\487\
---------------------------------------------------------------------------

    \485\ See infra section III.C.2; see also Schwab Comment Letter 
(agreeing that segregating institutional investors from retail 
investors would ``reduce the chance that retail investors, who tend 
to be slower to react to market events, will absorb a 
disproportionate share of the losses if a fund breaks the buck.'').
    \486\ See, e.g., ABA Business Law Comment Letter (``It is more 
likely, however, that larger institutions have greater analytical 
resources than other institutional investors, such as small pension 
plans and companies.'').
    \487\ Several commenters supported our belief that a floating 
NAV treats shareholders more equitably than under current rule 2a-7. 
See, e.g., Deutsche Comment Letter; TIAA-CREF Comment Letter; 
Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

    A floating NAV might also prompt investors who are the least 
tolerant of losses, and thus the most likely to redeem early to avoid a 
decline in a fund's NAV per share, to shift into other investment 
products, such as government money market funds or other stable value 
products that may more appropriately match their risk profile. Such a 
shift would further reduce the risks of dilution for the remaining 
investors, mitigating the chances that rapid heavy redemptions will 
result in negative outcomes for these funds and their investors.
    We recognize that our liquidity fees and gates reforms also address 
the risks of dilution to some extent. However, fees and gates may not 
address the incentives that cause rapid heavy redemptions to occur in 
certain money market funds in the first place (although they should 
help manage the results). They also are not primarily designed to 
address the risks associated with deviations in a fund's NAV caused by 
portfolio losses or other credit events; rather, they are designed to 
ensure that investors pay the costs of their liquidity and allow funds 
time to manage heavy redemptions. A floating NAV requires redeeming 
investors to receive only their fair share of the fund when there are 
embedded losses in the portfolio (avoiding dilution of remaining 
shareholders), even in cases where the fund has sufficient liquidity 
such that fees or gates would not be permitted. We believe that the 
risks associated with institutional prime money market funds--including 
the incentives associated with the first mover advantage that results 
from current rule 2a-7's valuation and pricing methods, and associated 
heavy redemptions that can worsen a decline in a fund's stable NAV--are 
significant enough that they need to be addressed through the targeted 
reform of a floating NAV.
c. Enhanced Allocation of Principal Volatility Risk
    Today, the risks associated with the principal volatility of a 
money market fund's portfolio securities can be obscured by the pricing 
and valuation methods that allow these funds to maintain a stable NAV. 
In non-money market funds, investors may look to historical principal 
volatility as an indicator of fund risk because changes in the 
principal may be the dominant source of the total return.\488\ 
Historical principal volatility in money market funds may not have been 
as fully appreciated by investors, because they do not experience any 
principal volatility unless the fund breaks the buck (even if such 
volatility has in fact occurred).\489\
---------------------------------------------------------------------------

    \488\ Mutual funds earn money through dividend payments, capital 
gains distributions (increases in the price of the fund's portfolio 
securities), and increased NAV. See SEC Office of Investor Education 
and Advocacy, Mutual Funds, A Guide for Investors (Aug. 2007), 
available at http://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf. Money market fund investors may be more likely to focus 
on the other components of total return in a fund, such as interest 
or dividends.
    \489\ Such principal volatility may be even less apparent if the 
fund's sponsor provides support for the fund. See supra section 
II.B.4.
---------------------------------------------------------------------------

    Some commenters suggested, and we agree, that transacting at prices 
based on current market values means that institutional investors who 
invest in floating NAV funds will be more aware of, and willing to 
tolerate, occasional fluctuations in fund share prices (largely 
resulting from volatility in principal that had been previously 
obscured).\490\ This may result in more efficient allocation of risk 
through a ``sorting effect'' whereby institutional investors in prime 
funds either remain in a floating NAV money market fund and accept the 
risks of regular principal

[[Page 47779]]

volatility \491\ or move their assets into alternative investment 
products better suited to their actual risk tolerance.\492\ 
Accordingly, the shareholders who remain in institutional prime money 
market funds must be prepared to experience gains and losses in 
principal on a regular basis, which may result in those remaining 
investors being less likely to redeem at the first sign that a money 
market fund may experience such principal volatility.
---------------------------------------------------------------------------

    \490\ See, e.g. Vanguard Comment Letter.
    \491\ We acknowledge, however, that although we expect money 
market fund shares priced to four decimal places likely will 
fluctuate on a somewhat regular basis, they are not likely to 
fluctuate daily primarily due to the high quality and short duration 
of the fund's underlying portfolio securities. A few commenters 
argued that a floating NAV will not necessarily inform investors 
because NAVs may not fluctuate much. See, e.g., Federated IV Comment 
Letter; HSBC Comment Letter; ICI Comment Letter. Our staff 
estimates, based on a historical analysis of money market fund 
shadow prices, that money market funds would have floated just over 
50% of the time if priced to four decimal places. See infra note 502 
and accompanying text.
    \492\ See, e.g. Vanguard Comment Letter (``The reason the 
floating NAV would mitigate the risk of disruptive shareholder 
redemptions in institutional prime MMFs is that the process of 
moving from a stable NAV to a floating NAV will force the 
shareholders of those funds, which tend to be concentrated with 
professional investors who cannot withstand any share price 
movement, into different investment vehicles. The shareholders who 
remain will have a greater tolerance for loss, making them less 
likely to flee at the first sign of stress.'').
---------------------------------------------------------------------------

    Some commenters recognized that making principal gains and losses 
more apparent to investors could recalibrate investors' perceptions of 
the risks inherent in money market funds.\493\ A number of commenters 
argued, however, that institutional investors who invest in money 
market funds that will be subject to a floating NAV are well aware of 
the risks of money market funds and that money market fund shares may 
fluctuate in value.\494\ But contrary to institutional investors' 
purported existing knowledge of those risks, when the reality of 
potential principal losses became more apparent during the financial 
crisis, many of them redeemed heavily from money market funds.\495\ Our 
floating NAV reform, by requiring that investors experience any gains 
or losses in principal when they transact in money market fund shares, 
will more fully reveal the risk from changes in the fund's principal 
value to shareholders.
---------------------------------------------------------------------------

    \493\ See, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable 
Comment Letter; Boston Federal Reserve Comment Letter.
    \494\ See, e.g., Federated IV Comment Letter (citing to comments 
submitted on the FSOC Proposed Recommendations); Hanson et al. 
Comment Letter. Commenters also noted that investors already 
understand that money market funds can ``break the buck.'' See, 
e.g., Comment Letter of OFI Global Asset Management, Inc. (Sept. 17, 
2013) (``Oppenheimer Comment Letter''); Dreyfus Comment Letter; UBS 
Comment Letter; Wells Fargo Comment Letter; Comment Letter of Key 
Bank, NA (Sept. 16, 2013) (``Key Bank Comment Letter'').
    \495\ Some commenters agreed with this view. See, e.g., American 
Bankers Ass'n Comment Letter; Angel Comment Letter.
---------------------------------------------------------------------------

    Finally, some commenters also suggested that enhanced disclosure 
(including daily Web site reporting of shadow NAVs), rather than a 
floating NAV, would be a more efficient and less costly way to achieve 
the same goal.\496\ We agree that daily disclosure of funds' shadow 
NAVs does improve visibility of risk to some degree, by making the 
information about NAV fluctuations available to investors should they 
choose to seek it out. But the mere availability of this information 
cannot provide the same effect that is provided by institutions 
experiencing actual fluctuations in the value of their investments (or 
acknowledging, through their investment in a fully disclosed floating 
NAV investment product, their willingness to accept daily fluctuations 
in share price value), which will be provided by a floating NAV.
---------------------------------------------------------------------------

    \496\ See, e.g., Federated IV Comment Letter; ICI Comment 
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II 
Comment Letter. A few commenters suggested that money market funds 
be required to transact in fund shares to the same level of 
precision as disclosed on fund Web sites, which is the approach that 
we are adopting today. See, e.g., Fidelity Comment Letter (stating 
that money market funds should disclose (on fund Web sites) the NAV 
to the same precision as it prices its shares for transactions in 
order to avoid arbitrage opportunities based on asymmetry of 
information).
---------------------------------------------------------------------------

4. Money Market Fund Pricing
    Having determined to adopt the floating NAV reform for 
institutional prime funds, there is a separate (albeit related) issue 
of how to price the shares for transactions. Today, for the reasons 
discussed previously in this section, we are amending rule 2a-7 to 
eliminate the exemption that currently permits institutional prime 
funds to maintain a stable NAV through amortized cost valuation and/or 
penny rounding pricing.\497\ We are also adopting, as proposed, an 
additional requirement that these money market funds value their 
portfolio assets and price fund shares by rounding the fund's current 
NAV to four decimal places in the case of a fund with a $1.0000 share 
price or an equivalent or more precise level of accuracy for money 
market funds with a different share price (e.g., a money market fund 
with a $10 target share price could price its shares at $10.000).\498\ 
Accordingly, the final amendments change the rounding convention for 
money market funds that are required to adopt a floating NAV--from 
penny rounding (i.e., to the nearest one percent) to ``basis point'' 
rounding (i.e., to the nearest 1/100th of one percent), which is a more 
precise standard than other mutual funds use today.
---------------------------------------------------------------------------

    \497\ As discussed further below, under our final rule 
amendments, government and retail money market funds will be 
permitted to use the amortized cost method and/or penny-rounding 
method to maintain a stable price per share as they do today.
    \498\ See rule 2a-7(c)(1)(ii). Mutual funds that are not relying 
on the exemptions provided by rule 2a-7 today are required to price 
and transact in fund shares rounded to a minimum of 1/10th of 1 
percent, or three decimal places. See ASR 219, supra note 5.
---------------------------------------------------------------------------

    We proposed to require that institutional prime funds use basis 
point rounding and we noted that basis point rounding appeared to be 
the level of sensitivity that would be required if gains and losses 
were to be regularly reflected in the share price of money market funds 
in all market environments, including relatively stable market 
conditions. We also noted that this level of precision may help more 
effectively inform investor expectations regarding the floating nature 
of their shares.\499\ In money market funds today, there is no 
principal volatility unless the fund breaks the buck, and thus this 
indicator of risk may not have always been readily apparent.\500\
---------------------------------------------------------------------------

    \499\ See Proposing Release, supra note 25, at section III.A.2.
    \500\ Some commenters recognized that making gains and losses 
more apparent to investors could help recalibrate investors' 
perceptions of the risks inherent in money market funds. See, e.g., 
Schwab Comment Letter; Fin Svcs. Roundtable Comment Letter; Boston 
Federal Reserve Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we considered, as an 
alternative to the basis point rounding requirement that we are 
adopting today (which is a condition for relying on rule 2a-7 for 
institutional prime money market funds), requiring institutional prime 
funds to price and transact in fund shares at a precision of 1/10th of 
one percent (which is typically the equivalent of three decimal places 
at $10.00 share price) (``10 basis point rounding''), like other mutual 
funds. But in the Proposing Release, we noted our concern that 10 basis 
point rounding may not be sufficient to ensure that investors can 
regularly observe the investment risks that are present in money market 
funds, particularly if funds manage themselves in such a way that their 
NAVs remain constant or nearly constant.\501\
---------------------------------------------------------------------------

    \501\ See supra note 491.
---------------------------------------------------------------------------

    In considering whether to require basis point rounding or, instead, 
to allow 10 basis point rounding, we have looked to the potential for 
price

[[Page 47780]]

fluctuations under the two approaches. Based on our staff analysis of 
Form N-MFP data between November 2010 and November 2013, 53% of money 
market funds have fluctuated in price over a twelve-month period with a 
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.\502\ We recognize that, either way, this limited 
fluctuation in prices is the result of the nature of money market fund 
portfolios, whose short duration and/or high quality generally results 
in fluctuations in value primarily when there is a credit deterioration 
or other significant market event.\503\ Because of the nature of money 
market fund portfolios, pricing with the accuracy of basis point 
rounding should better reflect the nature of money market funds as an 
investment product by regularly showing market gains and losses in an 
institutional prime money market fund's portfolio.\504\
---------------------------------------------------------------------------

    \502\ Our staff has updated its analysis from the discussion in 
the Proposing Release. See Proposing Release, supra note 25, at 
section III.A.2 and n.164.
    \503\ See, e.g., Comment Letter of Arnold & Porter LLP on behalf 
of Federated Investors (Elimination of the Use of Amortized Cost 
Method of Valuation by Stable Value Money Market Funds) (Sept. 16, 
2013) (``Federated VI Comment Letter'').
    \504\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    After considering the results of the staff's analysis, we are 
persuaded to require basis point rounding. We believe that some of the 
institutional investors in these funds may not appreciate the risk 
associated with money market funds.\505\ As for this subset of 
institutional investors, we believe that the basis point rounding 
requirement may accentuate the visibility of the risks in money market 
funds by causing these shareholders to experience gains and losses when 
the funds' value fluctuates by 1 basis point or more.\506\ We further 
believe this may, in turn, have two potential effects that are 
consistent with our overall goal of addressing features in money market 
funds that can make them susceptible to heavy redemption. First, to the 
extent that some of these investors become more aware of the risks, 
they may develop an increased risk tolerance that could help make them 
less prone to run.\507\ Second, by helping make the risk more apparent 
through periodic price fluctuations, basis point rounding may help 
signal to those investors who cannot tolerate the risk associated with 
the fluctuating NAV that they should migrate to other investment 
options, such as government funds.\508\ Because basis point rounding 
is, as the staff's study demonstrated, more likely to produce price 
fluctuations than 10 basis point rounding, we believe it is more likely 
to have these desired effects.\509\
---------------------------------------------------------------------------

    \505\ To be sure, this may not generally include the more 
sophisticated institutional investors who have professional 
financial experts advising them and carefully monitoring their 
investments. See, e.g., Federated IV Comment Letter (citing to 
comments submitted on the FSOC Proposed Recommendations; Hanson et 
al. Comment Letters). But within the class of institutional 
investors, we understand that there are many less sophisticated 
investors--e.g., smaller, closely held corporations--who rely on 
money market funds to manage their cash flow but who are not fully 
aware of the risks and the potential for loss.
    \506\ See, e.g., 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, 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) (``Federated May 
2011 Comment Letter'') (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''). As discussed above, we 
believe that our floating NAV reform improves the allocation of risk 
and should result in better-informed investors that, by choosing to 
invest in a floating NAV, appreciate and are willing to tolerate the 
risks of principal volatility, even if those fluctuations do not 
occur on a daily basis. See supra section III.B.3.c.
    \507\ Several commenters agreed with this position. See, e.g., 
Comment Letter of Eric S. Rosengren, President, Federal Reserve Bank 
of Boston, et al. (Sept. 12, 2013) (``Fed Bank President Comment 
Letter'') (``We agree with the SEC's position that a floating NAV 
requirement, if properly implemented, could recalibrate investors' 
perception of the risks inherent in a fund by `making gains and 
losses a more regularly observable occurrence'.''); HSBC Comment 
Letter.
    \508\ See, e.g., Fed Bank President Comment Letter (``Because a 
constant NAV MMMF generally draws risk-averse investors, it is 
likely that given an appropriate transition period, the investor 
base would either change or become more tolerant of NAV 
fluctuations, lowering the chance of destabilizing runs.'').
    \509\ We are concerned that, were we to adopt 10 basis point 
rounding, institutional prime money market funds would not regularly 
float during normal market times, in which case certain 
institutional investors may not fully appreciate that the investment 
has risks and they might thus invest in the product despite their 
lower risk tolerance. See, e.g., PWG Report, supra note 506, 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.'').
---------------------------------------------------------------------------

a. Other Considerations
    We recognize that 10 basis point rounding would provide certain 
benefits. For example, it could provide consistency in pricing among 
all floating NAV mutual funds and this could reduce investors' 
incentives to reallocate assets into other potentially riskier floating 
NAV mutual funds (e.g., ultra-short bond funds) that some commenters 
suggested may appear to present less volatility. A number of commenters 
argued for this alternative, suggesting that money market funds should 
not be required to use a more precise rounding convention than what is 
required of other mutual funds.\510\
---------------------------------------------------------------------------

    \510\ See, e.g., BlackRock II Comment Letter; Legg Mason & 
Western Asset Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    Notwithstanding these potential benefits, as discussed above we 
believe there are sufficient countervailing considerations that make it 
appropriate to require basis point rounding for institutional prime 
money market funds. Further, we are requiring this additional level of 
precision because institutional prime money market funds are distinct 
from other mutual funds in their regulatory structure, purpose, and 
investor risk tolerance, as well as the risks they pose of investor 
dilution and to well-functioning markets. Accordingly, we believe on 
balance that it is appropriate to require these money market funds to 
use a more precise pricing and rounding convention than used by other 
mutual funds.
    Some commenters also argued that enhanced disclosure (including 
daily Web site reporting of shadow NAVs), would be a more efficient and 
less costly way to achieve the same goal.\511\ We agree that daily 
disclosure of funds' shadow NAVs does improve visibility of risk to 
some degree, by making the information about NAV fluctuations available 
to investors should they choose to seek it out. But we are skeptical 
that, as to the subset of institutional investors who are less aware of 
the risks, the mere availability of this information can provide the 
same level of impact than is provided by actually experiencing 
fluctuations in the investment value (or acknowledging, through these 
investors' investment in a fully disclosed floating NAV investment 
product, their willingness to accept daily fluctuations in share price 
value), which will be provided by a floating NAV priced using basis 
rounding. In a similar vein, one commenter suggested that, as an 
alternative to a floating NAV, we consider a modified penny-rounding 
pricing method whereby a money market fund would be permitted to 
calculate an unrounded NAV once each

[[Page 47781]]

day and therefore, absent a significant market event, use the previous 
day's portfolio valuation for any intraday NAV calculations.\512\ Under 
this approach, money market funds would disclose their basis-point 
rounded price, but only transact at the penny-rounded price.\513\ 
Although we recognize that such an approach would likely retain the 
efficiencies associated with amortized cost valuation, this alternative 
is not without other risks, including the use of potentially stale 
valuation data. More significantly, unlike our floating NAV reform, 
this alternative does not address the first-mover advantage or risks of 
investor dilution discussed above.\514\
---------------------------------------------------------------------------

    \511\ See, e.g., Federated IV Comment Letter; ICI Comment 
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II 
Comment Letter.
    \512\ See Comment Letter of Federated Investors, Inc. (Nov. 6, 
2013); see also Comment Letter of Arnold & Porter LLP on behalf of 
Federated Investors (July 16, 2014). We note that this alternative, 
if combined with fees and gates, is very similar to the fees and 
gates alternative we proposed (which included a requirement for 
penny-rounded pricing). We discuss why we have chosen not to adopt 
that alternative in section III.L.1.
    \513\ Id.
    \514\ See supra section III.B.3.
---------------------------------------------------------------------------

    Several commenters argued that basis point rounding is an 
artificial means to increase the volatility of floating NAV funds and 
would mislead investors by exaggerating the risks of investing in money 
market funds compared to ultra-short bond funds, and suggested that 
instead we should adopt 10 basis point rounding.\515\ For example, one 
commenter noted that basis point rounding is so sensitive that it might 
produce price distinctions among funds that result merely from the 
valuation model used by a pricing service, rather than from a 
difference in the intrinsic value of the securities (``model 
noise'').\516\ We do not believe that basis point rounding will mislead 
investors, nor do we believe that price changes at the fourth decimal 
place will generally be a result of ``model noise'' rather than 
reflecting changes in the market value of the fund's portfolio.\517\ We 
note that today many money market funds are voluntarily disclosing 
their shadow price with basis point rounding, and they are prohibited 
from doing so if the shadow price was misleading to investors. Funds 
have also been required to report their shadow NAVs to us on Form N-MFP 
priced to the fourth decimal place since the inception of the form, and 
we have found the shadow NAVs priced at this level useful and relevant 
in our risk monitoring efforts. For example, reporting of shadow prices 
to four decimal places provides a level of precision (as compared with 
three decimal place rounding) needed for our staff to fully evaluate 
and monitor the impact of credit events on money market fund share 
prices.\518\
---------------------------------------------------------------------------

    \515\ See, e.g., Schwab Comment Letter; Stradley Ronon Comment 
Letter; SIFMA Comment Letter; Legg Mason & Western Asset Comment 
Letter; Fidelity Comment Letter.
    \516\ See Goldman Sachs Comment Letter.
    \517\ See, e.g., HSBC Comment Letter (noting that basis point 
rounding would ``better reflect gains and losses'' than 3 decimal 
place rounding).
    \518\ Basis point precision will also enable our staff to 
monitor the effect of shifts in interest rates on money market fund 
share prices (particularly in more regular market conditions).
---------------------------------------------------------------------------

    Some commenters also stated that ultra-short bond funds priced 
using 10 basis point rounding might appear less volatile than money 
market funds priced using basis point rounding.\519\ As a result, these 
commenters noted what they viewed as the undesirable effect that 
investors might be incentivized to move their assets into ultra-short 
bond funds that have similar investment parameters to money market 
funds but are not required to adhere to the risk-limiting conditions of 
rule 2a-7.\520\ Based on our staff analysis of Morningstar data between 
November 2010 and November 2013, 100% of ultra-short bond funds have 
fluctuated in price over a twelve-month period with a NAV priced using 
10 basis point rounding, compared with 53% of money market funds that 
would have fluctuated in price using basis point rounding.\521\ 
Accordingly, we do not believe that it is likely investors will view 
ultra-short bond funds as less volatile than money market funds priced 
using basis point rounding. We also note, however, that because 
floating NAV money market funds and ultra-short bond funds invest in 
different securities and are subject to different regulatory 
requirements (including risk-limiting conditions), investors may 
consider these factors when evaluating the risk profile of these 
different investment products.\522\ Existing disclosure requirements, 
along with the amendments to money market fund disclosure requirements 
we are adopting today, are designed to help investors understand these 
differences and the associated risks.
---------------------------------------------------------------------------

    \519\ See, e.g., BlackRock II Comment Letter; Stradley Ronon 
Comment Letter; SIFMA Comment Letter; Fidelity Comment Letter.
    \520\ We note that other features of ultra-short bond funds may 
counter this incentive, including that they are generally not a cash 
equivalent for accounting purposes and their less favorable tax 
treatment than what the Treasury Department and IRS have proposed 
and issued today. See infra section III.B.6.
    \521\ Using Morningstar data, our staff analyzed the monthly NAV 
fluctuations of 54 active ultra-short bond fund share classes during 
November 2010 and November 2013. The money market fund data was 
obtained using Form N-MFP data. See supra note 502 and accompanying 
text.
    \522\ As discussed in infra section III.B.6, the Treasury 
Department and the IRS will issue today a revenue procedure that 
exempts from the wash sale rule dispositions of shares in any 
floating NAV money market fund. This exemption does not apply to 
ultra-short bond funds.
---------------------------------------------------------------------------

b. Implementation of Basis Point Rounding
    One commenter noted that basis point rounding ``should be 
relatively straightforward for the industry to accommodate.'' \523\ A 
number of commenters, however, objected to our proposed amendment to 
require that floating NAV money market funds price and transact their 
shares at the fourth decimal place. Commenters stated that pricing and 
transacting at four decimal places (as opposed to reporting only their 
shadow price at four decimal places) would be operationally expensive 
and overly burdensome because money market fund systems are typically 
designed for processing all mutual funds,\524\ which generally process 
and record transactions rounded to the nearest penny (which is 
typically the equivalent of three decimal places at a $10.00 share 
price).\525\ We acknowledge that money market funds, intermediaries, 
and shareholders will likely incur significant costs in order to modify 
their systems to accommodate pricing and transacting in fund shares 
rounded to four decimals. We discuss these costs in section III.B.8.a 
below. We understand, however, that because virtually all mutual funds 
(including money market funds), regardless of price, round their NAV to 
the nearest penny, these system change costs will be incurred if we 
require money market funds to float their NAV, regardless of whether we 
require the use of basis point rounding (unless funds were to re-price 
to $10.00 per share).\526\
---------------------------------------------------------------------------

    \523\ Comment Letter of Interactive Data Corporation (Sept. 17, 
2013) (``Interactive Data Comment Letter'').
    \524\ See supra note 500.
    \525\ See, e.g., BlackRock II Comment Letter; Invesco Comment 
Letter; Schwab Comment Letter; Legg Mason & Western Asset Comment 
Letter; ICI Comment Letter.
    \526\ We understand that virtually all systems round to the 
nearest penny when processing fund share transactions. See ICI 
Comment Letter. Accordingly, if a money market fund continued to be 
priced at a dollar, even if rounded to the third decimal place, we 
understand that similar significant systems changes would be 
necessary to transact and report in fund shares priced at $1.000. We 
note that money market funds would be able to avoid these costs and 
move floating NAV money market funds to existing mutual fund systems 
by re-pricing fund shares to $100.00 per share, under a basis point 
rounding requirement. See id. We recognize that such a transition 
might create other costs, such as proxy solicitation if the fund's 
charter prohibits such a re-pricing and potential investor 
resistance to using a cash management product that prices based on a 
$100.00 initial share price. See id. (noting that basis point 
rounding would be workable (without significant costs) if money 
market funds moved to a $100.00 price per share, but suggesting that 
investors would be unlikely to use a cash management product priced 
at this level). We agree with this commenter that it is unlikely 
that investors would invest in a money market fund that implements 
an initial $100.00 share price in a floating NAV money market fund. 
If a money market fund chose to do so, we estimate that each fund 
would incur one-time proxy solicitation costs of $100,000. See infra 
note 735 and accompanying text.

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[[Page 47782]]

    A few commenters also noted that although basis point rounding may 
convey the risk of a floating NAV to investors more clearly by 
reflecting very small fluctuations in value, it does so at a 
significant cost--increasing the tax and accounting burdens associated 
with the realized gains and losses that would result from more frequent 
changes in a money market fund's NAV per share.\527\ As discussed in 
section III.B.6.a below, however, the Treasury Department and IRS are 
today proposing a new regulation that would permit investors to elect 
to use a ``simplified aggregate mark-to-market method'' to determine 
annual realized gains or losses and therefore eliminate the need to 
track purchase and sale transactions. Therefore, it is unlikely that 
there will be increased operational burdens that result from tax or 
accounting costs associated with more frequent realized gains or 
losses.\528\
---------------------------------------------------------------------------

    \527\ See, e.g., BlackRock II Comment Letter; UBS Comment 
Letter.
    \528\ As discussed in section III.B.6.a.i, however, investors 
are likely to incur additional, although small, realized gains and/
or losses as a result of more frequent fluctuations in the share 
price under a floating NAV priced to four decimal places.
---------------------------------------------------------------------------

c. Economic Analysis
    Under our final amendments, and as we proposed, institutional prime 
funds will round prices and transact in fund shares to four decimal 
places in the case of a fund with a $1.00 target share price (i.e., 
$1.0000) or an equivalent or more precise level of accuracy for money 
market funds with a different share price. During normal market 
conditions, rounding prices and transacting in fund shares at four 
decimal places will provide investors an opportunity to better 
understand the risks of institutional prime funds as an investment 
option and will provide investors with improved transparency in 
pricing. This should positively affect competition. During times of 
stress, it will reduce much of the economic incentive for shareholders 
to redeem shares ahead of other investors at a stable net asset value 
when the market value of portfolio holdings fall and will reduce 
shareholder dilution. As such, the risk of heavy share redemptions 
should decrease, and shareholders will be treated more equitably as 
they absorb their proportionate share of gains, losses, and costs. In 
addition, rounding prices and transacting in fund shares at four 
decimal places may help to further reduce the incentive for 
shareholders to redeem shares ahead of other investors by helping less 
informed investors better understand the inherent risks in money market 
funds. As such, the risk of heavy share redemptions may decrease as 
investors experience greater information efficiency and allocative 
efficiency by better understanding the risks more closely and directing 
their investments accordingly. Reducing the risk of heavy share 
redemptions by removing the first-mover advantage should promote 
capital formation by making money market funds a more stable source of 
financing for issuers of short-term credit instruments. We recognize, 
however, that as discussed below in section II.K, to the extent that 
money flows out of institutional prime floating NAV funds and into 
alternative investment vehicles, capital formation may be adversely 
affected.
5. Amortized Cost and Penny Rounding for Stable NAV Funds
    As discussed above, all money market funds that are not subject to 
our targeted floating NAV reform may continue to price fund shares as 
they do today and use the amortized cost method to value portfolio 
securities.\529\ This approach differs from our 2013 proposal, in which 
we proposed to eliminate the use of the amortized cost method of 
valuation for all money market funds. At that time, we stated that 
amortized cost valuation or penny rounding pricing 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, and in light of the fact that, under our proposal, all 
money market funds (including stable NAV funds) would be required to 
disclose on a daily basis their fund share prices with their portfolios 
valued using market-based factors (rather than amortized cost), we 
proposed to eliminate the use of amortized cost for stable NAV funds 
(but to continue to permit penny rounding pricing).\530\
---------------------------------------------------------------------------

    \529\ Stable NAV money market funds may also choose to use the 
penny rounding method of pricing fund shares. Under our amendments, 
government and retail money market funds will be permitted to 
maintain a stable NAV. See infra sections III.C.1 and III.C.2.
    \530\ See Proposing Release, supra note 25, at section III.A.3.
---------------------------------------------------------------------------

    A number of commenters objected to eliminating amortized cost 
valuation for stable NAV funds.\531\ Most significantly, commenters 
argued that prohibiting the use of amortized cost valuation would 
hinder money market funds' ability to provide for intraday purchases 
and redemptions and same-day settlement because of the increased time 
required to strike a market-based price.\532\ One commenter noted, for 
example, that if a money market fund prices at the close of the New 
York Stock Exchange, the fund may not be able to complete the penny 
rounding process, wire redemption proceeds, and settle fund trades 
before the close of the Fedwire.\533\ Commenters also argued that 
substituting penny rounding pricing for amortized cost valuation would 
increase costs and operational complexity without providing 
corresponding benefits.\534\ A few commenters also suggested that, in 
assessing whether to eliminate amortized cost valuation for securities 
that mature in more than 60 days, we should consider the broader 
systemic implications of a potential shift in money market fund 
portfolio holdings towards securities that mature within 60

[[Page 47783]]

days (in order to avoid the need to use market-based values).\535\
---------------------------------------------------------------------------

    \531\ See generally BlackRock II Comment Letter; Dreyfus Comment 
Letter; Federated VI Comment Letter; Wells Fargo Comment Letter; 
SIFMA Comment Letter. A number of commenters suggested that 
amortized cost is an appropriate valuation method for money market 
funds because the characteristics of typical portfolio holdings 
(i.e., high quality, short duration, and typically held-to-maturity) 
result in minimal differences between a money market fund's NAV 
calculated using amortized cost and a fund's market-based NAV. See, 
e.g., Legg Mason & Western Asset Comment Letter; UBS Comment Letter; 
Chamber II Comment Letter. Commenters also suggested that amortized 
cost valuation may increase objectivity and consistency across the 
fund industry because money market instruments do not often trade in 
the secondary markets and therefore the market-based prices may be 
less reliable. See, e.g., Federated VI Comment Letter; Goldman Sachs 
Comment Letter; Legg Mason & Western Asset Comment Letter.
    \532\ See, e.g., Federated VI Comment Letter (suggesting that it 
would take a minimum of three to four hours to strike a market-based 
NAV (assuming there are no technology problems), compared with as 
little as one hour for a fund using penny-rounded pricing and 
amortized cost valuation). See also, e.g., Legg Mason & Western 
Asset Comment Letter; SunGard Comment Letter; UBS Comment Letter; 
ICI Comment Letter; BlackRock II Comment Letter.
    \533\ See Federated VI Comment Letter.
    \534\ See, e.g., Federated VI Comment Letter (noting that June 
2012 survey data from Form N-MFP filings shows that approximately 
72% of prime money market fund assets had maturities of less than 60 
days). As a result, this commenter suggests that substituting penny 
rounding for amortized cost imposes disproportionately high costs 
without incremental benefits because a large portion of fund 
portfolios will continue to use amortized cost under current 
Commission guidance. See also, e.g., Legg Mason & Western Asset 
Comment Letter; SunGard Comment Letter; UBS Comment Letter; ICI 
Comment Letter.
    \535\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment 
Letter. As discussed in this section, we are not eliminating, as 
proposed, the use of amortized cost valuation for stable NAV money 
market funds under our final amendments.
---------------------------------------------------------------------------

    We no longer believe that, as we stated in the Proposing Release, 
there would be little additional cost to funds if we eliminated 
amortized cost valuation (and permitted only penny rounding) for all 
money market funds (including stable NAV money market funds). Our 
belief was, in part, based on the fact that, as proposed (and as we are 
adopting today), all money market funds would be required to post on 
their Web sites daily shadow prices (determined using market-based 
values) rounded to four decimal places. Because, under our proposal 
money market funds would be required to obtain daily market-based 
valuations in order to post daily shadow prices to fund Web sites, we 
believed that funds would have this information readily available (and 
therefore not require the use of amortized cost). Notwithstanding this, 
commenters noted, however, the ability to use amortized cost valuation 
provides a significant benefit to money market funds when compared to 
penny rounding pricing--the ability to provide intraday liquidity to 
shareholders in a cost-effective and efficient manner. We agree with 
commenters that eliminating amortized cost valuation would likely 
hinder the ability of funds to provide frequent intraday liquidity to 
shareholders and may impose unnecessary costs and operational burdens 
on stable NAV money market funds. This is particularly true in light of 
the fact that under existing regulatory restrictions and guidance, a 
material intraday fluctuation would still have to be recognized in fair 
valuing the security. We therefore believe that eliminating amortized 
cost valuation in the context of stable NAV funds would be contrary to 
a primary goal of our rulemaking--to preserve to the extent feasible, 
while protecting investors and the markets, the benefits of money 
market funds for investors and the short-term funding markets by 
retaining a stable NAV alternative.
    Accordingly, we are not adopting the proposed amendments that would 
prohibit stable NAV money market funds from using amortized cost to 
value portfolio securities. Rather, under the final amendments, stable 
NAV funds may continue to price fund shares as they do today, using the 
amortized cost method to value portfolio securities and/or the penny 
rounding method of pricing. Given the continued importance of amortized 
cost valuation under our final rules, we are providing expanded 
valuation guidance related to the use of amortized cost and other 
related valuation matters in section III.D.
6. Tax and Accounting Implications of Floating NAV Money Market Funds
a. Tax Implications
    In the Proposing Release, we discussed two principal tax 
consequences of requiring certain money market funds to implement a 
floating NAV, potentially causing shareholders to experience taxable 
gains or losses. First, under tax rules applicable at the time of the 
Proposing Release, floating NAV money market funds (or their 
shareholders) would be required to track the timing and price of 
purchase and sale transactions in order to determine and report capital 
gains or losses. Second, floating NAV funds would be subject to the 
``wash sale'' rule, which postpones the tax benefit of losses when 
shareholders sell securities at a loss and, within 30 days before or 
after the sale, buy substantially identical securities. These tax 
consequences generally do not exist today, because purchases and sales 
of money market fund shares at a stable $1.00 share price do not 
generate gains or losses. Because we are today adopting the floating 
NAV requirement for certain money market funds as part of our reforms, 
we have continued to analyze the related tax effects. As discussed 
below, the Treasury Department and IRS will address these tax concerns 
to remove almost all tax-related burdens associated with our floating 
NAV requirement.
i. Accounting for Net Gains and Losses
    As we discussed in the Proposing Release, we expected taxable 
investors in floating NAV money market funds, like taxable investors in 
other types of mutual funds, to experience gains and losses. 
Accordingly, we expected shareholders in floating NAV money market 
funds to owe tax on any realized gains, to receive tax benefits from 
any realized losses, and to be required to determine those amounts. 
However, because it is not possible to predict the timing of 
shareholders' future transactions and the amount of NAV fluctuations, 
we were not able to estimate with any specificity the amount of any 
increase or decrease in shareholders' tax burdens. Because we expect 
that investors in floating NAV money market funds will experience 
relatively small fluctuations in value, and because many money market 
funds may qualify as retail and government money market funds, any 
changes in tax burdens likely would be minimal.
    In the Proposing Release, we also noted that tax rules generally 
require mutual funds or intermediaries to report to the IRS and 
shareholders certain information about sales of shares, including sale 
dates and gross proceeds. If the shares sold were acquired after 
January 1, 2012, the fund or intermediary would also have to report 
basis and whether any gain or loss is long or short term.\536\ At the 
time of the Proposing Release, Treasury regulations excluded sales of 
stable value money market funds from this transaction reporting 
obligation.\537\ We noted that mutual funds and intermediaries (and, we 
anticipated, floating NAV money market funds) are not required to make 
reports to certain shareholders, including most institutional 
investors. The regulations call these shareholders ``exempt 
recipients.'' \538\
---------------------------------------------------------------------------

    \536\ 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) (26 U.S.C. 6045(g), 6045A, and 6045B); see also 26 CFR 1.6045-
1; Internal Revenue Service Form 1099-B. These new basis reporting 
requirements and the pre-2012 reporting requirements are 
collectively referred to as ``transaction reporting.''
    \537\ See 26 CFR 1.6045-1(c)(3)(vi).
    \538\ See 26 CFR 1.6045-1(c)(3)(i).
---------------------------------------------------------------------------

    We have been informed that the Treasury Department and the IRS 
today will propose new regulations to make all money market funds 
exempt from this transaction reporting requirement, and the exemption 
is to be formally applicable for calendar years beginning on or after 
the date of publication in the Federal Register of a Treasury Decision 
adopting those proposed regulations as final regulations. Importantly, 
the Treasury Department and the IRS have informed us that the text of 
the proposed regulations will state that persons subject to transaction 
reporting may rely on the proposed exemption for all calendar years 
prior to the final regulations' formal date of applicability. 
Therefore, the Treasury and IRS relief described above is available 
immediately.
    We noted in the Proposing Release our understanding that the 
Treasury Department and the IRS were considering alternatives for 
modifying forms and guidance: (1) To include net transaction 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. 
Many commenters argued that this potential relief does not go far 
enough and noted that, because institutions are exempt recipients, 
these

[[Page 47784]]

investors would still incur costs to build systems to track and report 
their own basis information and calculate gains and losses.\539\ We 
recognized in the Proposing Release the limitations of this potential 
tax relief.
---------------------------------------------------------------------------

    \539\ See, e.g., BlackRock II Comment Letter; Schwab Comment 
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    We have been informed that the Treasury Department and the IRS 
today will propose new regulations that will provide more comprehensive 
and effective relief than the approaches described in the Proposing 
Release. These regulations will, as suggested by one commenter,\540\ 
make a simplified aggregate method of accounting available to investors 
in floating NAV money market funds and are proposed to be formally 
applicable for taxable years ending after the publication in the 
Federal Register of a Treasury Decision adopting the proposed 
regulations as final regulations. Importantly, the Treasury Department 
and the IRS have informed us that the text of the proposed regulations 
will state that taxpayers may rely on the proposed rules for taxable 
years ending on or after the date that the proposed regulations are 
published in the Federal Register. That is, because investors may use 
this method of accounting before final regulations are published, the 
Treasury Department and IRS relief is available as needed before then.
---------------------------------------------------------------------------

    \540\ See Comment Letter of George C. Howell, III, Hunton & 
Williams LLP, on behalf of Federated Investors (Tax Compliance 
Issues Created by Floating NAV) (May 1, 2014) (``Federated XII 
Comment Letter'') (suggesting that a ``mark to market'' tax 
accounting method would meaningfully resolve the more significant 
tax issue (as compared with ``wash sale'' provisions) resulting from 
the floating NAV reform).
---------------------------------------------------------------------------

    The simplified aggregate method will allow money market fund 
investors to compute net capital gain or loss for a year by netting 
their annual redemptions and purchases with their annual starting and 
ending balances. Importantly, for shares in floating NAV money market 
funds, the simplified aggregate method will enable investors to 
determine their annual net taxable gains or losses using information 
that is currently provided on shareholder account statements and--most 
important--will eliminate any requirement to track individually each 
share purchase, each redemption, and the basis of each share redeemed. 
We expect that the simplified aggregate method will significantly 
reduce the burdens associated with tax consequences of the floating NAV 
requirement because funds will not have to build new tracking and 
reporting systems and shareholders will be able to calculate their tax 
liability using their existing shareholder account statements, rather 
than tracking the basis for each share. We have also considered the 
effect of this relief on the tax-related burdens associated with 
accounting for net gains and losses in our discussion of operational 
implications below.\541\
---------------------------------------------------------------------------

    \541\ See infra section III.B.8.
---------------------------------------------------------------------------

    The Treasury Department and IRS have informed us of their intention 
to proceed as expeditiously as possible with the process of considering 
comments and issuing final regulations regarding the simplified 
aggregate method of accounting for floating NAV money market funds. We 
note that money market funds and their shareholders may begin using the 
simplified method of accounting as needed before the regulations are 
finalized. Were the Treasury Department and IRS to withdraw or 
materially limit the relief in the proposed regulations, the Commission 
would expect to consider whether any modifications to the reforms we 
are adopting today may be appropriate.
ii. Wash Sales
    As discussed in the Proposing Release, the ``wash sale'' rule 
applies when shareholders sell securities at a loss and, within 30 days 
before or after the sale, buy substantially identical securities.\542\ 
Generally, if a shareholder incurs a loss from a wash sale, the loss 
cannot be recognized currently and instead must be added to the basis 
of the new, substantially identical securities, which postpones the 
loss recognition until the shareholder recognizes gain or loss on the 
new securities.\543\ 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) and subject to the wash sale 
rule.
---------------------------------------------------------------------------

    \542\ See 26 U.S.C. 1091.
    \543\ Id.
---------------------------------------------------------------------------

    Subsequent to our proposal, the Treasury Department issued for 
comment a proposed revenue procedure under which redemptions of 
floating NAV money market fund shares that generate losses below 0.5% 
of the taxpayer's basis in those shares would not be subject to the 
wash sale rule (de minimis exception).\544\ Many commenters noted, 
however, that the de minimis exception to the wash sale rule does not 
mitigate the tax compliance burdens and operational costs that would be 
required to establish systems capable of identifying wash sale 
transactions, determining if they meet the de minimis criterion, and 
adjusting shareholder basis when they do not.\545\
---------------------------------------------------------------------------

    \544\ See IRS Notice 2013-48, Application of Wash Sale Rules to 
Money Market Fund Shares (proposed July 3, 2013), available at 
http://www.irs.gov/pub/irs-drop/n-13-48.pdf.
    \545\ See, e.g., ICI Comment Letter; BlackRock II Comment 
Letter; Schwab Comment Letter.
---------------------------------------------------------------------------

    We understand that these concerns will not be applicable to 
floating NAV money market funds. First, under the simplified aggregate 
method of accounting described above, taxpayers will compute aggregate 
gain or loss for a period, and gain or loss will not be associated with 
any particular disposition of shares. Thus, the wash sale rule will not 
affect any shareholder that chooses to use the simplified aggregate 
method. Second, for any shareholder that does not use the simplified 
aggregate method, the Treasury Department and the IRS today will 
release a revenue procedure that exempts from the wash sale rule 
dispositions of shares in any floating NAV money market fund. This 
wash-sale tax relief will be available beginning on the effective date 
of our floating NAV reforms (60 days after publication in the Federal 
Register). We have also considered the effect of this relief from the 
tax-related burdens associated with the wash sale rule in our 
discussion of operational implications below.\546\
---------------------------------------------------------------------------

    \546\ See infra section III.B.8.
---------------------------------------------------------------------------

b. Accounting Implications
    In the Proposing Release, we noted that some money market fund 
shareholders may question whether they can treat investments in 
floating NAV money market funds as ``cash equivalents'' on their 
balance sheets. As we stated in the Proposing Release, and as we 
discuss below, it is the Commission's position that, under normal 
circumstances, an investment in a money market fund with a floating NAV 
under our final rules meets the definition of a ``cash equivalent.'' 
\547\
---------------------------------------------------------------------------

    \547\ See supra section III.A.7 for a discussion of accounting 
implications related to the liquidity fees and gates aspect of our 
final rules.
---------------------------------------------------------------------------

    Many commenters agreed with our position regarding the treatment of 
investments in floating NAV money market funds as cash 
equivalents.\548\ Most of these commenters, however, suggested that the 
Commission issue a more formal pronouncement and/or requested that FASB 
and GASB codify our position.\549\ A few commenters

[[Page 47785]]

suggested that our floating NAV requirement raises uncertainty about 
whether floating NAV money market fund shares could continue to be 
classified as cash equivalents,\550\ and one commenter disagreed and 
suggested that it is likely that under present accounting standards 
investors would have to classify investments in shares of floating NAV 
money market funds as trading securities or available-for-sale 
securities (rather than as a cash equivalent).\551\ We have carefully 
considered commenters' views and, for the reasons discussed below, our 
position continues to be that an investment in a floating NAV money 
market fund under our final rules, under normal circumstances, meets 
the definition of a ``cash equivalent.'' A more formal pronouncement 
(as requested by some commenters) is not required because the federal 
securities laws provide the Commission with plenary authority to set 
accounting standards, and we are doing so here.\552\ We reiterate our 
position below.\553\
---------------------------------------------------------------------------

    \548\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; Deloitte Comment Letter; Ernst & Young Comment Letter.
    \549\ See, e.g., ICI Comment Letter; BlackRock II Comment 
Letter; Fidelity Comment Letter. We do not have authority over the 
actions that GASB may or may not take with respect to local 
government investment pools (``LGIPs''). See infra section III.C.4.
    \550\ See, e.g., J.P. Morgan Comment Letter; Northern Trust 
Comment Letter; Boeing Comment Letter.
    \551\ See, Federated X Comment Letter (citing to Statement on 
Financial Accounting Standards No. 115); see also infra note 429 and 
accompanying text.
    \552\ The federal securities laws provide the Commission with 
authority to set accounting and reporting standards for public 
companies and other entities that file financial statements with the 
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15 
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 29(e), section 
30, and section 37(a) of the Investment Company Act.
    \553\ We are also amending the Codification of Financial 
Reporting Policies to reflect our interpretation under U.S. GAAP, as 
discussed below. See infra section VI.
---------------------------------------------------------------------------

    The adoption of a floating NAV alone for certain rule 2a-7 funds 
will not preclude shareholders from classifying their investments in 
money market funds as cash equivalents, under normal circumstances, 
because fluctuations in the amount of cash received upon redemption 
would likely be small and would be consistent with the concept of a 
`known' amount of cash. As already exists today with stable share price 
money market funds, events may occur that give rise to credit and 
liquidity issues for money market funds so that shareholders would need 
to reassess if their investments continue to meet the definition of a 
cash equivalent.
7. Rule 10b-10 Confirmations
    Rule 10b-10 under the Securities Exchange Act of 1934 (``Exchange 
Act'') addresses broker-dealers' obligations to confirm their 
customers' securities transactions.\554\ 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.\555\ Rule 10b-10(b), however, provides an 
exception for certain transactions in money market funds that attempt 
to maintain a stable NAV and where no sales load or redemption fee is 
charged. The exception permits broker-dealers to provide transaction 
information to money market fund shareholders on a monthly basis 
(subject to certain conditions) in lieu of immediate confirmations for 
all purchases and redemptions of shares of such funds.\556\
---------------------------------------------------------------------------

    \554\ 17 CFR 240.10b-10.
    \555\ 17 CFR 240.10b-10(a).
    \556\ 17 CFR 240.10b-10(b).
---------------------------------------------------------------------------

    Because share prices of institutional prime money market funds 
likely will fluctuate, 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 floating NAV money market funds.\557\ 
Instead, broker-dealers will be required to provide immediate 
confirmations for all such transactions. We note, however, that 
contemporaneous with this Release, the Commission is providing notice 
and requesting comment on a proposed order that, subject to certain 
conditions, would grant exemptive relief from the immediate 
confirmation delivery requirements of Rule 10b-10 for transactions 
effected in shares of any open-end management investment company 
registered under the Investment Company Act that holds itself out as a 
money market fund operating in accordance with rule 2a-
7(c)(1)(ii).\558\
---------------------------------------------------------------------------

    \557\ 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), (limiting alternative monthly reporting to money market 
funds that attempt[] to maintain a stable net asset value) (emphasis 
added).
    \558\ See 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, Exchange Act Release No. 34-72658 (July 23, 
2014) (``Notice of Proposed Exemptive Order'').
---------------------------------------------------------------------------

    In the Proposing Release, we 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.\559\ Commenters noted that there would be costs of 
implementing new systems to generate confirmations and ongoing costs 
related to creating and sending trade-by-trade confirmations.\560\ We 
estimate below the costs to broker-dealers associated with providing 
securities transaction confirmations for floating NAV money market 
funds.\561\
---------------------------------------------------------------------------

    \559\ See ICI Comment Letter; SIFMA Comment Letter at Appendices 
1 and 2; Dreyfus Comment Letter; Federated X Comment Letter.
    \560\ See, e.g., Federated X Comment Letter.
    \561\ Broker-dealers may not incur all of these costs if the 
exemptive relief we propose today is adopted.
---------------------------------------------------------------------------

    We believe that the initial one-time cost to implement, modify, or 
reprogram existing systems to generate immediate confirmations (rather 
than monthly statements) will be approximately $96,650 on average per 
affected broker-dealer, based on the costs that the Commission has 
estimated in a similar context of developing internal order and trade 
management systems so that a registered security-based swap entity 
could electronically process transactions and send trade 
acknowledgments.\562\ In addition, we estimate that 320 broker-dealers 
that are clearing customer transactions or carrying customer funds and 
securities would be affected by this requirement because they would 
likely be the broker-dealers responsible for providing trade 
confirmations.\563\ As a result, the

[[Page 47786]]

Commission estimates initial costs of $30,928,000 for providing 
immediate confirmations for shareholders in institutional prime money 
market funds.\564\
---------------------------------------------------------------------------

    \562\ This estimate is based on the following: [(Sr. Programmer 
(160 hours) at $285 per hour) + (Sr. Systems Analyst (160 hours) at 
$251 per hour) + (Compliance Manager (10 hours) at $294 per hour) + 
(Director of Compliance (5 hours) at $426 per hour) + (Compliance 
Attorney (20 hours) at $291 per hour)] = $96,650 per broker-dealer. 
See Trade Acknowledgement and Verification of Security-Based Swap 
Transactions, Exchange Act Release No. 63727, 76 FR 3859, 3871 n.81 
(Jan. 21, 2011). (We note that the original estimate in the Trade 
Acknowledgment release contained a technical error in the 
calculation stating a cost of $66,650 instead of $96,650 for a 
security-based swap entity.) A SIFMA survey also indicates that the 
costs are likely to be below $500,000 per firm. See SIFMA Comment 
Letter, at Appendices 1 and 2. According to this commenter, after 
surveying its members, it found that the vast majority of 
respondents estimated that initial costs associated with providing 
confirmation statements would fall below $500,000. However, based on 
the data provided, it was unclear at what level below $500,000 its 
members considered to be the actual cost and whether the firms were 
a representative sample (e.g., in terms of size and sophistication) 
of the type of firms that would be affected.
    \563\ Based on FOCUS Report data as of December 31, 2013, the 
Commission estimates that there are approximately 320 broker-dealers 
that are clearing or carrying broker-dealers that do not claim 
exemptions pursuant to paragraph (k) of Exchange Act rule 15c3-3. 
Because not all of these clearing or carrying broker-dealers would 
necessarily provide rule 10b-10 confirmations to customers of 
institutional prime money market funds, the Commission anticipates 
that this is a conservative estimate of the number of clearing or 
carrying broker-dealers that would provide trade confirmations to 
customers in money market funds subject to the floating NAV 
requirement.
    \564\ This estimate is based on the following: $96,650 x 320 
firms = $30,928,000.
---------------------------------------------------------------------------

    To estimate ongoing costs of providing immediate confirmations, one 
commenter stated that, based on the data it had gathered, the median 
estimated ongoing annual cost associated with confirmation statements 
would constitute between 10% and 15% of the initial costs.\565\ To be 
conservative, we have estimated that the ongoing annual costs would 
constitute 15% of the initial costs. Applying that figure to the 
initial costs, the Commission estimates ongoing annual costs of 
$4,639,200 for providing immediate confirmations for shareholders in 
institutional prime money market funds.\566\
---------------------------------------------------------------------------

    \565\ See SIFMA Comment Letter, at Appendices 1 and 2.
    \566\ This estimate is based on the following: $30,928,000 x 15% 
= $4,639,200.
---------------------------------------------------------------------------

    The Commission notes that benefits related to the immediate trade 
confirmation requirements under Rule 10b-10 with respect to 
institutional prime money market funds are difficult to quantify as 
they relate to the additional value to investors provided by having 
more timely confirmations with respect to funds that we expect will 
experience relatively small fluctuations in value. While the Commission 
did not receive any comments regarding these potential benefits, 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.\567\
---------------------------------------------------------------------------

    \567\ The Commission acknowledges that shareholders that invest 
in institutional prime money market funds will continue to have 
extensive investor protections separate and apart from the 
protections provided under rule 10b-10, including that (1) funds 
subject to the floating NAV requirement will continue to be subject 
to the ``risk-limiting'' conditions of rule 2a-7, and (2) 
information on prices will be available through other means (for 
example, under the new fund disclosure requirements of Investment 
Company Act Rule 2a-7(h)(10), investors will be able to access a 
fund's daily market-based NAV per share on a money market fund's Web 
site). See Notice of Proposed Exemptive Order, at 6-7.
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8. Operational Implications of Floating NAV Money Market Funds
a. Operational Implications to Money Market Funds and Others in the 
Distribution Chain
    In the Proposing Release, we stated that we expect that money 
market funds and transfer agents already have laid the foundation 
required to use floating NAVs because they are required under rule 2a-7 
to have the capacity to redeem and sell fund shares at prices based on 
the funds' current NAV pursuant to rule 22c-1 rather than $1.00, i.e., 
to transact at the fund's floating NAV.\568\ 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.\569\ We also noted that before the Commission adopted the 
2010 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.\570\
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    \568\ See current rule 2a-7(c)(13). See also 2010 Adopting 
Release, supra note 17, at nn.362-363.
    \569\ See, e.g., 2010 Adopting Release, supra note 17, 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'').
    \570\ 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).
---------------------------------------------------------------------------

    Commenters noted, as we recognized in the Proposing Release, 
however, that some funds, transfer agents, intermediaries, and others 
in the distribution chain may not currently have the capacity to 
process constantly transactions at floating NAVs, as would be required 
under our proposal.\571\ Accordingly, consistent with our views 
reflected in the Proposing Release and as discussed below, we continue 
to 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.\572\ In each case, the procedures and controls that support the 
accounting systems at these entities would have to be modified to 
permit those systems to calculate a money market fund's floating NAV 
periodically each business day and to communicate that value to others 
in the distribution chain on a permanent basis.
---------------------------------------------------------------------------

    \571\ See, e.g., ICI Comment Letter; Comment Letter of Chapin 
Davis, Inc. (Aug. 28, 2013) (``Chapin Davis Comment Letter''); 
Federated IV Comment Letter.
    \572\ 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, supra note 569, at 20. The systems of 
sub-transfer agents and other parties may also require modifications 
related to the floating NAV requirement. We have included these 
anticipated modifications in our cost estimates below.
---------------------------------------------------------------------------

    Some commenters noted that our floating NAV requirement would 
adversely affect cash sweep programs, in which customer cash balances 
are automatically ``swept'' into investments in shares of money market 
funds (usually through a broker-dealer or other intermediary). For 
example, one commenter suggested that sweep programs cannot accommodate 
a floating NAV because such programs are predicated on the return of 
principal.\573\ Another commenter suggested that the substantial cost 
and complexity associated with intraday pricing makes it likely that 
many intermediaries will discontinue offering floating NAV 
institutional prime money market funds as sweep options, and instead 
turn to alternative investment products, including stable NAV 
government funds.\574\ Although we do not know to

[[Page 47787]]

what extent, if at all, intermediaries will continue to offer sweep 
accounts for floating NAV money market funds, we acknowledge that there 
are significant operational costs involved in order to modify sweep 
platforms to accommodate a floating NAV product. Accordingly, we 
anticipate that sweep account assets currently invested in 
institutional prime money market funds will likely shift into 
government funds that will maintain a stable NAV under our final rules. 
We discuss in the Macroeconomic Effects section below potential costs 
related to a migration of assets away from floating NAV funds into 
alternative investments, including stable NAV money market funds such 
as government funds. Because the amount of sweep account assets 
currently invested in institutional prime money market funds is not 
reported to us, nor are we aware of such information in the public 
domain, we are not able to provide a reasonable estimate of the amount 
of sweep account assets that may shift into alternative investment 
products.
---------------------------------------------------------------------------

    \573\ See, e.g., ICI Comment Letter. Another commenter noted 
that the sweep investment product is only feasible in the current 
stable-NAV environment because the client knows at the time of 
submitting the purchase order how many shares it has purchased, and 
how many shares it will receive the next day upon redemption, absent 
a break-the-buck event. See State Street Comment Letter.
    \574\ See, e.g., Wells Fargo Comment Letter (acknowledging that, 
as we stated in the Proposing Release, sweep products may continue 
to be viable for floating NAV money market funds because fund 
sponsors and other intermediaries will make modifications to price 
fund shares periodically during the day, but suggesting that the 
costs for broker-dealers to reprogram their systems would be 
significant and the operational complexity could be made worse to 
the extent that fund sponsors do not standardize the times of day at 
which they price shares).
---------------------------------------------------------------------------

    In the Proposing Release, we also estimated additional costs under 
our floating NAV reform that would be imposed on money market funds and 
other recordkeepers to track portfolio security gains and losses, 
provide ``basis reporting,'' and monitor for potential wash-sale 
transactions. As discussed above, we have been informed that, today, 
the Treasury Department and the IRS will propose new regulations that 
will eliminate the need for money market funds and others to track 
portfolio gains and losses and basis information, as well as issue 
today a revenue procedure that exempts money market funds from the 
wash-sale rules. Accordingly, our cost estimates for the floating NAV 
reform have been revised from our proposal to reflect this fact.\575\
---------------------------------------------------------------------------

    \575\ See supra section III.B.8.a.
---------------------------------------------------------------------------

    We understand that the costs to modify a particular entity's 
existing controls and procedures will 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.\576\ Procedures and controls that support 
systems that operate in highly automated operating environments will 
likely be less costly to modify while those that support complex 
operations with multiple fund types or limited automation or both will 
likely be more costly to change. Because each system's capabilities and 
functions are different, an entity will likely have to perform an in-
depth analysis of the new 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 \577\ of the potential costs of 
modifying procedures and controls, we expect that each entity will bear 
one-time costs to modify existing procedures and controls in the 
functional areas that are likely to be impacted by the floating NAV 
reform.
---------------------------------------------------------------------------

    \576\ See, e.g., Chamber I Comment Letter.
    \577\ We are using the term ``point estimate'' to indicate a 
specific single estimate as opposed to a range of estimates.
---------------------------------------------------------------------------

    In the Proposing Release, we 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) and 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.\578\ In addition, we noted that we expect money market funds 
(and their intermediaries) would incur additional costs associated with 
programs and systems modifications necessary to provide shareholders 
with access to information about the floating NAV per share online, 
through automated phone systems, and on shareholder statements and to 
explain to shareholders that the value of their money market funds 
shares will fluctuate.\579\ We 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 and that the 
ongoing costs to maintain automated phone systems and systems for 
processing shareholder statements would range from 5% to 15% of the 
one-time costs.\580\ In sum, we estimated that the total range of one-
time implementation costs to money market funds and others in the 
distribution chain would be approximately $1,430,000 to $2,790,000 per 
entity, with ongoing costs that range between 5% to 15% of these one-
time costs.\581\
---------------------------------------------------------------------------

    \578\ See Proposing Release, supra note 25, nn.285-86 and 
accompanying text. We estimated 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. 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.
    \579\ See id. at n.287 and accompanying text. We expect 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.
    \580\ See id. at n.288 and accompanying text. We estimate 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 578.
    \581\ This estimate is calculated as follows: less extensive 
modifications ($1,200,000 + $230,000 = $1,430,000); more extensive 
modifications ($2,300,000 + $490,000 = $2,790,000).
---------------------------------------------------------------------------

    Commenters did not generally disagree with the type and nature of 
costs that we estimated will be imposed by our floating NAV reform. One 
commenter noted that the costs required to make the necessary systems 
changes would not be prohibitive and could be completed within two to 
three years.\582\ A number of commenters, however, provided a wide 
range of estimated operational costs to money market funds, 
intermediaries, and others in the distribution chain. These commenters 
suggested that estimated one-time implementation costs would be between 
$350,000 to $3,000,000, depending on the affected entity.\583\ One 
commenter estimated that it could cost up to $2,300,000 per fund, 
transfer agent, or intermediary, to modify systems procedures and 
controls to implement a floating NAV.\584\ Another commenter estimated 
that it would cost each back office processing service provider 
$1,725,000 in one-time costs to implement a floating NAV.\585\ We also 
received from commenters some cost estimates provided on a fund complex 
level. Two fund complexes estimated their total one-time costs to 
implement a floating NAV to be between $10,000,000 to $11,000,000, and 
one of the largest money market fund sponsors approximated its one-time 
costs to be $28,000,000. Averaged across the number of money market 
funds offered, these one-time implementation costs

[[Page 47788]]

range from $306,000 to $718,000.\586\ Another commenter provided survey 
data stating that 40% of respondents (asset managers and 
intermediaries) estimated that it would cost $2,000,000 to $5,000,000 
in one-time costs to implement a floating NAV.\587\ Finally, a few 
commenters estimated the one-time costs to the entire fund industry 
related to implementing our floating NAV reform.\588\
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    \582\ See HSBC Comment Letter.
    \583\ See Chamber II Comment Letter (citing Treasury Strategies, 
Operational Implications of a Floating NAV across Money Market Fund 
Industry Key Stakeholders (Summer 2013) (``TSI Report'')). This 
commenter estimated costs for various intermediaries in order to 
implement a floating NAV: Corporate treasury management system 
vendors ($350,000-$400,000); fund accounting service providers 
($400,000-$425,000); broker-dealers and portals ($500,000-$600,000); 
transfer agent systems ($2,000,000-$2,500,000); and sweep account 
software providers ($2,000,000-$3,000,000). Another commenter 
estimated that it would cost approximately $2,000,000 in one-time 
costs for a large trust group to implement a floating NAV. See 
Treasury Strategies Comment Letter.
    \584\ See Federated II Comment Letter.
    \585\ See Fin. Info. Forum Comment Letter.
    \586\ See Federated X Comment Letter (estimating its one-time 
costs to implement a floating NAV to be $11,200,000); Schwab Comment 
Letter (estimating its one-time costs to implement a floating NAV to 
be $10,000,000); Fidelity Comment Letter (estimating its one-time 
costs of implement a floating NAV to be $28,000,000). Based on Form 
N-MFP data as of February 28, 2014, the per fund costs are: 
Federated $311,000 ($11,200,000 / 36 money market funds); Schwab 
$588,000 ($10,000,000 / 17 money market funds); and Fidelity 
$718,000 ($28,000,000 / 39 money market funds).
    \587\ See SIFMA Comment Letter (stating that another 20% of 
survey respondents estimated that one-time implementation costs for 
a floating NAV would be between $5,000,000 to $15,000,000). Because 
we do not have access to the names of the survey respondents or 
their specific cost estimates, we are unable to approximate these 
costs on a per fund basis.
    \588\ See, e.g., TSI Report (estimating $1.8 to $2.0 billion in 
total upfront costs for U.S. institutional money market fund 
investors to modify operations in order to comply with a floating 
NAV requirement); Angel Comment Letter (estimating $13.7 to $91.5 
billion in initial upfront costs related to implementing a floating 
NAV reform). As discussed above, we have analyzed a variety of 
commenter estimates and provided cost estimates on a per-fund basis. 
We are unable, however, to verify the accuracy or make a relevant 
comparison between our per-fund cost estimates and the broad range 
of costs provided by these commenters that apply to all U.S. 
institutional money market fund investors and/or the entire fund 
industry.
---------------------------------------------------------------------------

    We estimated in the Proposing Release that it would cost each money 
market fund, intermediary, and other participant in the distribution 
chain approximately $1,430,000 (for less extensive modifications) to 
$2,790,000 (for more extensive modifications) in one-time costs to 
implement a floating NAV.\589\ Based on staff analysis and experience, 
we are revising the estimated operational costs for our floating NAV 
reform downward by 15% to reflect the tax relief discussed above.\590\ 
In addition, as discussed above (and, in a change from our proposal), 
our final rules will permit retail and government money market funds to 
continue to maintain a stable NAV as they do today and to use amortized 
cost valuation and/or penny-rounding pricing. A number of commenters 
noted that eliminating the ability of stable NAV funds to use amortized 
cost valuation, as we proposed, would impose significant operational 
costs on these funds.\591\ Accordingly, based on staff analysis and 
experience, we are also revising the estimated operational costs 
downward by 5% to reflect the ability of stable NAV funds to continue 
to use amortized cost valuation as they do today. We therefore estimate 
that it will cost each money market fund, intermediary, and other 
participant in the distribution chain approximately $1,144,000 (for 
less extensive modifications) to $2,232,000 (for more extensive 
modifications) in one-time costs to implement the floating NAV 
reform.\592\
---------------------------------------------------------------------------

    \589\ See supra note 581.
    \590\ See supra section III.B.6.a. We note that many commenters 
suggested that a primary drawback (and cost) of our floating NAV 
reform is the substantial operational costs associated with 
complying with tax tracking requirements in a floating NAV fund. 
See, e.g., Fin. Svcs. Roundtable Comment Letter; Federated IV 
Comment Letter; Fidelity Comment Letter. Although we attribute a 15% 
reduction in estimated operational costs to tax-related costs, the 
cost savings could be higher or lower than our estimate.
    \591\ See supra note 534.
    \592\ This estimate is calculated as follows: $1,430,000 x 80% = 
$1,144,000 (less extensive modifications); $2,790,000 x 80% = 
$2,232,000 (more extensive modifications). A few commenters also 
noted that our floating NAV requirement would also result in 
significant lost management fees. See, e.g., Federated X Comment 
Letter (suggesting that a shift of one-third of assets away from 
institutional prime funds would result in annual lost management 
fees of approximately $578 million for money market fund advisers 
nationwide). We acknowledge that, to the extent there is a 
significant outflow of assets from the institutional prime funds 
into non-money market funds as a result of the floating NAV 
requirement, money market fund managers may experience declines in 
management fee income. We discuss the possibility of such shifts in 
money market fund assets in our discussion of macroeconomic effects 
below.
---------------------------------------------------------------------------

    We believe that this range of estimated costs generally fits within 
the range of costs suggested by commenters as described above (after 
accounting for estimated costs savings related to tax relief and the 
increased availability of amortized cost valuation, not contemplated by 
commenters in their estimates). We note, 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 will likely experience economies of scale. 
Accordingly, we expect that the cost for many individual entities that 
would have to process transactions at a floating NAV will likely be 
less than these estimated costs.\593\
---------------------------------------------------------------------------

    \593\ For example, the costs will 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.
---------------------------------------------------------------------------

    In addition to the estimated one-time implementation costs, we 
estimate that funds, intermediaries, and others in the distribution 
chain will incur annual operating costs of approximately 5% to 15% of 
initial costs. Accordingly, we estimate that funds and other 
intermediaries will incur annual operating costs as a result of the 
floating NAV reform that range from $57,200 to $334,800.\594\ Most 
commenters that addressed this issue directly did not disagree with our 
estimate of ongoing costs, although we note that a few commenters 
estimated the new annual operating costs to the entire fund industry 
related to implementing our floating NAV reform.\595\ One commenter 
provided survey data showing that 66% of respondents (asset managers 
and intermediaries) estimated that annual costs would approximate 10% 
to 15% of initial costs.\596\ Another commenter, however, disagreed 
with our estimate of annual operating costs of approximately 5% to 15% 
of initial costs and suggested that the annual costs to fund sponsors 
will actually be close to the costs of initial implementation. We 
disagree. This commenter noted that most of the ongoing cost would 
result from the elimination of amortized cost accounting (generally) 
and more frequent price calculations using market-based factors.\597\ 
Because stable NAV money market funds may continue to use amortized 
cost valuation under our final rules (unlike our proposal), we believe 
this commenter has overstated the ongoing costs under our final 
rules.\598\ Therefore, we believe consistent with the comments 
received, that it is more appropriate to continue to estimate the 
ongoing operational

[[Page 47789]]

costs as approximately 5% to 15% of the initial implementation costs 
and are not revising the ongoing cost estimates from our proposal.
---------------------------------------------------------------------------

    \594\ This estimate is calculated as follows: less extensive 
modifications = $57,200 ($1,144,000 x 5%); more extensive 
modifications = $334,800 ($2,232,000 x 15%).
    \595\ See, e.g., Chamber II Comment Letter (estimating $2.0 to 
$2.5 billion in new annual operating costs relating to the FNAV 
reform). As discussed above, most commenters did not specifically 
object to our estimated range of ongoing costs on a per-fund basis. 
We do not, however, have information available to us to evaluate the 
accuracy of cost estimates to the entire fund industry or make a 
meaningful comparison of such estimates with our per-fund cost 
ongoing cost estimates.
    \596\ See SIFMA Comment Letter.
    \597\ See Federated X Comment Letter (noting, however, that it 
estimates annual operating costs of approximately $231,000 per fund 
($5.7 million for pricing services + $1.5 million for transfer agent 
services + $2.5 million for technology, training, and other 
monitoring costs = $9.7 million / 42 money market funds managed by 
Federated = approximately $231,000 per fund). This estimate is 
consistent with our estimated range of ongoing costs. See supra note 
594.
    \598\ We recognize, however, that under our final rules, 
floating NAV money market funds will incur increased costs as a 
result of the elimination of amortized cost valuation. These costs, 
discussed above, are significantly lower than those that funds would 
incur under our proposal (that would have eliminated amortized cost 
valuation for all money market funds, including those funds not 
subject to our floating NAV reform).
---------------------------------------------------------------------------

b. Operational Implications to Money Market Fund Shareholders
    In addition to money market funds and other entities in the 
distribution chain, each money market fund shareholder will also likely 
be required to analyze 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. We 
describe below the types of activities typically involved in making 
systems modifications and estimate a range of hours and costs that we 
anticipate will be required to perform these activities. We sought 
comment in the Proposing Release regarding the potential costs of 
system modifications for money market fund shareholders, and the 
comments we received, along with the differences between our proposal 
and the final rules, have informed our estimates.
    In the Proposing Release, we 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. In deriving our 
estimates, we considered the need to modify systems and related 
procedures and controls related to recordkeeping, accounting, trading, 
and cash management, and to provide training concerning these 
modifications. We estimated that a shareholder whose systems (including 
related procedures and controls) would require less extensive 
modifications would incur one-time costs ranging from $123,000 to 
$253,000, while a shareholder whose systems (including related 
procedures and controls) would require more extensive modifications 
would incur one-time costs ranging from $1.4 million to $2.9 
million.\599\
---------------------------------------------------------------------------

    \599\ We estimate 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.
---------------------------------------------------------------------------

    Most commenters did not disagree with our cost estimates. One 
commenter stated that it expects at least 50% of institutional 
investors in money market funds will require some systems development 
to be able to invest in a floating NAV money market fund. This 
commenter also noted that having sufficient time to implement the 
changes is a more important factor than cost in determining the extent 
to which corporate treasurers, for example, would use a floating NAV 
fund product.\600\ Another commenter acknowledged our range of 
estimated costs and suggested that while these estimates may not appear 
substantial at first glance, when viewed in the context of current 
money market fund returns, such costs represent a significant 
disincentive to continued investment in institutional prime funds.\601\ 
Although we acknowledge that the costs to money market fund 
shareholders may make investing in floating NAV money market funds 
uneconomical given the current rates of return, we note that we are 
adopting a two-year compliance period that may, to the extent that 
interest rates return to more typical levels, counter any disincentive 
that may exist currently.\602\
---------------------------------------------------------------------------

    \600\ See HSBC Comment Letter.
    \601\ See Wells Fargo Comment Letter.
    \602\ See infra section III.N.2. for a discussion of the 
floating NAV compliance date.
---------------------------------------------------------------------------

    The TSI Report \603\ provided ranges of costs that it expects would 
be imposed on floating NAV money market fund shareholders. These costs 
ranged from $250,000 for a U.S. business that invests in floating NAV 
money market funds and makes the fewest changes possible, to $550,000 
for a government-sponsored entity money market fund shareholder.\604\ 
We have carefully considered this range of costs to shareholders 
provided by the commenter and the changes from the proposal to the rule 
that we are adopting today, and we now believe that it is appropriate 
to decrease our cost estimates from the proposal. Accordingly, we 
estimate that a shareholder whose systems (including related procedures 
and controls) would require less extensive modifications would incur 
one-time costs ranging from $212,500 to $340,000, while a shareholder 
whose systems (including related procedures and controls) would require 
more extensive modifications would incur one-time costs ranging from 
$467,500 to $850,000. We believe that these estimates better reflect 
the changes in our final rules from those that we proposed.\605\ We 
also recognize that these estimates are more consistent with the range 
of cost estimates provided by this commenter. We estimate that the 
annual maintenance costs to these systems and procedures and controls, 
and the costs to provide continuing training, will range from 5% to 15% 
of the one-time implementation costs.\606\
---------------------------------------------------------------------------

    \603\ See supra note 583.
    \604\ See id., TSI Report (estimating that the one-time 
implementation costs would range from $350,000 to $370,000 for a 
corporate investor; $275,000 to $300,000 for a public university 
investor; $325,000 to $350,000 for a municipality investor; and 
$400,000 to $425,000 for a fiduciary investor).
    \605\ Consistent with our cost estimates discussed above for 
funds, intermediaries, and others in the distribution chain, we have 
considered in these estimates cost savings related to the tax relief 
discussed above. See supra section III.B.8.a.
    \606\ See supra note 578. Commenters did not address 
specifically our estimate of ongoing costs to money market fund 
shareholders in floating NAV funds. Accordingly, we are not amending 
our estimate from the proposal.
---------------------------------------------------------------------------

c. Intraday Liquidity and Same-Day Settlement
    As discussed below, we believe that floating NAV money market funds 
should be able to continue to provide shareholders with intraday 
liquidity and same-day settlement by pricing fund shares periodically 
during the day (e.g., at 11 a.m. and 4 p.m.). In the Proposing Release, 
we noted that 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. 
Shareholders generally are able to transact in fund shares at a stable 
value known in advance, which permits money market fund transactions to 
settle on the same day that an investor places a purchase or sell order 
and determine the exact value of his or her money market fund shares 
(absent a liquidation event) at any time. These features have made 
money market funds an important component of systems for processing and 
settling various types of transactions.
    Some commenters have expressed concern that intraday liquidity and/
or same-day settlement would not be available to investors in floating 
NAV money market funds. These commenters point to, for example, 
operational challenges such as striking the NAV multiple times during 
the day while needing to value each portfolio security using market-
based values.\607\ A few commenters also noted that pricing services 
may not be able to provide periodic pricing throughout the day.\608\ 
Some commenters also raised concerns about the additional costs 
involved with striking the NAV multiple times per

[[Page 47790]]

day, including, for example, costs for pricing services to provide 
multiple quotes per day and for accounting agents to calculate multiple 
NAVs.\609\ On the other hand, one commenter who provides pricing 
services noted that, while providing intraday liquidity and same-day 
settlement for floating NAV funds would require some investment, they 
believe that calculating NAVs multiple times per day is feasible within 
our proposed two-year compliance period.\610\ A few commenters further 
noted that transfer agents will need to enhance their systems to 
account for floating NAV money market funds and condense their 
reconciliation and audit processes (which may, for example, increase 
the risk of errors).\611\
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    \607\ See, e.g., BlackRock II Comment Letter; ICI Comment 
Letter; Chamber II Comment Letter.
    \608\ See, e.g., Federated IV Comment Letter; Interactive Data 
Comment Letter; Chamber II Comment Letter.
    \609\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter; State Street Comment Letter.
    \610\ See Interactive Data Comment Letter. Another commenter 
noted that money market funds would still be able to provide same-
day settlement in floating NAV funds. See State Street Comment 
Letter.
    \611\ See J.P. Morgan Comment Letter; Dreyfus Comment Letter; 
Comment Letter of DST Systems, Inc. (Sept. 18, 2013) (``DST Systems 
Comment Letter'').
---------------------------------------------------------------------------

    A few commenters also asserted that if floating NAV funds are 
unable to provide same-day settlement, this could affect features that 
are particularly appealing to retail investors, such as ATM access, 
check writing, and electronic check payment processing services and 
products.\612\ First, as discussed below, we believe that many floating 
NAV money market funds will continue to be able to provide same-day 
settlement. Second, we note that under the revised retail money market 
fund definition adopted today, retail investors should have ample 
opportunity to invest in a fund that qualifies as a retail money market 
fund and thus is able to maintain a stable NAV. As a result, this 
should significantly alleviate concerns about the costs of altering 
these features and permit a number of funds to continue to provide 
these features as they do today. Nonetheless, we recognize that not all 
funds with these features may choose to qualify as retail money market 
funds, 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.
---------------------------------------------------------------------------

    \612\ See, e.g., Fidelity 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.'').
---------------------------------------------------------------------------

    We understand that many money market funds currently permit same-
day trading up until 5 p.m. Eastern Time. These funds do so because 
amortized cost valuation allows funds to calculate their NAVs before 
they receive market-based prices (typically provided at the end of the 
day after the close of the Federal Reserve Cash Wire). We recognize 
that, under the floating NAV reform, closing times for same-day 
settlement will likely need to be moved earlier in the day to allow 
sufficient time to calculate the NAV prior to the close of the Federal 
Reserve Cash Wire. One commenter suggested that it will take a minimum 
of three to four hours to strike a market-based NAV price.\613\ As a 
result, investors in floating NAV money market funds may not have the 
ability to redeem shares late in the day, as they can today. We also 
recognize that floating NAV money market funds may price only once a 
day, at least until such time as pricing vendors are able to provide 
continuous pricing throughout the day.\614\ We considered these 
potential costs as well as the benefits of our floating NAV reform and 
believe that, as discussed above, it is appropriate to address, through 
the floating NAV reform, the incremental incentive that exists for 
shareholders to redeem in times of stress from institutional prime 
money market funds. We note, however, that because stable NAV money 
market funds may continue to use amortized cost as they do today (as 
revised from our proposal), these same-day settlement concerns raised 
by commenters here would be limited to institutional prime funds--the 
only money market funds subject to the floating NAV reform.\615\
---------------------------------------------------------------------------

    \613\ See Federated II Comment Letter.
    \614\ See SIFMA Comment Letter (noting that in its survey of 
members, 60% of asset managers expect to price their floating NAV 
money market funds only once per day, which is less frequent than 
currently offered by most money market funds). See also 
Institutional Cash Distributors, ICD Commentary: Operational and 
Accounting Issues with the Floating NAV and the Impact on Money 
Market Funds (July 2013), available at http://www.sec.gov/comments/
;s7-03-13/s70313-40.pdf. One commenter noted that they are already 
investing in new technology that includes real-time debt security 
evaluations. See Comment Letter of Interactive Data.
    \615\ See SIFMA Comment Letter (noting that, under our proposal, 
the impediment to same-day settlement exists for stable NAV money 
market funds as well as floating NAV money market funds because both 
types of funds would be prohibited from using amortized cost for 
securities with remaining maturities over 60 days). As noted above, 
we are no longer prohibiting stable NAV funds from using amortized 
cost.
---------------------------------------------------------------------------

    We sought comment in the Proposing Release on the costs associated 
with providing same-day settlement and for pricing services to provide 
prices multiple times each day. One commenter provided survey data that 
estimated the range of costs for floating NAV funds to offer same-day 
settlement. Seventy-five percent of respondents estimated the one-time 
costs to be approximately $500,000 to $1 million, and 25% of 
respondents estimated the one times costs to be approximately $1 
million to $2 million.\616\ Sixty-six percent of respondents 
approximated ongoing costs that would range between 10-15% of initial 
costs.\617\ We did not receive other quantitative estimates 
specifically on the costs associated with modifying systems to allow 
for same-day settlement by floating NAV funds.\618\ We have carefully 
considered this survey data with respect to same-day settlement issues 
in arriving at our aggregate operational cost estimates discussed above 
in section III.B.8.a.\619\
---------------------------------------------------------------------------

    \616\ As discussed supra in note 587, we do not have access to 
the names of the survey respondents or their specific cost estimates 
and are therefore unable to approximate these costs on a per fund 
basis. Accordingly, the costs on a per fund basis will likely be 
significantly lower than the figures provided here.
    \617\ See SIFMA Comment Letter.
    \618\ We note that some commenters may have included costs 
associated with enabling floating NAV funds to provide same-day 
settlement in their cost estimates of operational implications 
generally. These costs are discussed above.
    \619\ We have based our cost estimates for same-day settlement 
principally on staff experience and expertise. In assessing the 
reasonableness of our estimates, we considered as an outer bound the 
survey data provided by SIFMA (although as noted above, the survey 
respondents likely represent fund complexes and thus we are not able 
to determine these costs on a per fund basis). We estimate that 
money market funds will likely establish twice per day pricing as 
the appropriate balance between current money market fund practice 
to provide multiple settlements per business day and the additional 
costs and complexities involved in pricing money market fund shares 
using market-based values.
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9. Transition
    We are providing a two-year compliance date (as proposed) for money 
market funds to implement the floating NAV reform. A long compliance 
period will give more time for funds to implement any needed changes to 
their investment policies and train staff, and also will provide more 
time for investors to analyze their cash management strategies. This 
compliance period will also give time for retail money market funds to 
reorganize their operations and establish new funds. Importantly, this 
compliance period will allow additional time for the Treasury 
Department and IRS to consider finalizing rules addressing certain tax 
issues relating to a floating NAV described above and for the

[[Page 47791]]

Commission to consider final rules removing NRSRO ratings from rule 2a-
7,\620\ so that funds could make several compliance-related changes at 
one time.
---------------------------------------------------------------------------

    \620\ See Removal of Certain References to Credit Ratings and 
Amendment to the Issuer Diversification Requirement in the Money 
Market Fund Rule, Investment Company Act Release No. IC-31184 (July 
23, 2014).
---------------------------------------------------------------------------

    We acknowledge, as discussed in the Proposing Release and as noted 
by some commenters, that a transition to a new regulatory regime could 
itself cause the type of heavy redemptions that the amendments, 
including the floating NAV reform, are designed to prevent.\621\ In the 
proposal, we noted that our proposed two-year compliance period would 
benefit money market funds and their shareholders by allowing money 
market funds to make the transition to a floating NAV at the optimal 
time and potentially not at the same time as all other money market 
funds. In addition, we stated our belief that money market fund 
sponsors would use the relatively long compliance period to select an 
appropriate conversion date that would minimize the risk that 
shareholders may pre-emptively redeem shares at or near the time of 
conversion if they believe that the market value of their shares will 
be less than $1.00. Several commenters reiterated this concern, with 
one commenter noting that shareholders in floating NAV money market 
funds may be incentivized to redeem in order to avoid losses or realize 
gains, depending on the expected NAV at the time of conversion.\622\ A 
few commenters suggested that money market funds will likely be 
unwilling or unable to stagger their transitions over our proposed two-
year transition period, but did not provide any survey data or other 
support for their beliefs.\623\
---------------------------------------------------------------------------

    \621\ See, e.g., Dreyfus Comment Letter; Goldman Sachs Comment 
Letter. The PWG Report suggests that a transition to a floating NAV 
could itself result in significant redemptions. See PWG Report, 
supra note 506, at 22.
    \622\ See Stradley Ronon Comment Letter.
    \623\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment 
Letter.
---------------------------------------------------------------------------

    We continue to believe that an extended compliance period (as 
adopted, two years) should help mitigate potential pre-emptive 
redemptions by providing money market fund shareholders with sufficient 
time to consider the reforms and decide, if they determine that a 
floating NAV investment product is not appropriate or desirable, to 
invest a stable NAV retail or government money market fund or an 
alternative investment product. We recognize that, although money 
market funds may comply with the rule amendments at any time between 
the effective date and the compliance date, in practice, money market 
funds may implement amendments relating to floating NAV near the end of 
the transition period, which may further cause the potential for 
widespread redemptions prior to the transition. Although a few 
commenters suggested as much,\624\ we did not receive any survey data 
and we are not able to reasonably estimate the extent to which money 
market funds may or may not stagger their transition to a floating NAV.
---------------------------------------------------------------------------

    \624\ Id.
---------------------------------------------------------------------------

    We note, however, that in order to mitigate this risk, money market 
fund managers could take steps to ensure that the fund's market-based 
NAV is $1.00 or higher at the time of conversion and communicate to 
shareholders the steps that the fund plans to take ahead of time in 
order to mitigate the risk of heavy pre-emptive redemptions, though 
funds would be under no obligation to do so. Even if funds took such 
steps, investors may pre-emptively withdraw their assets from money 
market funds that will transact at a floating NAV to avoid this risk. 
We note, however, that while a two-year compliance period does not 
eliminate such concerns, we expect, as discussed above, that providing 
a two-year compliance period will allow money market funds time to 
prepare and address investor concerns relating to the transition to a 
floating NAV, and therefore possibly mitigate the risk that the 
transition to a floating NAV, itself, could prompt significant 
redemptions. In addition, the liquidity fees and gates reforms will be 
effective and therefore available to fund boards as a tool to address 
any heightened redemptions that may result from the transition to a 
floating NAV.\625\
---------------------------------------------------------------------------

    \625\ We will monitor fund redemption activity during the 
transition period and consider appropriate action if it appears 
necessary. For example, such action could include SEC Staff 
contacting fund groups to determine the nature of any stress from 
redemption activity and the potential need for any exemptive or 
other relief.
---------------------------------------------------------------------------

C. Effect on Certain Types of Money Market Funds and Other Entities

1. Government Money Market Funds
    The fees and gates and floating NAV reforms included in today's 
Release will not apply to government money market funds, which are 
defined as a money market fund that invests at least 99.5% of its total 
assets in cash, government securities,\626\ and/or repurchase 
agreements that are ``collateralized fully'' (i.e., collateralized by 
cash or government securities).\627\ In addition, under today's 
amendments, government money market funds may invest a de minimis 
amount (up to 0.5%) in non-government assets,\628\ unlike our proposal 
and under current rule 2a-7, which permits government money market 
funds to invest up to 20% of total assets in non-government 
assets.\629\
---------------------------------------------------------------------------

    \626\ A ``government security'' is backed by the full faith and 
credit of the U.S. government. See rule 2a-7(a)(17); section 
2(a)(16).
    \627\ See rule 2a-7(a)(5) (defining ``collateralized fully'' by 
reference to rule 5b-3(c)(1), which requires that collateral be 
comprised of cash or government securities).
    \628\ Non-government assets would include all ``eligible 
securities'' permitted under rule 2a-7 other than cash, government 
securities (as defined in section 2(a)(16), or repurchase agreements 
that are ``collateralized fully'' (as defined in rule 5b-3).
    \629\ Under current rule 2a-7 (and as proposed), a government 
money market fund is defined based on the portfolio holdings test 
used today for determining the accuracy of a fund's name (``names 
rule''). See Proposing Release, supra note 25, n.169 and 
accompanying text (rule 35d-1 states that 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). While in the 
Proposing Release we discussed the definition of government money 
market fund in the context of the proposed floating NAV reform, this 
definition also was applicable to the proposed fees and gates 
reform. We understand that government money market funds today 
invest in other government money market funds (``fund of funds'') 
and look through those funds to the underlying securities when 
determining compliance with rule 35d-1, or the ``names rule.'' 
Accordingly, we expect that money market funds will continue to 
evaluate compliance with what investments qualify under our 
definition of government money market fund in the same way, and 
therefore categorize, as appropriate, investments in other 
government money market funds as within the 99.5% government-asset 
basket.
---------------------------------------------------------------------------

    Additionally, as proposed, a government money market fund will not 
be required to, but may, impose a fee or gate if the ability to do so 
is disclosed in a fund's prospectus and the fund complies with the fees 
and gates requirements in the amended rule.\630\
---------------------------------------------------------------------------

    \630\ See rule 2a-7(c)(2)(iii). Any government money market fund 
that chooses not to rely on rule 2a-7(c)(2)(iii) may wish to 
consider providing notice to shareholders. We believe at least sixty 
days written notice of the fund's ability to impose fees and gates 
would be appropriate.
---------------------------------------------------------------------------

    With respect to the floating NAV reform, most commenters supported 
a reform that does not apply to government money market funds.\631\

[[Page 47792]]

Commenters noted that government funds pose significantly less risk of 
heavy investor redemptions than prime funds, have low default risk and 
are highly liquid even during market stress, and experienced net 
inflows during the financial crisis.\632\ Also, few commenters 
explicitly supported or opposed excluding government funds from the 
fees and gates reforms. Of these commenters, a few supported a narrowly 
tailored fees and gates reform that does not apply to government money 
market funds,\633\ and a few commenters argued that all types of money 
market funds--including government money market funds--should have the 
ability to apply a fee or gate.\634\
---------------------------------------------------------------------------

    \631\ See, e.g., J.P. Morgan Comment Letter; T. Rowe Price 
Comment Letter; Vanguard Comment Letter; ICI Comment Letter; IDC 
Comment Letter. But see Comment Letter of J. Huston McCulloch (Sept. 
13, 2013) (``McCulloch Comment Letter'') (suggesting that the 
floating NAV reform also apply to government money market funds and 
noting that even short-term treasury bills fluctuate in present 
value). As discussed below, we continue to believe that our floating 
NAV reform should not apply to government funds. Our belief is 
based, in part, on the strong commenter support in favor of a more 
targeted floating NAV reform that addresses the incremental 
incentive for institutional investors to redeem from prime funds, 
and our stated goal of preserving as much as possible the benefits 
of money market funds for most investors, while appropriately 
balancing concerns about the risks of heavy redemptions in prime 
funds during times of stress and the harm this can cause to short-
term funding markets.
    \632\ See, e.g., J.P Morgan Comment Letter; ICI Comment Letter; 
IDC Comment Letter; T. Rowe Price Comment Letter.
    \633\ See, e.g., BlackRock II Comment Letter, (``Government MMFs 
. . . should not be required to implement liquidity fees and 
gates.''); J.P. Morgan Comment Letter.
    \634\ See, e.g., U.S. Bancorp Comment Letter, (``If ultimately 
adopted, gating should be available to all classes of funds . . 
.''); HSBC Comment Letter, (``[W]e believe all MMFs should be 
required to have the power to apply a liquidity fee or gate so that 
the MMF provider can manage a low probability but high impact 
event.'').
---------------------------------------------------------------------------

    We continue to believe that government money market funds should 
not be subject to the fees and gates and floating NAV reforms. As 
discussed in the Proposing Release, government money market funds face 
different redemption pressures and have different risk characteristics 
than other money market funds because of their unique portfolio 
composition.\635\ The securities primarily held by government money 
market funds typically have a lower credit default risk than commercial 
paper and other securities held by prime money market funds and are 
highly liquid in even the most stressful market conditions.\636\ As 
noted in our proposal, government funds' primary risk is interest rate 
risk; that is, the risk that changes in the interest rates result in a 
change in the market value of portfolio securities.\637\ Even the 
interest rate risk of government money market funds, however, is 
generally mitigated because these funds typically hold assets that have 
short maturities and hold those assets to maturity.\638\
---------------------------------------------------------------------------

    \635\ Proposing Release, supra note 25, at section III.A.3. See 
also DERA Study, supra note 24, at 8-9.
    \636\ Proposing Release, supra note 25, at section III.A.3.; see 
also J.P. Morgan Comment Letter; Vanguard FSOC Comment Letter.
    \637\ See Proposing Release, supra note 25, at 66.
    \638\ See Proposing Release, supra note 25, n.173.
---------------------------------------------------------------------------

    As discussed in the DERA Study and below, government money market 
funds historically have experienced inflows, rather than outflows, in 
times of stress.\639\ In addition, the assets of government money 
market funds tend to appreciate in value in times of stress rather than 
depreciate.\640\ Most government money market funds always have at 
least 30% weekly liquid assets because of the nature of their portfolio 
(i.e., the securities they generally hold, by definition, are weekly 
liquid assets). Accordingly, with respect to fees and gates, the 
portfolio composition of government money market funds means that these 
funds are less likely to need to use these tools.
---------------------------------------------------------------------------

    \639\ See DERA Study, supra note 24, at 6-13.
    \640\ See Proposing Release, supra note 25, n.412.
---------------------------------------------------------------------------

    We have also determined not to impose the fees and gates and 
floating NAV reforms on government money market funds in an effort to 
facilitate investor choice by providing a money market fund investment 
option that maintains a stable NAV and that does not require investors 
to consider the imposition of fees and gates. As noted above, we expect 
that some money market fund investors may be unwilling or unable to 
invest in a money market fund that floats its NAV and/or can impose a 
fee or gate.\641\ By not subjecting government money market funds to 
the fees and gates and floating NAV reforms, fund sponsors will have 
the ability to offer money market fund investment products that meet 
investors' differing investment and liquidity needs.\642\ We also 
believe that this approach preserves some of the current benefits of 
money market funds for investors. Based on our evaluation of these 
considerations and tradeoffs, and the more limited risk of heavy 
redemptions in government money market funds, we believe it is 
preferable to tailor today's reforms and not apply the floating NAV 
requirement to government funds, but to permit them to implement the 
fees and gates reforms if they choose.\643\
---------------------------------------------------------------------------

    \641\ For example, there could be some types of investors, such 
as sweep accounts, that may be unwilling to invest in a money market 
fund that could impose a gate because such an investor generally 
requires the ability to immediately redeem at any point in time, 
regardless of whether the fund or the markets are distressed.
    \642\ To the extent a number of government funds opt in to the 
fees and gates requirements, and there exists investor demand to 
invest in government funds that are not subject to the fees and 
gates reforms, we believe market forces and competitive pressures 
may lead to the creation of new government funds that do not 
implement fees and gates.
    \643\ Although government money market funds may opt-in to fees 
and gates, we expect these funds will rarely impose fees and gates 
because their portfolio assets present little credit risk.
---------------------------------------------------------------------------

    We also sought comment on the appropriate size of the non-
government basket. Notwithstanding the relative safety and stability of 
government money market funds, we noted our concern that a credit event 
in this 20% basket or a shift in interest rates could trigger a decline 
in a fund's shadow price and therefore create an incentive for 
shareholders to redeem shares ahead of other investors (similar to that 
described for institutional prime funds subject to the floating NAV 
reform). We stated in the Proposing Release our preliminary belief that 
the benefits of retaining a stable share price money market fund option 
and the relative safety in a government money market fund's 80% basket 
appropriately counterbalances the risks associated with the 20% portion 
of a government money market fund's portfolio that may be invested in 
non-government securities.\644\
---------------------------------------------------------------------------

    \644\ The Proposing Release also would have required unaffected 
stable NAV funds, including government money market funds, to 
maintain a stable NAV through penny-rounding pricing (and generally 
eliminate amortized cost valuation except for securities with 
remaining maturities of 60 days or less). As discussed in section 
III.B.5, however, we have revised our approach and will permit 
stable NAV funds to continue to value portfolio securities using 
amortized cost and price fund shares using penny-rounding, as they 
do today. We are also providing expanded guidance on the use of 
amortized cost. See infra section III.D.
---------------------------------------------------------------------------

    A number of commenters, however, raised concerns that the proposed 
definition of government money market fund would permit these funds to 
invest up to 20% of their portfolio in non-government assets, and, 
contrary to the goals of our money market fund reforms, potentially 
increase risk as stable NAV government funds may use this 20% basket to 
reach for yield.\645\ One

[[Page 47793]]

commenter noted that, notwithstanding the current 20% non-government 
security basket, its government money market funds invest 100% of fund 
assets in government securities because doing so meets the expectations 
of government money market fund investors.\646\
---------------------------------------------------------------------------

    \645\ See, e.g., Goldman Sachs Comment Letter (suggesting that a 
new class of money market funds could emerge that would invest 19.9% 
of its assets in higher yield commercial paper and other privately 
issued debt while maintaining a stable NAV, and under Commission 
rules, holding itself out as a government money market fund); HSBC 
Comment Letter; CFA Institute Comment Letter; Systemic Risk Council 
Comment Letter; Invesco DERA Comment Letter. One commenter suggested 
reducing further the percentage of portfolio assets required to be 
invested in government securities and potentially including state 
and local government securities in the permissible investment 
basket. See Comment Letter of The Independent Trustees of the North 
Carolina Capital Management Trust (``Sept. 17, 2013) (``NC Cap. 
Mgmt. Trust Comment Letter''). We believe that the definition of a 
government money market fund should not include state and local 
government securities as suggested by this commenter. We discuss the 
risks present in these types of securities and municipal money 
market funds in general, infra section III.C.3. See also infra note 
773 and accompanying text. In addition, as discussed above, reducing 
further the percentage of assets that must be invested in government 
securities undercuts the goals of this rulemaking. A few commenters 
also raised concerns about the economic effects of not applying our 
floating NAV reform to government funds, including promoting the 
ability of the federal government to borrow at the expense of state 
and local governments and private issuers. See, e.g., Comment Letter 
of Arnold & Porter LLP on behalf of Federated Investors [Alternative 
1] (Sept. 13, 2013) (``Federated III Comment Letter''); Mass. 
Governor Comment Letter; Systemic Risk Council Comment Letter. We 
address the macroeconomic effects of the floating NAV requirement 
and related exemptions in section III.K. One commenter also noted 
that because stable NAV funds (including government money market 
funds) would no longer be permitted to value securities using 
amortized cost, these funds would still incur many of the same 
operational burdens as floating NAV funds. See Federated II Comment 
Letter; Federated III Comment Letter. As discussed in section 
III.B.5, however, we have revised our approach from the Proposing 
Release and will permit both retail and government money market 
funds to continue to value portfolio securities using amortized cost 
and use the penny-rounding method of pricing.
    \646\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    We agree with commenters who suggested that permitting government 
funds to invest potentially up to 20% of fund assets in riskier non-
government securities may promote a type of hybrid money market fund 
that presents new risks that are not consistent with the purposes of 
the money market reforms adopted today.\647\ One commenter suggested 
that without a 20% basket, there may be an oversupply of commercial 
paper that disrupts corporate funding (presumably a result of a shift 
of assets out of institutional prime funds required to adopt our 
floating NAV reform).\648\ As a result, this commenter suggested that 
the Commission wait until after final rules are adopted to evaluate the 
use of the 20% basket, including the effects on commercial paper 
supply, and then consider phasing the 20% basket out over time, if 
appropriate. We disagree. As stated above, the reason for not applying 
our fees and gates and floating NAV reforms to government money market 
funds is, in part, a recognition of the relative stability of this type 
of money market fund, through its lack of credit risk. It would limit 
the effectiveness of our floating NAV reform, for example, to allow a 
hybrid government fund to develop and potentially present credit risk 
to institutional investors seeking greater yield, while keeping the 
benefit of a stable NAV.
---------------------------------------------------------------------------

    \647\ See, e.g., Comment Letter of BlackRock, Inc. (June 6, 
2013) (``Blackrock I Comment Letter''); CFA Institute Comment Letter 
(noting that ``the 80 percent requirement [. . .] would undermine 
the implied NAV stability of a [g]overnment fund[']s structure. 
Allowing fund managers to invest as much as 20 percent of their 
assets in securities and instruments with greater volatility in 
value than government securities, while continuing to operate as 
stable NAV funds creates potential problems.'').
    \648\ See Blackrock DERA Comment Letter. We discuss in section 
III.K below the macroeconomic effects of a potential shift in assets 
out of institutional prime money market funds and into alternative 
investment products.
---------------------------------------------------------------------------

    As noted above, many commenters suggested completely eliminating 
the 20% basket.\649\ One commenter suggested a smaller de minimis 
basket, for example 5%.\650\ Our approach includes a 0.5% de minimis 
basket in which government funds may invest in non-government 
securities. In order to evaluate an appropriate de minimis amount of 
non-government securities, Commission staff, using Form N-MFP data, 
analyzed the exposure of government money market funds to non-
government securities between November 2010 and November 2013.\651\
---------------------------------------------------------------------------

    \649\ See, e.g., Goldman Sachs Comment Letter; HSBC Comment 
Letter; see Fidelity DERA Comment Letter.
    \650\ See CFA Institute Comment Letter.
    \651\ See DERA Memorandum regarding Government Money Market Fund 
Exposure to Non-Government Securities, dated March 17, 2014 (DERA 
Government MMF Exposure Memo'') available at http://www.sec.gov/comments/s7-03-13/s70313-322.pdf. This analysis categorized 
securities into two types: ``government securities'' and ``other 
securities.'' ``Government securities'' includes Treasury Debt, 
Treasury Repurchase Agreements, Government Agency Debt, and 
Government Agency Repurchase Agreements. ``Other securities'' 
includes all remaining non-government securities (as referred to 
above), such as non-government tri-party repurchase agreements, 
financial company commercial paper, and variable rate demand notes 
without a demand feature or guarantee. Although this analysis 
sought, where possible, to identify ``other securities'' that may 
actually qualify as ``government securities,'' it is possible that 
some assets classified as other securities may still qualify as 
government securities. Accordingly, the results of this analysis 
should be viewed as upper bounds on the extent to which government 
money market funds invest in ``other securities'' (i.e. non-
government securities).
---------------------------------------------------------------------------

    This analysis showed, among other things, that as of November 2013, 
approximately 17% of all money market funds were government funds and 
that average total net assets of government funds remained fairly 
constant at near $500 billion since March of 2012.\652\ An analysis of 
the data also showed that, between November 2010 and November 2013, 
government money market funds generally invested between 0.5% and 2.5% 
of their total amortized cost dollar holdings in non-government 
securities and, more recently closer to 0.5% in non-government 
securities from November 2012 to November 2013.\653\ For example, the 
90th percentile of reporting government money market funds demonstrates 
that investments in non-government securities declined from 12.7% 
(representing 11 funds) in November 2010 to nearly zero in November 
2013.\654\
---------------------------------------------------------------------------

    \652\ See id. (reporting based on Form N-MFP data, as of 
November 2013, 97 government money market funds out of 565 total 
money market funds).
    \653\ Id.
    \654\ Id.
---------------------------------------------------------------------------

    A few commenters suggested that this analysis is flawed because it 
inappropriately focuses on the historical use of the non-government 
securities basket to predict future use of the 20% basket, when we 
cannot accurately predict how investors will react following the 
adoption of proposed regulatory changes, such as a floating NAV.\655\ 
One commenter further suggested that the analysis instead should 
address the potential systemic risk posed by a hybrid fund.\656\ As 
other commenters noted, however, we recognize the potential for 
increased investor interest in hybrid government money market funds, 
and as discussed above, we are concerned that continuing to permit 
government money market funds to invest potentially up to 20% of fund 
assets in non-government securities presents risks that are contrary to 
goals of this rulemaking. In fact, the concern raised by these 
commenters, suggesting that the historical use of the 20% basket is 
irrelevant in the context of a future regulatory regime that includes a 
floating NAV reform, further supports our concern that retaining the 
20% non-government securities basket is likely to result in increased 
risk taking by

[[Page 47794]]

institutional prime fund investors who move to government money market 
funds in search of greater yield (but with the continued benefit of a 
stable NAV). We also note that our staff's analysis of the historical 
use of the 20% basket establishes the baseline (i.e., the extent to 
which government money market funds have used the 20% basket) for our 
economic analysis discussed below.
---------------------------------------------------------------------------

    \655\ See, e.g., Comment Letter of the Dreyfus Corporation (Apr. 
23, 2014, DERA Study) (``Dreyfus DERA Comment Letter'') (expecting 
that the staff's analysis would not show significant industry 
investment by government funds in non-government securities, but 
suggesting that this is a result of investor preference that must be 
viewed in the context of stable NAV money market funds and noting 
that investor interest in hybrid government money market funds may 
increase in a floating NAV context); Comment Letter of Wells Fargo 
Fund Management, LLC (Apr. 23, 2014, DERA Study) (``Wells Fargo DERA 
Comment Letter'') (suggesting that without the ability for 
government money market funds to diversify into prime and municipal 
securities, a significant inflow into government funds could force 
already low yields on short-term government securities to turn 
negative). Although we recognize the potentially adverse effects of 
negative yields (e.g., some funds might close to further investment, 
affecting capital formation), we believe that the potential risks 
associated with a government fund investing up to 20% of its total 
assets in non-government assets outweighs speculative concerns about 
future interest rates that may or may not remain at historic lows 
two years after the rules regarding our floating NAV reform become 
final.
    \656\ See Dreyfus DERA Comment Letter.
---------------------------------------------------------------------------

    One commenter stated its belief that allowing government money 
market funds to invest up to 20% in non-government securities will not 
materially increase the risks of these funds to investors or the 
financial system and that such a fund would have adequate liquidity to 
satisfy any increased redemption pressure that results from a credit 
event in the 20% basket.\657\ This commenter cites to our statement in 
the Proposing Release, where we characterized as ``minimal'' the risk 
of government money market funds that maintain at least 80% of their 
total assets in cash, government securities, or repurchase agreements 
that are collateralized by cash or government securities.\658\ We 
continue to believe, however, as we also stated in the Proposing 
Release, that ``a credit event in [the] 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.'' \659\ Even if we assume that a government fund had 
sufficient liquidity from its 80% basket of government securities to 
cover adequately increased redemptions that result from a credit event 
in the 20% basket, we note that the structural incentives that exist in 
stable NAV money market funds, and the associated first mover advantage 
and potential shareholder dilution concerns, still exist.\660\ And, 
indeed, after our floating NAV reform takes effect, the incentives 
could be even more pronounced in government funds if those 
institutional investors who are the most sensitive to risk move to 
government funds.
---------------------------------------------------------------------------

    \657\ See Wells Fargo DERA Comment Letter.
    \658\ See Proposing Release, supra note 25, at text accompanying 
n.176.
    \659\ See id. at text following n.173.
    \660\ See supra section III.B.3.
---------------------------------------------------------------------------

    Based on the staff's analysis, we expect that the 0.5% non-
conforming basket is consistent with current industry practices and 
strikes an appropriate balance between providing government money 
market fund managers with adequate flexibility to manage such funds 
while preventing them from taking on potentially high levels of risk 
associated with non-government assets. We therefore are revising the 
definition of a government fund to require that such a fund invest at 
least 99.5% (up from 80% in the proposal) of its assets in cash, 
government securities, and/or repurchase agreements that are 
collateralized by cash or government securities. A money market fund 
may not call itself or include in its name ``government money market 
fund'' or similar names unless the fund complies with this 
requirement.\661\
---------------------------------------------------------------------------

    \661\ Rule 2a-7(a)(16) defines a government money market fund 
and requires that such funds invest at least 99.5% of fund assets in 
cash, government securities, and repurchase agreements that are 
collateralized fully.
---------------------------------------------------------------------------

    Because we believe that the de minimis basket we are adopting is 
consistent with current industry practice, we do not believe that 
government funds will experience any material reduction in yield, based 
on current interest rates, as a result of our amendments. In addition, 
we do not believe that government funds will be required to make any 
systems modifications as a result of changing to a 0.5% de minimis 
basket because funds are already required to monitor compliance with 
the existing 20% non-government basket requirement. As discussed below, 
however, we do expect that money market funds may need to amend their 
policies and procedures to reflect the changes we are adopting today, 
including the new 0.5% de minimis basket.\662\ We estimate that it will 
cost each money market fund complex approximately $2,580 in one-time 
costs to amend their policies and procedures.\663\
---------------------------------------------------------------------------

    \662\ These costs are included as part of the Paperwork 
Reduction Act analysis. See infra section IV.A.
    \663\ Id.
---------------------------------------------------------------------------

    Because staff analysis shows that our 0.5% non-conforming basket is 
consistent with industry practice, we believe that any effect on 
efficiency, competition, or capital formation should be minimal. In 
addition, any government money market funds that do currently use the 
20% basket could roll out of any excess exposure to non-government 
assets by the time that funds are required to comply with the amended 
rule, given rule 2a-7's maturity limits on portfolio securities. 
Nevertheless, reducing the size of the basket could affect efficiency, 
competition, or capital formation in the future because decreasing the 
size of the basket reduces a government fund's flexibility to invest in 
non-government assets in the future. For example, decreasing the size 
of the basket could lead to a loss of efficiency if government funds 
are unable to invest in securities that government funds are currently 
permitted to purchase. Reducing the basket size could also restrict 
competition among money market funds because government funds would not 
be able to invest more than 0.5% in non-government assets and thus will 
have a reduced ability to compete with other money market funds based 
on yield. Finally, capital formation in the commercial paper market 
could be hindered by reducing the 20% basket and reducing these funds' 
ability to invest in commercial paper. We do not expect any such effect 
to be substantial, however, given the very small extent to which 
government funds have recently used the non-government basket.
    We also recognize the potential for a significant inflow of money 
market fund assets into government money market funds from 
institutional prime investors (seeking a stable NAV alternative) and 
investors that are unable or unwilling to invest in a product that may 
restrict liquidity (through our liquidity fees and gates reform). As we 
discuss in section III.K below, we do not anticipate that the impact 
from the final rule amendments, including those related to our floating 
NAV reform, will be large enough to constrain government funds and 
their potential investors.
2. Retail Money Market Funds
    As was proposed, our fees and gates reform will apply to retail 
money market funds, but our floating NAV reform will not. However, as 
discussed more below, we are revising the definition of a retail money 
market fund from our proposal to address concerns raised by commenters. 
As amended, a retail money market fund means a money market fund that 
has policies and procedures reasonably designed to limit all beneficial 
owners of the fund to natural persons.\664\
---------------------------------------------------------------------------

    \664\ See infra note 679 and accompanying text.
---------------------------------------------------------------------------

    As discussed in the Proposing Release and the DERA Study, retail 
investors historically have behaved differently from institutional 
investors in a crisis, being less likely to make large redemptions 
quickly in response to the first sign of market stress. During the 
financial crisis, institutional prime money market funds had 
substantially larger redemptions than prime money market funds that 
self-identify as retail.\665\ As noted in the Proposing Release, for 
example, approximately 4-5% of retail prime money market funds had 
outflows of greater than 5% on each

[[Page 47795]]

of September 17, 18, and 19, 2008, compared to 22-30% of institutional 
prime money market funds.\666\ 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.\667\ Studies of money 
market fund redemption patterns in times of market stress also have 
observed this difference.\668\ As we noted in the Proposing Release and 
discussed above, we believe that 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 more sophisticated tools to 
monitor and analyze the portfolio holdings of the funds in which they 
invest.\669\ We discuss below our fees and gates and floating NAV 
reforms and their application to retail money market funds, as defined 
by our amendments adopted today.
---------------------------------------------------------------------------

    \665\ See Proposing Release, supra note 25, at n.185 and 
accompanying text.
    \666\ See id.
    \667\ See Proposing Release, supra note 25, at n.187 and 
accompanying text. We noted that, based on iMoneyNet data, retail 
money market funds experienced 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. We have also reviewed the redemption activity for 
institutional prime funds during this same time period and note that 
institutional prime funds experienced net redemptions of 
approximately 9% between June 14, 2011 and July 5, 2011, and 46 
institutional prime money market funds had redemptions in excess of 
5% during that period (and of these funds 35 had redemptions in 
excess of 10% during this period), far greater redemptions than 
those incurred by retail funds.
    \668\ See, e.g., DERA Study, supra note 24, at 8; Cross Section, 
supra note 35, at 9 (noting that institutional prime money market 
funds experienced 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 
experienced net redemptions of $40 billion (or 5% of assets under 
management) during this same time period); Marcin Kacperczyk & 
Philipp Schnabl, How Safe are Money Market Funds?, 128 Q. J. Econ. 
1017 (April 5, 2013) (``Kacperczyk & Schnabl''); Wermers Study, 
supra note 35.
    \669\ We also understand that retail money market funds' 
shareholder base tends to be less concentrated and, thus, less 
likely to move large amounts of money at once. We believe this may 
be, in part, why retail money market funds experienced fewer 
redemptions during the financial crisis.
---------------------------------------------------------------------------

a. Fees and Gates
    Largely for the reasons discussed above, several commenters argued 
that our fees and gates reforms should not apply to retail money market 
funds, in the same way that our floating NAV reform would not apply to 
retail funds.\670\ More specifically, commenters argued that retail 
investors behave differently than institutional investors and, 
therefore, retail money market funds are insulated from runs and sudden 
losses of liquidity.\671\
---------------------------------------------------------------------------

    \670\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Comment 
Letter of United Services Automobile Association (Sept. 17, 2013) 
(``USAA Comment Letter''); MFDF Comment Letter; see also Fidelity 
Comment Letter (arguing that the fees and gates requirements should 
be limited to institutional prime funds).
    \671\ See, e.g., USAA Comment Letter; MFDF Comment Letter 
(``Because retail investors are demonstrably slower to redeem their 
shares, the fund's adviser will have greater ability to manage the 
fund's liquidity in a way necessary to meet redemptions, even in 
times of market stress, without necessitating the cost of that 
liquidity being imposed on redeeming retail shareholders.''); 
Comment Letter of Financial Services Institute (Sept. 17, 2013) 
(``Fin. Svcs. Inst. Comment Letter'') (``Retail investors pose a 
substantially lower risk of high redemption activities during 
periods of market stress . . . .'').
---------------------------------------------------------------------------

    Although, as discussed above, the evidence suggests that retail 
investors historically have exhibited much lower levels of redemptions 
or a slower pace of redemptions in times of stress,\672\ we cannot 
predict future investor behavior with certainty and, thus, we cannot 
rule out the potential for heavy redemptions in retail funds in the 
future. Empirical analyses of retail money market fund redemptions 
during the financial crisis show that at least some retail investors 
eventually began redeeming shares.\673\ Similarly, we note that when 
the Reserve Primary Fund, which was a mixed retail and institutional 
money market fund, ``broke the buck'' as a result of the Lehman 
Brothers bankruptcy, almost all of its investors ran--retail and 
institutional alike. Additionally, we note that it is possible that the 
introduction of the Treasury Temporary Guarantee Program on September 
19, 2008 (a few days after institutional prime money market funds 
experienced heavy redemptions) lessened the incentive for shareholders 
to redeem from retail money market funds. Moreover, as we recognized in 
the Proposing Release, retail prime money market funds, unlike 
government money market funds, generally are subject to the same credit 
and liquidity risks as institutional prime money market funds.\674\ As 
such, absent fees and gates, there would be nothing to help manage or 
prevent a run on retail prime money market funds in the future.
---------------------------------------------------------------------------

    \672\ See Proposing Release, supra note 25, at n.199 and 
accompanying text.
    \673\ See Proposing Release, supra note 25, at n.197 and 
accompanying text; see also Wermers Study, supra note 35.
    \674\ See Proposing Release, supra note 25, at 199.
---------------------------------------------------------------------------

    As noted in the Proposing Release, we also believe there is a 
difference in the anticipated shareholder behaviors we are trying to 
address by the fees and gates requirements and floating NAV requirement 
as applied to retail funds.\675\ The floating NAV requirement is 
specifically designed to address shareholders' incentive to redeem to 
take advantage of pricing discrepancies between a money market fund's 
market-based NAV per share and its stable share price. As discussed 
above, we believe this incentive likely is greatest among institutional 
investors because they are more likely to have significant sized 
investments at stake and the sophistication and resources to monitor 
actively such discrepancies.\676\ While retail investors are unlikely 
to be motivated to a substantial degree by the first-mover advantage 
created by money market funds' stable pricing convention, they may be 
motivated to redeem heavily in flights to quality, liquidity, and 
transparency (even if they may do so somewhat slower than institutional 
investors). Fees and gates are designed to address these types of 
redemptions.\677\ We also note that retail money market funds today 
operate with the potential for gates under rule 22e-3, which allows a 
fund board to permanently gate and liquidate a money market fund under 
certain circumstances. Today's amendments include a number of 
disclosure reforms that are designed to ensure that retail investors 
will understand this new additional fee and gate regime for money 
market funds.\678\
---------------------------------------------------------------------------

    \675\ See Proposing Release, supra note 25, at 200.
    \676\ See generally supra note 669 and accompanying text.
    \677\ See supra section III.B.1; see also Invesco Comment Letter 
(suggesting that liquidity fees would mitigate the ``first-mover'' 
advantage); UBS Comment Letter.
    \678\ See infra section III.E.
---------------------------------------------------------------------------

    In addition, the floating NAV requirement will affect a 
shareholder's experience with an institutional prime money market fund 
on a daily basis. It thus is a significant reform that is targeted only 
at those investors that we consider most likely to be motivated to 
redeem at least in part on the basis of pricing discrepancies in the 
fund. In contrast, and as discussed above, the fees and gates 
requirements will not affect a money market fund on a day-to-day basis; 
its effect will be felt only if the fund's weekly liquid assets fall 
below 30% of its total assets--i.e., unless it comes under potential 
stress--and even then, only if the board determines that a fee and/or 
gate is in

[[Page 47796]]

the best interests of the fund. Further, while we recognize that a 
retail money market fund may be less likely to experience strained 
liquidity (and thus less likely to need to impose a fee or gate), we 
believe there is still a sufficient risk of this occurring that we 
should allow such funds to impose a fee or gate to manage any related 
heavy redemptions when the weekly liquid assets fall below 30% and 
doing so is in the fund's best interests. For the same reasons, we 
believe requiring a fund to impose a liquidity fee when weekly liquid 
assets fall below 10% is also appropriate, unless the board determines 
otherwise based on the fund's best interests. Accordingly, retail money 
market funds will be subject to the fees and gates reform.
b. Floating NAV
i. Definition of Retail Money Market Fund
    As we proposed, however, we are not imposing the floating NAV 
reform on retail money market funds. For purposes of the floating NAV 
reform, we are defining a retail money market fund to mean a money 
market fund that has policies and procedures reasonably designed to 
limit all beneficial owners of the fund to natural persons (``retail 
funds'').\679\
---------------------------------------------------------------------------

    \679\ See rule 2a-7(a)(25). ``Beneficial ownership'' typically 
means having voting and/or investment power. See, e.g., Securities 
Exchange Act rules 13d-3 and 16a-1(a)(2); Metropolitan Life 
Insurance Company, SEC Staff No-Action Letter (Nov. 23, 1999) (``Met 
Life No-Action Letter'') at n.9 and accompanying text. We note that 
our definition of retail money market fund is consistent with the 
way in which Congress defined a ``retail customer'' in section 
913(a) of the Dodd-Frank Act (defining ``retail customer,'' among 
other things, as a natural person). 15 U.S.C. 80b-11(g)(2). A retail 
fund may disclose in its prospectus that it limits investments to 
accounts beneficially owned by natural persons and describe in its 
policies and procedures how the fund complies with the retail fund 
limitation when a shareholder of record is an omnibus account holder 
that does not provide transparency down to the beneficial ownership 
level. We discuss omnibus account issues below. See infra section 
III.C.2.b.iii.
---------------------------------------------------------------------------

    Many commenters generally supported not applying a floating NAV 
requirement to retail money market funds, noting, for example, retail 
investors' moderate redemption activity during the financial crisis as 
compared with institutional prime funds and the importance of retaining 
a stable NAV investment product for retail investors that facilitates 
cash management, particularly where there are few alternatives offering 
diversification, stability, liquidity, and a market-based rate of 
return for these investors.\680\ Some commenters, however, objected to, 
or expressed concerns about not applying a floating NAV to retail 
funds. These commenters noted, for example, that (i) retail investors 
in the future may not behave the way we observed in 2008; (ii) 
increases in sophistication of retail investors (for example, through 
technological advancements) may lead retail investors to act more like 
institutional investors over time; and (iii) any differentiation 
between retail and institutional funds provides opportunities for 
gaming behavior by institutional investors.\681\
---------------------------------------------------------------------------

    \680\ See, e.g., Blackrock I Comment Letter; Blackrock II 
Comment Letter; Vanguard Comment Letter; T. Rowe Price Comment 
Letter; ICI Comment Letter.
    \681\ See, e.g., Goldman Comment Letter; J.P. Morgan Comment 
Letter; HSBC Comment Letter; Hanson et al. Comment Letter.
---------------------------------------------------------------------------

    We recognize, as discussed above, that we cannot be certain how 
retail investors would have reacted during the financial crisis had the 
Treasury Temporary Guarantee Program not been implemented. Similarly, 
we cannot predict whether retail investors, in light of new tools to 
manage liquidity (e.g., fees and gates) and enhanced disclosure and 
transparency, will behave more like institutional investors in the 
future. But the evidence to date suggests that retail investors do not 
present the same risks associated with high levels of redemptions posed 
by institutional investors.\682\ We continue to believe that the 
significant benefits of providing an alternative stable NAV fund option 
justify the risks associated with the potential for a shift in retail 
investors' behavior in the future, particularly given that retail money 
market funds will be able to use fees and gates as tools to stem heavy 
redemptions should they occur. We also note that, as discussed below, 
our revised approach to defining a retail fund based on shareholder 
characteristics should minimize the potential for gaming behavior by 
institutional investors.
---------------------------------------------------------------------------

    \682\ See supra notes 666 and 667 and accompanying text.
---------------------------------------------------------------------------

    As of February 28, 2014, funds that self-report as retail money 
market funds held nearly $998 billion in assets, which is approximately 
one-third of all assets held in money market funds.\683\ Unlike under 
our proposal, which would have required retail funds generally to value 
portfolio securities using market-based factors rather than amortized 
cost, money market funds that qualify as retail funds may continue to 
offer a stable value as they do today--and facilitate their stable 
price by use of amortized cost valuation and/or penny-rounding pricing 
of their portfolios. As discussed below, our definition of a retail 
fund reflects several modifications from our proposal (in which a 
retail fund was defined as a fund that limits redemptions to $1 million 
in a single business day) and reflects an approach suggested by a 
number of commenters.\684\
---------------------------------------------------------------------------

    \683\ Staff estimates were derived by using self-reported data 
from iMoneyNet as of February 28, 2014 to estimate percentages for 
retail and institutional segments by money market fund type. Staff 
then applied these percentages to the total market size segments 
based on Form N-MFP data as of February 28, 2014. Of these assets, 
approximately $593 billion are held by prime money market funds and 
another $209 billion are in government funds. Because the final 
rules do not subject government funds to the floating NAV 
requirement, funds that qualify as retail money market funds would 
be potentially relevant only to the investors holding the $593 
billion in retail prime funds.
    \684\ The definition of retail money market fund we are adopting 
is informed by a joint comment letter submitted by eight fund 
complexes that manage approximately $1.2 trillion of U.S. money 
market funds (representing approximately 45% of the total U.S. money 
market fund industry assets) as of September 30, 2013. See Comment 
Letter dated October 31, 2013 (submitted by BlackRock, Fidelity, 
Invesco, Legg Mason & Western Asset, Northern Trust, T. Rowe, 
Vanguard, and Wells Fargo) (``Retail Fund Joint Comment Letter'').
---------------------------------------------------------------------------

    We proposed to define a fund as retail, and thus not subject to the 
floating NAV reform, if it is a fund that restricts a shareholder of 
record from redeeming more than $1 million in any one business day. We 
explained our belief that this approach should be relatively simple to 
implement because it would only require a fund to establish a one-time, 
across-the-board redemption policy, unlike other approaches based on 
shareholder characteristics that would require ongoing monitoring by 
the fund. We also stated our belief that our proposed approach would 
reduce the risk that a retail fund would experience heavier redemption 
requests than it could effectively manage in a crisis because it would 
limit the total amount of redemptions a fund can experience in a single 
day and therefore provide the fund time to better predict and manage 
its liquidity.
    In the Proposing Release, we selected a $1 million redemption limit 
because we expected this amount would be high enough to make money 
market funds a viable cash management tool for retail investors, but 
low enough that institutional investors would likely self-select out of 
these funds because it would not satisfy their operational needs.\685\ 
Under the proposed retail fund definition, a fund would be able to 
permit an ``omnibus account holder'' to

[[Page 47797]]

redeem more than $1 million in a single business day provided the fund 
has policies and procedures reasonably designed to allow the conclusion 
that the omnibus account holder does not permit any beneficial owner to 
directly or indirectly redeem more than $1 million in a single 
day.\686\ The Proposing Release also considered and sought comment on 
other ways to distinguish a retail fund from an institutional fund, 
including applying limitations based on maximum account balance, 
shareholder concentration, or shareholder characteristics (e.g., a 
social security number that would identify the shareholder as an 
individual person and not an institution).\687\ We discuss below 
comments received on these alternative means for distinguishing retail 
funds from institutional funds.
---------------------------------------------------------------------------

    \685\ The Proposing Release also noted that a money market fund 
that sought to qualify as a retail fund would need to effectively 
describe that it is intended for retail investors and include in the 
fund's prospectus and advertising materials information about the 
fund's daily redemption limitations. See Proposing Release, supra 
note 25, at section III.A.4.b.i.
    \686\ We proposed to define an ``omnibus account holder'' 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).
    \687\ See infra note 701 and accompany text for a discussion of 
social security numbers as a means for distinguishing retail from 
institutional funds in the Proposing Release.
---------------------------------------------------------------------------

    A number of commenters supported (some with suggested scope 
modifications) our proposed approach to define a retail investor by 
means of a daily redemption limit.\688\ Many commenters, however, 
raised concerns with defining a retail fund as a fund that imposes a 
daily redemption limit on its investors, stating, for example, that the 
$1 million daily redemption limit would (i) unduly limit liquidity by 
prohibiting transactions by shareholders whose behavior does not 
present run risk; (ii) restrict full liquidity not only in times of 
market stress, but also when the markets are operating effectively; and 
(iii) be costly and difficult to implement, monitor, and enforce.\689\ 
As noted above, however, a number of commenters have suggested defining 
a retail money market fund as a fund that seeks to limit beneficial 
ownership interest to natural persons.\690\ After analyzing the 
comments received, we agree that defining a retail fund as a fund that 
has policies and procedures reasonably designed to limit beneficial 
ownership to natural persons (``natural person test'') provides a 
simpler and more cost-effective way to accomplish our goal of targeting 
the floating NAV reform to the type of money market fund that has 
exhibited greater tendencies to redeem first in times of market stress 
and has the investors most likely to seek to take advantage of any 
pricing discrepancies and therefore dilute the interests of remaining 
shareholders.\691\ We discuss below the operation of the natural person 
test and its economic effects.
---------------------------------------------------------------------------

    \688\ See, e.g., CFA Institute Comment Letter; Northern Trust 
Comment Letter; Schwab Comment Letter; USAA Comment Letter; Vanguard 
Comment Letter. These commenters also offered suggested scope 
modifications, including increasing or decreasing the daily 
redemption limit, creating an advance notice provision (pre-approved 
redemptions over $1 million in a single business day), applying the 
daily redemption limit on a per-account basis rather than a per-
shareholder basis, and exempting certain transactions from the daily 
redemption limit.
    \689\ See, e.g., Comment Letter of John D. Hawke, Jr., Arnold 
and Porter, LLP on behalf of Federated Investors, Inc., Washington, 
District of Columbia (Nov. 21, 2013) (``Federated XIII Comment 
Letter''); Federated II Comment Letter; Fidelity Comment Letter; ICI 
Comment Letter; SIFMA Comment Letter.
    \690\ See supra note 684 and accompanying text. In addition to 
the eight commenters who submitted a joint comment letter in support 
of defining a retail fund by limiting beneficial ownership to 
natural persons, a number of other commenters also supported this 
definition. See, e.g., SunTrust Comment Letter; ICI Comment Letter; 
SIFMA Comment Letter.
    \691\ A number of commenters supported alternate means of 
defining a retail investor. See, e.g., Schwab Comment Letter 
(supporting defining retail investors based on concentration risk); 
Deutsche Comment Letter (supporting defining retail investors based 
on a maximum account balance limit); SIFMA Comment Letter 
(supporting defining retail investors based on a minimum initial 
investment, but also supporting the ``natural person'' approach we 
are adopting today); Dreyfus Comment Letter (supporting defining 
retail investors based on settlement times); Fin. Svcs. Roundtable 
Comment Letter (supporting defining institutional investors, rather 
than retail investors, by, for example, reference to assets under 
management). We have carefully considered these alternative means of 
defining a retail investor, but we believe, as discussed below, that 
the ``natural person'' approach suggested by a number of other 
commenters is a simpler and more cost effective way to distinguish 
between institutional and retail investors.
---------------------------------------------------------------------------

ii. Operation of the Natural Person Test
    As discussed in the Proposing Release, it currently is difficult to 
distinguish precisely 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. We noted that the operational challenges of 
defining a retail fund are numerous and complex. In addition, as 
discussed below, drawing a distinction between retail and institutional 
investors is complicated by the extent to which shares of money market 
funds are held by investors through omnibus accounts and other 
financial intermediaries. We also recognize that any distinction 
between retail and institutional funds could result in ``gaming 
behavior'' whereby investors having the general attributes of an 
institution might attempt to fit within the confines of whatever retail 
fund definition we craft. We believe, however, that defining a retail 
fund using the natural person test will, as a practical matter, 
significantly reduce opportunities for gaming behavior because we 
believe that most funds will use social security numbers as part of 
their compliance process to limit beneficial ownership to natural 
persons, and institutional investors are not issued social security 
numbers.
    A money market fund that has policies and procedures reasonably 
designed to limit beneficial owners to natural persons will not be 
subject to the floating NAV reform. We expect that a fund that intends 
to qualify as a retail money market fund would disclose in its 
prospectus that it limits investments to accounts beneficially owned by 
natural persons.\692\ Funds will have flexibility in how they choose to 
comply with the natural person test. As noted by commenters, we expect 
that many funds will rely on social security numbers to confirm 
beneficial ownership by a natural person. The social security number is 
one well-established method of identification, issued to natural 
persons who qualify under the Social Security Administration's 
requirements. Because social security numbers are in nearly all cases 
obtained as part of the account-opening process (for natural persons) 
and are populated in transfer agent and intermediary recordkeeping 
systems, this approach should reduce significantly the required 
enhancements to systems, processes, and procedures that would be 
required under alternative approaches, including our proposed daily 
redemption limit.\693\ In addition, for intermediaries using omnibus 
account registrations where the beneficial owners are natural persons 
(e.g., retail brokerage accounts, certain trust accounts, and defined 
contribution plan accounts), a social security number is a key 
component of customer account-opening procedures and compliance and 
therefore should allow intermediaries to distinguish retail from 
institutional investors (and therefore assist retail funds in 
satisfying the retail fund definition).\694\ In many cases, funds and 
intermediaries already collect this data to comply with ``know your 
customer'' practices and anti-money laundering laws and should easily 
be

[[Page 47798]]

able to identify if a beneficial owner is a natural person.\695\
---------------------------------------------------------------------------

    \692\ For example, a fund could disclose that it is a retail-
only money market fund not subject to the floating NAV requirement, 
consistent with the requirements of Form N-1A. See, e.g., Item 6 and 
Item 11 of Form N-1A; see also infra note 940 and accompanying text.
    \693\ See, e.g., ICI Comment Letter.
    \694\ Id.
    \695\ Id.
---------------------------------------------------------------------------

    As commenters noted, defining a retail fund in this way encompasses 
a large majority of individual investors who use retail accounts 
today.\696\ For example, we understand that many tax-advantaged savings 
accounts and ordinary trusts are beneficially owned by natural persons, 
and therefore would likely qualify under the natural person test.\697\ 
We understand that, often, in these types of accounts, natural persons 
are responsible for making the decision to redeem from a fund during a 
time of crisis (rather than an institutional decision maker). We 
acknowledge, however, that a fund may still qualify as a retail money 
market fund notwithstanding having an institutional decision maker 
(e.g., a plan sponsor in certain retirement arrangements, or an 
investment adviser managing discretionary investment accounts) that 
could eliminate or change an investment option, such as offering or 
investing in a money market fund. We also recognize that there is a 
potential risk that an institutional decision maker may react 
differently in times of market stress than the individuals that we 
expect will invest in retail money market funds as defined under our 
amended rule. We believe that in many instances, however, this risk can 
be mitigated. A number of commenters noted, for example, that under 
section 3(34) of ERISA, the plan sponsor of a defined contribution plan 
can eliminate or change an investment option without providing notice 
of the change, but stated that the plan sponsor would likely provide 30 
days' notice of any change in order to obtain the benefit of the 
fiduciary safe harbor in section 404(c) of ERISA.\698\ To the extent 
that there remains a risk that an institutional decision maker 
associated with a qualifying retail fund makes decisions inconsistent 
with how we understand retail funds generally behave, we believe that 
our approach appropriately balances this potential risk against the 
substantial benefits of providing a simple and cost-effective way to 
distinguish retail funds and provide a targeted floating NAV 
requirement.
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    \696\ See Retail Fund Joint Comment Letter.
    \697\ Natural persons often invest in money market funds through 
a variety of tax-advantaged accounts and trusts, including, for 
example: (i) participant-directed defined contribution plans 
(section 3(34) of the Employee Retirement Income Security Act 
(``ERISA'')); (ii) individual retirement accounts (section 408 or 
408A of the Internal Revenue Code (``IRC'')); (iii) simplified 
employee pension arrangements (section 408(k) of the IRC); (iv) 
simple retirement accounts (section 408(p) of the IRC); (v) 
custodial accounts (section 403(b)(7) of the IRC); (vi) deferred 
compensation plans for government or tax-exempt organization 
employees (section 457 of the IRC); (vii) Keogh plans (section 
401(a) of the IRC); (viii) Archer medical savings accounts (section 
220(d) of the IRC); (ix) college savings plans (section 529 of the 
IRC); (x) health savings account plans (section 223 of the IRC); and 
(xi) ordinary trusts (section 7701 of the IRC). Accounts that are 
not beneficially owned by natural persons (for example, accounts not 
associated with social security numbers), such as those opened by 
businesses, including small businesses, defined benefit plans, or 
endowments, would not qualify as retail money market funds.
    \698\ See Retail Fund Joint Comment Letter.
---------------------------------------------------------------------------

    As noted above, funds that intend to satisfy the retail fund 
definition will be required to adopt and implement policies and 
procedures reasonably designed to restrict beneficial ownership to 
natural persons.\699\ For example, funds could have policies and 
procedures that will help enable the fund to ``look through'' these 
types of accounts and reasonably conclude that the beneficial owners 
are natural persons. A fund's policies and procedures could, for 
example, require that the fund reasonably conclude that ownership is 
limited to natural persons and do so (i) directly, such as when the 
investor provides a social security number to the fund adviser, when 
opening a taxable or tax-deferred account through the adviser's 
transfer agent or brokerage division; or (ii) indirectly, such as when 
a social security number is provided to the fund adviser in connection 
with recordkeeping for a retirement plan, or a trust account is opened 
with information regarding the individual beneficiaries. We note that 
our definition of a retail money market fund provides a fund with the 
flexibility to develop policies and procedures that best suit its 
investor base and does not require that the fund use social security 
numbers to reasonably conclude that investors are natural persons. For 
example, a money market fund or the appropriate intermediary could 
determine the beneficial ownership of a non-U.S. natural person by 
obtaining other government-issued identification, for example, a 
passport.\700\
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    \699\ See rule 2a-7(a)(25).
    \700\ See, e.g., 31 CFR 1023.220(a)(2)(i)(A)(4)(ii) (requiring a 
broker-dealer to obtain for non-U.S. persons [a] taxpayer 
identification number, a passport number and country of issuance, an 
alien identification card number, or the number and country of 
issuance of any other government-issued document evidencing 
nationality or residence and bearing a photograph or similar 
safeguard).
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    In the Proposing Release, we discussed as an alternative to the 
daily redemption limit approach requiring that funds consider 
shareholder characteristics, such as whether the investor has a social 
security number or a taxpayer identification number. We noted our 
concern, however, that social security numbers do not necessarily 
correlate to an individual, and taxpayer identification numbers do not 
necessarily correlate to a business (for example, businesses operated 
as pass-through entities).\701\ One commenter reiterated this 
concern.\702\ We note, however, that the definition of a retail fund 
does not rely solely on each investor having a social security number. 
Rather, our approach recognizes that in most cases, a fund or 
intermediary may often satisfy the natural person test by implementing 
policies and procedures that require verifying a social security number 
at the time of account opening. But, the fund or intermediary may, for 
example, determine that a non-U.S. investor who does not have a social 
security number is a natural person (e.g., using a passport).
---------------------------------------------------------------------------

    \701\ See Proposing Release, supra note 25, at section 
III.A.4.c.iii.
    \702\ See Schwab Comment Letter (suggesting that any final rule 
identify accounts that are inherently retail and include them as 
part of the definition of a retail fund so that, for example, 
estates and trusts would qualify to invest in a retail money market 
fund (despite having a tax identification number, rather than a 
social security number). We note that an estate or trust would be 
able to qualify for investment in a retail fund under our 
definition, provided the fund reasonably concludes that the 
beneficial owner(s) is a natural person.
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    Finally, we note that, currently, it is not uncommon for a money 
market fund to be owned by both retail and institutional investors, 
typically through a retail and institutional share class, 
respectively.\703\ In order to qualify as a retail money market fund, 
funds with separate share classes for different types of investors (as 
well as single-class funds for both types of investors) will need to 
reorganize into separate money market funds for retail and 
institutional investors, which may be separate series of the fund.\704\ 
In the case of a money market fund with retail and institutional

[[Page 47799]]

share classes, two commenters suggested that the Commission provide 
relief from section 18(f)(1) of the Act (designed, in part, to prohibit 
material differences among the rights of shareholders in a fund) \705\ 
to allow the fund to reorganize the classes into separate money market 
funds.\706\
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    \703\ Rule 18f-3 under the Investment Company Act enables a 
money market fund to offer retail and institutional share classes by 
providing an exemption from sections 18(f)(1) and 18(i) of the 
Investment Company Act. We are amending, as proposed, rule 18f-3 
(the multiple class rule) 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 the money market funds that are subject the floating NAV 
requirement would not use the amortized cost method to a greater 
extent than mutual funds generally.
    \704\ Each series of a series investment company is a separate 
investment company under the Investment Company Act. See, e.g., Fair 
and Equitable Treatment of Series Type Investment Company 
Shareholders, Rel. No. IC-7276 (Aug. 8, 1972). See also J.R. 
Fleming, Regulation of Series Investment Companies under the 
Investment Company Act of 1940, 44 Bus. Law. 1179 (Aug. 1989).
    \705\ See Exemption for Open-End Management Investment Companies 
Issuing Multiple Classes of Shares; Disclosure by Multiple Class and 
Master-Feeder Funds, Investment Company Act Release No. 19955 (Dec. 
15, 1993), at n.19 and accompanying text.
    \706\ See Dechert Comment Letter; NYC Bar Committee Comment 
Letter. Section 18(f)(1) of the Act generally prohibits a fund from 
issuing any ``senior security'' and section 18(i) of the Act 
generally requires that every share of stock issued by a fund 
``shall be a voting stock and have equal voting rights with every 
other outstanding voting stock.'' Rule 18f-3 under the Act provides 
a conditional exemption from sections 18(f)(1) and 18(i) of the Act, 
but Rule 18f-3 does not provide an exemption to permit a fund with 
multiple classes of shares to separate a class from the other 
class(es) and reorganize it into a separate fund, and such a 
reorganization may implicate the concerns underlying sections 
18(f)(1) and 18(i) of the Act.
---------------------------------------------------------------------------

    We recognize that a reorganization of a share class of a money 
market fund into a new series may implicate section 18 of the 
Investment Company Act, as well as section 17(a) of the Investment 
Company Act (section 17(a) prohibits, among other things, certain 
transactions between a fund and an affiliated person of the fund to 
prevent unfairness to the fund or overreaching by the affiliated 
person).\707\ Notwithstanding the prohibitions in sections 17(a) and 
18(f)(1) and 18(i) of the Act, in the context of distinguishing between 
retail and institutional money market funds when implementing the 
reforms we are adopting today, the Commission is of the view that a 
reorganization of a class of a fund into a new fund may take place 
without separate exemptive relief, provided that the fund's board of 
directors, including a majority of the directors who are not interested 
persons of the fund, determines that the reorganization results in a 
fair and approximately pro rata allocation of the fund's assets between 
the class being reorganized and the class remaining in the fund.\708\ 
As is the case with any board determination, the basis for the fund 
board's determination should be documented fully in the fund's 
corporate minutes.\709\ We believe that a reorganization accomplished 
in this manner would be consistent with the investor protection 
concerns in sections 17(a) and 18 of the Act in this context. More 
specifically, we believe that this board determination, in the context 
of a one-time reorganization related specifically to effectuating a 
split of separate share classes in order to qualify as a retail money 
market fund, addresses the primary concerns that sections 17 and 18 of 
the Act are intended, in part, to address--to ensure that shareholders 
in a fund are treated fairly and prohibit overreaching by affiliates.
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    \707\ See section 17(b) (setting forth, among other things, the 
standards for exempting a transaction from the prohibition). Section 
17(a) of the Act, among other things, generally prohibits any 
affiliated person of a fund, acting as principal, from knowingly 
selling to or buying from the fund, any security or other property, 
with certain limited exceptions. A fund whose class of shares is 
being reorganized into a new fund may be an affiliated person of the 
new fund, due to, among other possibilities, sharing an investment 
adviser or board of directors. Similarly, the new fund may be an 
affiliated person of the fund. Accordingly, the sale of the assets 
of the fund to the new fund, and the new fund's purchase of those 
assets from the fund, in a reorganization of a class of the fund may 
be prohibited under sections 17(a)(1) and (2) of the Act. Rule 17a-8 
under the Act provides an exemption from sections 17(a)(1) and 
17(a)(2) of the Act for a transaction that is a ``merger, 
consolidation, or purchase or sale of substantially all of the 
assets'' of a fund that meets the rule's conditions. A 
reorganization of a class of a fund into a new fund may not be 
covered by rule 17a-8.
    \708\ A pro rata allocation ensures, for example, that portfolio 
securities with different liquidity and/or quality characteristics 
are distributed equally among each fund class. The board's 
determination requires a finding that the reorganization results in 
a fair and approximately pro rata allocation of the fund's assets in 
order to acknowledge that there may be limited situations in which a 
100% pro rata allocation may not be practical (e.g., an odd-lot 
portfolio security).
    \709\ All registered investment companies, including money 
market funds, must maintain as part of their records minute books 
for board of directors' meetings and preserve such records 
permanently, the first two years in an easily accessible place. See 
rules 31a-1(b)(4) and 31a-2(a)(1).
---------------------------------------------------------------------------

    The Commission's position is that, as part of implementing a 
reorganization in response to the amendments we are adopting today, a 
money market fund may involuntarily redeem certain investors that will 
no longer be eligible to invest in the newly established or existing 
money market fund. We recognize that such an involuntary redemption (or 
cancellation) of fund shares may implicate section 22(e) of the Act, 
which, among other things, generally prohibits a fund from suspending 
(or postponing) the right of redemption for any redeemable security for 
more than seven days after tender of such shares.\710\ Our staff has, 
in the past, however, provided no-action relief under section 22(e) of 
the Act in similar situations (e.g., where an investor's account 
balance falls below a certain value, provided shareholders are notified 
in advance).\711\ Notwithstanding the prohibitions in section 22(e) of 
the Act, in the context of a one-time reorganization to distinguish 
between retail and institutional money market funds (either in 
separating classes into new funds or in ensuring that an existing fund 
only has retail or institutional investors), the Commission's position 
is that a fund may involuntarily redeem investors who no longer meet 
the eligibility requirements in a fund's retail and/or institutional 
money market funds without separate exemptive relief, provided that the 
fund notifies in writing such investors who become ineligible to invest 
in a particular fund at least 60 days before the redemption occurs.
---------------------------------------------------------------------------

    \710\ For example, if a shareholder may not redeem a portion of 
his shares without causing an involuntary redemption of his or her 
entire account balance, the shareholder may be deprived of the right 
to redeem that portion of his account balance, in contravention of 
section 22(e).
    \711\ See, e.g., Scudder Group of Funds (pub. avail. Sept. 15, 
1992) (no-action relief granted to a fund that proposed to, upon 
providing 30 days' notice, involuntarily redeem accounts whose 
shareholders failed to provide taxpayer identification numbers); DFA 
U.S. Large Cap Portfolio Inc. (pub. avail. Sept. 7, 1990) (no-action 
relief provided to a fund that may, upon providing 30 days' notice, 
involuntarily redeem investors who failed to maintain at least $15 
million in a private advisory account with the investment adviser 
that produced annual advisory fees of at least $100,000; Axe-
Houghton Income Fund, Inc. (pub. avail. Mar. 19, 1981) (no-action 
relief provided to a fund that may, upon providing a number of 
notice and delayed effectiveness provisions, involuntarily redeem 
investors whose account balances fall below a prescribed threshold).
---------------------------------------------------------------------------

    Accordingly, the Commission is exercising its authority under 
section 6(c) of the Act to provide exemptions from these provisions of 
the Act to permit a money market fund to reorganize a class of a fund 
into a new fund in order to qualify as a retail money market fund and 
make certain involuntary redemptions as discussed above.\712\ As 
discussed above, 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. We discuss the potential costs of 
reorganizing funds below.\713\
---------------------------------------------------------------------------

    \712\ See section 6(c).
    \713\ We expect that money market funds that choose to rely on 
our exemptive relief above and make this determination in order to 
separate an existing retail share class into a new fund would do so 
only where the fund's adviser believes it would result in cost 
savings as compared with the costs of establishing entirely new 
funds (these costs are estimated below). We do not estimate any 
additional costs for funds to document the board's determination 
that the reorganization results in a fair and approximately pro rata 
allocation of the fund's assets. See supra note 709.
---------------------------------------------------------------------------

iii. Omnibus Account Issues
    As we discussed in the Proposing Release, most money market funds 
do

[[Page 47800]]

not have the ability to look through omnibus accounts to determine the 
characteristics 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, net redemptions, and they 
often present a single buy and single sell order to the fund. 
Accordingly, omnibus accountholders may make it more difficult for a 
money market fund to assure itself that it is able to operate as a 
retail fund.\714\
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    \714\ As we noted in the Proposing Release, the challenges of 
managing implementation of fund policies through omnibus accounts 
are not unique to distinguishing between retail and institutional 
funds. 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. Service providers also offer services designed to 
facilitate compliance and evaluation of intermediary activities.
---------------------------------------------------------------------------

    A money market fund that seeks to qualify as a retail fund must 
have policies and procedures that are reasonably designed to limit the 
fund's beneficial owners to natural persons. Because an omnibus 
accountholder is the shareholder of record (and not the beneficial 
owner), retail funds will need to determine that the underlying 
beneficial owners of the omnibus account are natural persons. We are 
not prescribing the ways in which a fund may seek to satisfy the retail 
fund definition, including how the fund will reasonably conclude that 
underlying beneficial owners of an omnibus account are natural 
persons.\715\ There are many ways for a fund to effectively manage 
their relationships with their intermediaries, including contractual 
arrangements or periodic certifications. Funds may manage these 
relations in the manner that best suits their circumstances. We note 
that a fund's policies and procedures could include, for example, 
relying on periodic representations of a third-party intermediary or 
other verification methods to confirm the individual's ownership 
interest, such as when a fund is providing investment only services to 
a retirement plan or an omnibus provider is unable or unwilling to 
share information that would identify the individual. Regardless of the 
specific policies and procedures followed by a fund in reasonably 
concluding that the underlying beneficial owners of an omnibus account 
are natural persons, we expect that a fund will periodically review the 
adequacy of such policies and procedures and the effectiveness of their 
implementation.\716\ Accordingly, such periodic reviews would likely 
assist funds in detecting and correcting any gaps in funds' policies 
and procedures, including a fund's ability to reasonably conclude that 
the underlying beneficial owners of an omnibus account are natural 
persons. As discussed below in the economic analysis, we have included 
in our aggregate cost estimate costs for funds to establish policies 
and procedures with respect to omnibus accounts, but we expect that 
funds generally will rely on financial intermediaries to implement such 
policies (rather than, for example, entering into contractual 
arrangements).
---------------------------------------------------------------------------

    \715\ We note that although it is a fund's obligation to satisfy 
the retail fund definition, an intermediary could nonetheless be 
held liable for violations of other federal securities laws, 
including the antifraud provisions, where institutional investors 
are improperly funneled into retail funds.
    \716\ See rule 38a-1(a)(3).
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iv. Economic Analysis
    In addition to the costs and benefits discussed above, implementing 
any reform that distinguishes between retail and institutional money 
market funds will likely have similar effects on efficiency, 
competition, and capital formation, regardless of how we define a 
retail money market fund (or retail investor). We discussed these 
effects in the Proposing Release and they are described below.\717\ To 
the extent that retail investors prefer a stable NAV money market fund, 
our floating NAV reform (that does not apply to retail funds) helps to 
maintain the utility of such a money market fund investment product. 
However, to the extent that funds seek to maintain a stable NAV by 
qualifying as a retail fund, there may be an adverse effect on capital 
formation if the associated costs incurred by funds are passed on to 
shareholders. Funds that choose to qualify as retail money market funds 
will incur some operational costs (discussed below) and, depending on 
their magnitude, these costs might affect capital formation and 
competition (depending on the varied ability of funds to absorb these 
costs).
---------------------------------------------------------------------------

    \717\ Commenters did not specifically address our discussion in 
the Proposing Release of the effects on efficiency, competition, and 
capital formation. A few commenters raised concerns about the costs 
associated with reorganizing money market funds into separate retail 
and institutional funds (or series), but did not quantify those 
costs or object specifically to the costs we estimated in the 
Proposing Release. See, e.g., Goldman Sachs Comment Letter; UBS 
Comment Letter.
---------------------------------------------------------------------------

    To the extent that retail investors prefer a stable NAV product and 
funds seek to qualify as retail money market funds under the amended 
rules, there may be negative effects on competition by benefitting fund 
groups with large percentages of retail investors relative to other 
funds. The Commission estimates that, as of February 28, 2014, 39 fund 
complexes (or 46% of all fund complexes) have 75% or more of their 
total assets self-reported as ``retail.'' \718\ There also could be a 
negative effect on competition to the extent that certain fund groups 
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 (retail and institutional). The Commission estimates 
that, as of February 28, 2014, there are approximately 76 fund 
complexes that currently offer separately designated retail and 
institutional money market funds (or series).\719\ 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 an 
existing structure that includes separate retail and institutional 
funds.
---------------------------------------------------------------------------

    \718\ Based on iMoneyNet data (39 fund complexes / 84 total fund 
complexes reported = 46%).
    \719\ Based on data from iMoneyNet.
---------------------------------------------------------------------------

    Two commenters also suggested that a bifurcation of existing assets 
in money market funds into retail and institutional funds might lead to 
a significant reduction in scale and therefore some funds may become 
uneconomical to operate, leading to further consolidation in the 
industry and a reduction in competition.\720\ As noted above, many fund 
complexes already operate under structures that separate retail and 
institutional investors, either by established funds, series, or 
classes, and therefore demonstrate that doing so is not uneconomical. 
We recognize, however, that to the extent there are money market funds 
or fund groups that determine that it would not be economical to 
operate separate retail and institutional individual money market 
funds, there may be a reduction in competition. We believe that such 
effects would be relatively small, as discussed in section III.K below. 
Finally, we note that there may be an adverse effect on competition to 
the extent that large money market funds are able, based on information 
from broker-dealers and other intermediaries, to receive full 
transparency into

[[Page 47801]]

beneficial owners. In this way, larger money market funds may find it 
easier to comply with their policies and procedures (and, in 
particular, with regard to omnibus account holders) to qualify as 
retail money market funds.
---------------------------------------------------------------------------

    \720\ See HSBC Comment Letter; M&T Bank Comment Letter.
---------------------------------------------------------------------------

    To the extent that money market funds are not able to distinguish 
effectively institutional from retail shareholders, it may have 
negative effects on efficiency by permitting ``gaming behavior'' by 
shareholders with institutional behavior patterns who nonetheless 
invest in retail funds. As discussed above, however, we believe the 
natural person test we are adopting reduces significantly the 
opportunity for ``gaming behavior'' when compared with our proposal. We 
also recognize that establishing qualifying retail money market funds 
may also negatively affect fund efficiency to the extent that 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.\721\ The costs of such a re-
organization are discussed below.
---------------------------------------------------------------------------

    \721\ We provide exemptive relief from certain provisions of the 
Act to facilitate the ability of money market funds to convert an 
existing retail fund share class into a separate retail fund series. 
See supra notes 706-709 and accompanying text.
---------------------------------------------------------------------------

    The costs and benefits of the natural person test are discussed 
above. In the Proposing Release, we also quantified the operational 
costs that money market funds, intermediaries, and money market fund 
service providers might incur in implementing and administering a $1 
million daily redemption limit.\722\ As commenters noted, however, we 
expect that the approach we are adopting today, based on limiting 
beneficial ownership to natural persons, is a simpler and more cost-
effective way to achieve our goals. Commenters noted that the natural 
person approach provides a front-end qualifying test that effectively 
requires intermediaries and/or fund advisers to verify the nature of 
each investor only once. As a result, the natural person test reduces 
operational complexity and eliminates some of the need for costly 
programming and ongoing monitoring.\723\ These commenters also noted 
that, although this approach will require some refinements to existing 
systems, these modifications will be significantly less costly than 
building a new system for tracking and aggregating daily shareholder 
redemption activity (as would be required under our proposal). Below, 
we quantify the estimated operational costs associated with 
implementing the natural person test.\724\
---------------------------------------------------------------------------

    \722\ We estimated that the initial costs would range from 
$1,000,000 to $1,500,000 for each fund that chooses to qualify as a 
retail money market fund and that money market funds and 
intermediaries implementing policies and procedures to qualify as 
retail money market funds likely would incur ongoing costs of 20%-
30% of the one-time costs, or between $200,000 and $450,000 per 
year. See Proposing Release, supra note 25, at nn.245 and 246 and 
accompanying text.
    \723\ See Retail Fund Joint Comment Letter.
    \724\ Our cost estimates are informed by the analysis in the 
Proposing Release, comments received, and adjusted to reflect the 
definition of a retail money market fund we are adopting today. See 
Proposing Release, supra note 25, at section III.A.4.d.
---------------------------------------------------------------------------

    The Commission estimates that based on those money market funds 
that self-report as ``retail,'' approximately 195 money market funds 
are likely to seek to qualify as a retail money market fund under our 
amended rules.\725\ We have estimated the ranges of hours and costs 
associated with the natural person test that may be required to perform 
activities typically involved in making systems modifications, 
implementing fund policies and procedures, and performing related 
activities.\726\ Although we do not have the information necessary to 
provide a point estimate of the potential costs associated with the 
natural person test, these estimates include one-time and ongoing costs 
to establish separate funds (or series) if necessary, modify systems 
and related procedures and controls, update disclosure in a fund's 
prospectus, as well as ongoing operational costs. All estimates are 
based on the staff's experience, commenter estimates, and discussions 
with industry representatives. We expect that only funds that determine 
that the benefits of qualifying as a retail money market fund justify 
the costs would seek to qualify and thus bear these costs. Otherwise, 
they would incur the costs of implementing a floating NAV generally or 
decide to liquidate the fund.
---------------------------------------------------------------------------

    \725\ Based on iMoneyNet, as of February 28, 2014.
    \726\ The costs estimated in this section would be spread among 
money market funds, intermediaries, and money market fund service 
providers (e.g., transfer agents and custodians). 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, we have 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.
---------------------------------------------------------------------------

    As discussed above, many money market funds currently are owned by 
both retail and institutional investors, although they often are 
separated into retail and institutional share classes. A fund that 
seeks to qualify as a retail money market fund under our amended rules 
will need to be structured to limit beneficial ownership to only 
natural persons, 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. In addition, funds may 
have one-time costs to obtain shareholder approval to the extent that a 
money market fund's charter documents and/or applicable state law 
require shareholder approval to effect a reorganization into separate 
retail and institutional money market funds.\727\ Funds and 
intermediaries also may incur one-time costs in training staff to 
understand the operation of the fund and effectively implement the 
natural person test.
---------------------------------------------------------------------------

    \727\ One commenter provided survey data suggesting that the 
one-time range of costs of a shareholder vote to segregate retail 
from institutional investors could range from $2 million--$5 million 
(57% of respondents) or $1 million--$2 million (14% of respondents). 
See SIFMA Comment Letter. No other commenters provided cost 
estimates regarding shareholder votes.
---------------------------------------------------------------------------

    In order to qualify as a retail money market fund, a fund will be 
required to adopt and implement policies and procedures reasonably 
designed to restrict beneficial owners to natural persons. Adopting 
such policies and procedures and modifying systems to identify an 
investor as a natural person who is eligible for investment in the fund 
also would involve one-time costs for funds and intermediaries. 
Regarding omnibus accounts, the rule does not prescribe the way in 
which funds should determine that underlying beneficial owners of an 
omnibus account are natural persons. We note that a fund may require 
(as a matter of doing business) that its intermediaries implement its 
policies, including those related to qualification as a retail fund. 
However, there are also other ways for a fund to manage their 
relationships with their intermediaries, such as entering into a 
contractual arrangement or obtaining certifications from the omnibus 
account holder. In preparing

[[Page 47802]]

the following cost estimates, we assumed that funds will generally rely 
on financial intermediaries to implement their policies without 
undergoing the costs of entering into a contractual arrangement with 
the financial intermediaries because funds and intermediaries would 
typically take the approach that is the least expensive. However, some 
funds may choose to undertake voluntarily the costs of obtaining an 
explicit contractual arrangement despite the expense.\728\
---------------------------------------------------------------------------

    \728\ A fund might, as a general business practice, prefer to 
enter into a formal contractual arrangement.
---------------------------------------------------------------------------

    In our proposal, we estimated that the initial costs would range 
from $1,000,000 to $1,500,000 for each fund that seeks to satisfy the 
retail money market fund definition (as proposed, using a daily 
redemption limit).\729\ One commenter provided specific cost estimates 
related to our proposal to define a retail money market fund based on a 
$1,000,000 daily redemption limit, estimating that it would cost the 
fund complex $11,200,000, or $311,000 per fund.\730\
---------------------------------------------------------------------------

    \729\ See supra note 722.
    \730\ See Federated X Comment Letter (``Federated would have to 
create new funds and fund classes in order to implement retail vs. 
institutional fund structures. This would cost approximately $1.7 
million. In order to accomplish client outreach, effect shareholder 
votes, print new regulatory documents, create new sales literature 
and engage with investors as to the new nature of their shares and 
alternatives, we estimate that Federated will expend another $4 
million. Revisiting and revising contractual relationships with 
broker-dealers and other intermediaries to provide for enforcement 
of the $1 million redemption limit would cost a further $1.3 
million. Charges from independent pricing services, custodians, 
record-keepers, and transfer agents are expected at nearly $3 
million. Upgrades to Federated's internal systems and systems that 
interface with customers and transfer agents would cost another $1.2 
million.''). These costs total $11,200,000. Averaged across the 
number of money market funds offered, this commenter estimates the 
one-time implementation costs to be $311,000 per fund ($11,200,000 / 
36 money market funds). See supra note 586 (using Form N-MFP data, 
Federated manages 36 money market funds).
---------------------------------------------------------------------------

    Based on staff experience and review of the comments received, as 
well as the changes to the retail definition in the final amendments, 
we estimate that the one-time costs necessary to implement policies and 
procedures and/or for a fund to qualify as a retail money market fund 
under our amended rules, including the various organizational, 
operational, training, and other costs discussed above, will range from 
$830,000 to $1,300,000 per entity.\731\ Our estimates represent a 
decrease of $170,000 on the low end, and a decrease of $200,000 on the 
high end from our proposed range of estimated operational costs.\732\ 
Our revised cost estimates reflect, as noted by commenters, a more 
cost-effective way to define a retail money market fund. Accordingly, 
our cost estimates take into account the fact that most money market 
funds will largely be able to satisfy the natural person test using 
information that funds already collect and have readily available, and 
reduce the estimated amount of resources necessary, for example, to 
program systems capable of tracking and aggregating daily shareholder 
redemption activity (that would have been required under our 
proposal).\733\
---------------------------------------------------------------------------

    \731\ Estimates also include costs to intermediaries to 
implement systems and procedures to satisfy money market fund 
requirements regarding omnibus accounts. We estimate that the 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 
documents necessary to reorganize fund structures into retail and 
institutional funds; and (iii) preparing training materials and 
administering training sessions for staff in affected areas. Our 
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 2013 at infra note 
2214. See infra note 2228 for the various types of professionals we 
estimate 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 estimates generally are based on our assumption that 
funds would use 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.A.2 of this Release.
    \732\ These amounts are calculated as follows: $1,000,000 
(proposed)--$830,000 = $170,000 (low end); $1,500,000 (proposed)--
$1,300,000 = $200,000 (high end). See Proposing Release, supra note 
25, at n.245 and accompanying text.
    \733\ See supra notes 722-724 and accompanying text.
---------------------------------------------------------------------------

    In addition to these one-time costs, as discussed above, funds may 
have one-time costs to obtain shareholder approval to the extent that a 
money market fund's charter documents and/or applicable state law 
require shareholder approval to effect a reorganization into separate 
retail and institutional money market funds. One commenter provided 
survey data that estimated the one-time costs would be between 
$1,000,000 to $5,000,000.\734\ We note, however, that the survey 
respondents are asset managers, many of whom may be responsible for 
fund complexes, and it is not clear whether these cost estimates 
represent costs to a fund complex or to a single fund. Although the 
Commission does not have the information necessary to estimate the 
number of funds that may seek shareholder approval to effect a 
reorganization, we estimate that it will cost, on average, 
approximately $100,000 per fund in connection with a shareholder 
vote.\735\ Finally, money market funds that seek to qualify as retail 
funds will be required to adopt policies and procedures that are 
reasonably designed to limit beneficial owners of the fund to natural 
persons. As discussed in section IV.A.2 (Retail Funds) below, we 
estimate that the initial time costs associated with adopting policies 
and procedures will be $492,800 for all fund complexes.
---------------------------------------------------------------------------

    \734\ See supra note 727.
    \735\ Our estimate is based on the most recently approved 
Paperwork Reduction Act renewal for rule 17a-8 under the Act 
(Mergers of Affiliated Companies), OMB Control No. 3235-0235, 
available at http://reginfo.gov/public/do/PRAViewICR?ref_nbr=201304-3235-015. Our estimate includes legal, mailing, printing, 
solicitation, and tabulation costs in connection with a shareholder 
vote.
---------------------------------------------------------------------------

    Funds that intend to qualify as retail money market funds will 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. Other ongoing costs may include 
systems maintenance, periodic review and updates of policies and 
procedures, and additional staff training. Finally, our estimates 
include ongoing costs for funds to manage and monitor intermediaries' 
compliance with fund policies regarding omnibus accounts. Accordingly, 
we continue to estimate, as we did in the proposal, that money market 
funds and intermediaries likely will incur ongoing costs related to 
implementation of a retail money market fund definition of 20%-30% of 
the one-time costs, or between $166,000 and $390,000 per year.\736\ We 
received no comments on this aspect of our proposal.
---------------------------------------------------------------------------

    \736\ 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.
---------------------------------------------------------------------------

3. Municipal Money Market Funds
    Both the fees and gates reform and floating NAV reform will apply 
to municipal money market funds (or tax-exempt funds \737\). We discuss 
below the

[[Page 47803]]

key characteristics of tax-exempt funds, commenter concerns regarding 
our proposal (and final amendments) to apply the fees and gates and 
floating NAV reforms to tax-exempt funds, and an analysis of potential 
economic effects. We note, as addressed below, that the majority of the 
comments received relating to tax-exempt funds were given in the 
context of our floating NAV reform.\738\
---------------------------------------------------------------------------

    \737\ ``Municipal money market fund'' and ``tax-exempt fund'' 
are used interchangeably throughout this Release. A municipal money 
market fund that qualifies as a retail money market fund would not 
be subject to the floating NAV reform. See supra section III.C.2.
    \738\ Section III.C.7 below discusses more general reasons for 
not excluding specific types of money market funds from the fees and 
gates amendments. These reasons apply equally to our analysis of 
municipal money market funds and the fees and gates amendments.
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a. Background
    Tax-exempt funds primarily hold obligations of state and local 
governments and their instrumentalities, which pay interest that 
generally is exempt from federal income taxes.\739\ Thus, the majority 
of investors in tax-exempt money market funds are those investors who 
are subject to federal income tax and therefore can benefit from the 
funds' tax-exempt interest. As discussed below, state and local 
governments rely in part on tax-exempt funds to fund public 
projects.\740\ As of February 28, 2014, tax-exempt funds held 
approximately $279 billion of assets, out of approximately $3.0 
trillion in total money market fund assets.\741\
---------------------------------------------------------------------------

    \739\ See 2009 Proposing Release, supra note 66.
    \740\ See infra section III.C.3.c; see also Investment Company 
Institute, Report of the Money Market Working Group, at 18 (Mar. 17, 
2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI 
Report'').
    \741\ Based on data from Form N-MFP.
---------------------------------------------------------------------------

    Industry data suggests institutional investors hold approximately 
29% ($82 billion) of municipal money market fund assets.\742\ This 
estimate is likely high, as omnibus accounts (which often represent 
retail investors) are often categorized as institutional by third-party 
researchers. One commenter, for example, surveyed its institutional 
tax-exempt money market funds, and found that approximately 50% of the 
assets in these ``institutional'' funds were beneficially owned by 
institutions.\743\
---------------------------------------------------------------------------

    \742\ Based on data from iMoneyNet and Form N-MFP as of February 
28, 2014. See supra note 683.
    \743\ See Comment Letter of the Dreyfus Corporation (Mar. 5, 
2014) (``Dreyfus II Comment Letter'').
---------------------------------------------------------------------------

    On average, over 70% of tax-exempt funds' assets (valued based upon 
amortized cost) are comprised of municipal securities issued as 
variable-rate demand notes (``VRDNs'').\744\ The interest rates on 
VRDNs are typically reset either daily or every seven days.\745\ VRDNs 
include a demand feature that provides the investor with the option to 
put the issue back to the trustee at a price of par value plus accrued 
interest.\746\ This demand feature is supported by a liquidity facility 
such as letters of credit, lines of credit, or standby purchase 
agreements provided by financial institutions.\747\ The interest-rate 
reset and demand features shorten the duration of the security and 
allow it to qualify as an eligible security under rule 2a-7. Tax-exempt 
funds also invest in tender option bonds (``TOBs''), which typically 
are floating rate securities that provide the holder with a put option 
at par, supported by a liquidity facility provided by a commercial 
bank.\748\
---------------------------------------------------------------------------

    \744\ Based on Form N-MFP data as of February 28, 2014 (the 
remaining holdings are ``other municipal debt'').
    \745\ See Frank J. Fabozzi & Steven V. Mann eds, Handbook of 
Fixed Income Securities 237 (8th ed. 2012).
    \746\ Id.
    \747\ See Neil O'Hara, The Fundamentals of Municipal Bonds 40-41 
(6th ed. 2012).
    \748\ See id. at 43-44.
---------------------------------------------------------------------------

b. Discussion
    In the Proposing Release, we noted that because most municipal 
money market funds tend to be owned by retail investors, who are among 
the greatest beneficiaries of the funds' tax advantages, most tax-
exempt funds would qualify under our proposed definition of retail 
money market fund and therefore would continue to offer a stable share 
price.\749\ We stated that, although there are some tax-exempt money 
market funds that self-classify as institutional funds, we believed 
these funds' shareholder base typically is comprised of omnibus 
accounts with underlying individual investors. As noted by commenters 
and discussed below, we now understand that only some (and not all) of 
these funds' shareholder base is comprised of omnibus accounts with 
underlying individual investors. We also stated our belief that, like 
many securities in prime funds, municipal securities present greater 
credit and liquidity risk than U.S. government securities and could 
come under pressure in times of stress.
---------------------------------------------------------------------------

    \749\ A few commenters noted that, in addition to individuals, 
corporations, partnerships, and other business entities may enjoy 
the tax benefits of investments in tax-exempt funds. See, e.g., 
Comment Letter of Federated Investors (Regulation of Tax-Exempt 
Money Market Funds) (Sept. 16, 2013) (``Federated VII Comment 
Letter''). One commenter noted that, while corporations may not 
enjoy the tax advantages afforded under the Internal Revenue Code to 
exempt dividends to the full degree that individuals can enjoy them, 
eligible corporations can benefit from a tax exemption under certain 
conditions (such as meeting a minimum holding period). See Dreyfus 
II Comment Letter.
---------------------------------------------------------------------------

    Many commenters suggested that we not apply our floating NAV reform 
\750\ or our fees and gates reform \751\ to municipal money market 
funds. Commenters raised specific concerns about the ability and extent 
to which tax-exempt funds would qualify as retail money market funds as 
proposed (and therefore be permitted to maintain a stable NAV). Several 
commenters noted that high-net-worth individuals, who often invest in 
tax-exempt funds because of the tax benefits, engage in periodic 
transactions that exceed the proposed $1 million daily redemption 
limit, which would effectively disqualify them from investing in a 
retail municipal fund, as proposed.\752\ We are addressing these 
concerns by adopting a definition of retail money market fund that will 
allow many of these individuals to invest in tax-exempt funds that 
offer a stable NAV. Funds that wish to qualify as retail money market 
funds will be required to limit beneficial ownership interests to 
``natural persons'' (e.g., individual accounts registered with social 
security numbers). Because the retail money market fund definition is 
not conditioned on a daily redemption limitation, but instead requires 
that retail money market funds restrict beneficial ownership to natural 
persons, high-net-worth individuals will not be subject to a redemption 
limit and thus should be able to continue investing in tax-exempt funds 
much like they do today.\753\
---------------------------------------------------------------------------

    \750\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; ICI Comment Letter.
    \751\ See, e.g., ICI Comment Letter; J.P. Morgan Comment Letter; 
Vanguard Comment Letter; see also Dreyfus II Comment Letter, 
(suggesting the fees and gates requirements should be limited to 
taxable prime funds); Legg Mason & Western Asset Comment Letter.
    \752\ See, e.g., Fidelity Comment Letter; Dechert Comment 
Letter; Fin. Svcs. Roundtable Comment Letter.
    \753\ Tax-exempt funds would, however, be potentially subject to 
our fees and gates reform.
---------------------------------------------------------------------------

    Several commenters expressed concern that a number of municipal 
money market funds would not qualify as retail money market funds, as 
proposed, because institutional investors hold them. Commenters noted 
that approximately 30% (and historically between 25% and 40%\754\) of 
tax-exempt funds currently self-report as institutional funds.\755\ We 
understand that some but not all of these funds' shareholder base is 
comprised of

[[Page 47804]]

omnibus accounts with underlying individual investors. A number of 
commenters supported the view that most investors in tax-exempt funds 
are individuals.\756\ One commenter stated its belief, however, that 
institutions rather than individuals or natural persons beneficially 
own a significant, if not majority, portion of the assets invested in 
these self-reported institutional tax-exempt funds.\757\ Although we 
understand that some omnibus accounts may be comprised of institutions 
without underlying individual beneficial owners, the lack of a 
statutory or regulatory definition of institutional and retail funds, 
along with a lack of information regarding investor attributes in 
omnibus accounts, prevents us from estimating with precision the 
portion of investors and assets in tax-exempt funds that self-report as 
institutional that are beneficially owned by institutions. As discussed 
above, however, industry data suggests that approximately 30% of 
municipal money market fund assets are held by institutional 
investors--investors that may not qualify to invest in a retail 
municipal money market fund.\758\
---------------------------------------------------------------------------

    \754\ Our staff's analysis, based on iMoneyNet data, shows that 
the amount of municipal money market fund assets held by 
institutional investors varied between 25% to 43% between 2001 to 
2013.
    \755\ See, e.g., BlackRock II Comment Letter; Federated VII 
Comment Letter; J.P. Morgan Comment Letter; Dreyfus II Comment 
Letter.
    \756\ See, e.g., T. Rowe Price Comment Letter (``[t]he tax-
exempt money market is retail-dominated''); Schwab Comment Letter; 
SIFMA Comment Letter.
    \757\ See Dreyfus II Comment Letter, supra note 743 and 
accompanying text. This commenter provided data suggesting that 
approximately 50% of the assets of its self-reported 
``institutional'' tax-exempt funds are beneficially owned by 
institutional investors. We acknowledge that certain tax-exempt 
funds may be beneficially owned by a large number of institutional 
investors. However, this data, which reflects only an analysis of 
this commenter's money market funds (rather than industry-wide 
data), does not necessarily support a finding that a majority of 
such assets is ``institutional'' in nature.
    \758\ See supra note 742.
---------------------------------------------------------------------------

    Several commenters argued that tax-exempt funds should not be 
subject to the fees and gates and floating NAV reforms because the 
municipal money market fund industry is not systemically risky. In 
support, commenters pointed to the relatively small amount of assets 
managed by municipal money market funds, the stability of tax-exempt 
funds during recent periods of market stress, and the diversity of the 
municipal issuer market.\759\ As discussed above, we acknowledge that 
the current institutional municipal money market fund industry is small 
relative to the overall money market fund industry. Despite its 
relatively small size, however, we are concerned that institutional 
investors that currently hold prime funds might be incentivized to 
shift assets from prime funds to municipal money market funds as an 
alternative stable NAV investment. This could undermine the goals of 
reform with respect to the floating NAV requirement by providing an 
easy way for institutional investors to keep stable value pricing while 
continuing to invest in funds with assets that, relatively speaking, 
have a risk character that is significantly closer to prime funds than 
government funds.\760\
---------------------------------------------------------------------------

    \759\ See, e.g., Fidelity Comment Letter; Schwab Comment Letter; 
Deutsche Comment Letter; T. Rowe Price Comment Letter; Dreyfus 
Comment Letter.
    \760\ In addition, as discussed below, municipal money market 
funds may be subject to heavy redemptions, even if they have not 
been in the past. The fees and gates amendments are intended to give 
funds and their boards tools to stem such heavy redemptions.
---------------------------------------------------------------------------

    Commenters argued that historical shareholder flows in municipal 
money market funds, as well as their past resiliency, demonstrate that 
they are not prone to runs or especially risky.\761\ They pointed out 
that shareholder flows from tax-exempt funds were moderate during times 
of recent market stress compared to significant outflows from 
institutional prime money market funds.\762\ A review of money market 
fund industry asset flows during the market stress in 2008 and 2011 
shows that tax-exempt funds remained relatively flat and tracked 
investor flows in other retail prime funds.\763\ We believe that some 
of this stability may be attributable to municipal money market funds' 
significant retail investor base rather than low portfolio risk.\764\ 
In this regard, we note that although investors did not flee municipal 
funds in times of market stress, they also did not move assets into 
municipal funds as they did into government funds.\765\ Accordingly, it 
appears that those investors did not perceive the risk characteristics 
of municipal funds to be similar to those of government funds. 
Consistent with this observation, our analysis indicates that the 
shadow price of tax-exempt funds is distributed more similarly to that 
of prime funds than government funds.\766\ Specifically, the volatility 
of the distribution of municipal money market fund shadow prices is 
significantly larger than the volatility of government funds.\767\ In 
addition, our staff's analysis of historical shadow prices shows that 
tax-exempt funds are more likely than government funds to experience 
large losses.\768\ Thus, we believe municipal funds are more similar in 
nature to prime funds than government funds for purposes of the 
floating NAV reform.
---------------------------------------------------------------------------

    \761\ See, e.g., Fidelity Comment Letter (noting that, more 
recently, the largest municipal bankruptcy (City of Detroit) had no 
discernible effects on money market funds); ICI Comment Letter; J.P. 
Morgan Comment Letter. A number of commenters also noted that during 
these periods of market stress, tax-exempt funds did not experience 
contagion from heavy redemptions like those experienced by 
institutional prime funds. See, e.g., ICI Comment Letter (noting 
that a tax-exempt fund sponsored by Lehman Brothers (the Neuberger 
Berman Tax-Free Fund) had two-thirds of its total net assets 
redeemed, but had no ripple effect on other tax-exempt funds or the 
broader municipal market); Dechert Comment Letter; BlackRock II 
Comment Letter.
    \762\ Id.
    \763\ See iMoneyNet (analyzing money market fund industry flows 
from September 12-December 19, 2008 and June 1-November 16, 2011). 
See also DERA Study, supra note 24, at 11, Figure 3.
    \764\ See ICI Comment Letter (stating that ``[t]he calm response 
of tax-exempt money market fund investors to events in Detroit is 
characteristic of how retail [emphasis added] investors are 
generally perceived to respond to market stresses.'').
    \765\ See DERA Study, supra note 24, at 7-8.
    \766\ Using data collected from Form N-MFP and iMoneyNet, the 
standard deviation of shadow prices (which is a measure used to 
assess the overall riskiness of a fund) estimated over the time 
period from November 2010 to February 2014 are 0.00023, 0.00039, and 
0.00052 for government, prime, and tax-exempt funds, respectively. 
This data shows that the standard deviation of tax-exempt funds is 
statistically significantly larger than the other two types of funds 
with a 99% confidence level. Furthermore, the frequency at which the 
shadow prices for tax-exempt funds is less than 1.000 is greater 
than for government funds and is increasing at lower shadow price 
values. Accordingly, this means that the likelihood for large 
negative returns and hence large losses is greater for tax-exempt 
funds than for government funds.
    \767\ Id.
    \768\ Id.
---------------------------------------------------------------------------

    Several commenters noted that the diversity of the municipal issuer 
market reduces the risks associated with municipal money market 
funds.\769\ We note that although there is some diversity among the 
direct issuers of municipal securities, the providers of most of the 
demand features for the VRDNs, most of which are financial services 
firms, are highly concentrated.\770\ This is a significant 
countervailing consideration because VRDNs comprise the majority of 
tax-exempt funds' portfolios.\771\ This level of concentration 
increases municipal funds' exposure to financial sector risk relative 
to, for example, government funds.\772\ And, in this regard, we are 
mindful of the potential for increased sector risk to the financial 
services firms that provide the demand features if investors reallocate 
assets to tax-exempt funds that are not subject to the fees and gates 
and floating NAV reforms.
---------------------------------------------------------------------------

    \769\ See supra note 759 and accompanying text.
    \770\ See DERA memo ``Municipal Money Market Funds Exposure to 
Parents of Guarantors'' http://www.sec.gov/comments/s7-03-13/s70313-323.pdf.
    \771\ See supra note 744 and accompanying text.
    \772\ Based on a review of Form N-MFP data as of February 28, 
2014, over 10% of the amortized cost value of VRDNs are guaranteed 
by a single bank, and approximately 54% of the amortized cost value 
is guaranteed by 10 banks.
---------------------------------------------------------------------------

    A number of commenters cited the resilient portfolio construction 
of municipal money market funds and

[[Page 47805]]

argued that the liquidity risk, interest rate risk, issuer risk, and 
credit/default risk of tax-exempt funds are more similar to government 
funds than prime funds.\773\ As discussed above, however, staff 
analysis shows that the distribution of fluctuations in the shadow NAV 
of tax-exempt funds is more similar to that of prime funds than 
government funds.\774\ Municipal securities typically present greater 
credit and liquidity risk than government securities.\775\ We believe 
that recent municipal bankruptcies have highlighted liquidity concerns 
related to municipal money market funds and note that, although 
municipal money market funds have previously weathered these events, 
there is no guarantee that they will be able to do so in the future.
---------------------------------------------------------------------------

    \773\ See, e.g., Fidelity Comment Letter (weekly liquid assets 
of tax-exempt funds is typically more than double the current 30% 
requirement under rule 2a-7). See also, e.g., ICI Comment Letter; 
SIFMA Comment Letter; Invesco Comment Letter; Legg Mason & Western 
Asset Comment Letter. Interest rate risk, as measured by weighted 
average maturity, is consistently lower for tax-exempt funds 
(averaging 35 days, well below the 60-day requirement in rule 2a-7) 
than prime and government funds. See Fidelity Comment Letter (citing 
iMoneyNet). Commenters also argued that the credit risk of tax-
exempt funds is more similar to government funds than prime funds. 
See, e.g., ICI Comment Letter (tax-exempt securities have low credit 
risk because municipalities are not generally interconnected and 
deterioration occurs over a protracted time); Dreyfus Comment Letter 
(many distressed issues (e.g., City of Detroit) become ineligible 
under rule 2a-7s risk-limiting conditions and therefore bankruptcy 
does not affect direct holdings of tax-exempt funds).
    \774\ See supra note 766.
    \775\ See, e.g., Notice of the City of Detroit, Michigan's 
bankruptcy filing with the United States Bankruptcy Court, Eastern 
District of Michigan, available at http://www.mieb.uscourts.gov/sites/default/files/detroit/Chp%209%20Detroit.pdf.
---------------------------------------------------------------------------

    Further, although we recognize that the structural features of 
VRDNs may provide tax-exempt funds with higher levels of weekly liquid 
assets and reduced interest rate risk as compared with prime funds, we 
do not find that on balance that warrants treating municipal funds more 
like government funds than prime funds. This is so because, among other 
things, the liquidity risk, interest rate risk, and credit risk 
characteristics result from concentrated exposure to VRDNs, and not 
because the municipal debt securities underlying the VRDNs or the 
related structural support are inherently liquid, free from interest 
rate risk, or immune from credit risks in the way that government 
securities generally are.\776\ Indeed, long-term municipal debt 
securities underlie most VRDNs, and these securities infrequently 
trade.\777\ Instead, the liquidity is provided through the demand 
feature to a concentrated number of financial institutions, and money 
market funds have experienced problems in the past when a large number 
of puts on securities were exercised at the same time.\778\
---------------------------------------------------------------------------

    \776\ See supra note 744 and accompanying text.
    \777\ See supra notes 744-748 and accompanying text.
    \778\ See DERA Study, supra note 24, at Table 1 (discussing how 
money market funds were adversely affected because of credit events 
that resulted in large numbers of securities being ``put'' back to 
demand feature providers, which resulted in bankruptcy, including 
Mutual Benefit Life Insurance Company and General American Life 
Insurance Co.).
---------------------------------------------------------------------------

    In fact, when we adopted the 2010 amendments to rule 2a-7, we cited 
to commenter concerns regarding the market structure of VRDNs and heavy 
reliance of tax-exempt funds on these security investments in 
determining not to require that municipal money market funds meet the 
10% daily liquid asset requirement that other money market funds must 
satisfy.\779\ Commenters did not generally support adding such a 
requirement, but the lack of a mandated supply of daily liquid assets 
leaves these funds more exposed to potential increases in redemptions 
in times of fund and market stress.\780\ As a result, the portfolio 
composition of some tax-exempt funds may change and present different 
risks in the future. In addition, because of the daily liquidity issues 
associated with VRDNs and the fact that tax-exempt money market funds 
are not required to maintain 10% daily liquid assets,\781\ these funds 
in particular may experience stress on their liquidity necessitating 
the use of fees and gates to manage redemptions (even with respect to 
the lower level of redemptions expected in a tax-exempt retail money 
market fund as compared to an institutional prime fund).
---------------------------------------------------------------------------

    \779\ See 2010 Adopting Release, supra note 17, at nn.240-243 
and accompanying text.
    \780\ See Fidelity Comment Letter; but see Wells Fargo Comment 
Letter. We note also that new regulations also may affect the 
issuance of the dominant types of securities that now provide the 
stability of tax-exempt funds. For example, because TOB programs are 
not exempt from the Volcker rule, banks and their affiliates will no 
longer be able to sponsor or provide support to a TOB program. See 
Volcker Rule, infra note 782. As a result, the portfolio composition 
of some tax-exempt funds may change and present different risks in 
the future.
    \781\ See rule 2a-7(d)(4)(ii).
---------------------------------------------------------------------------

    Several commenters also argued that certain structural features of 
tax-exempt funds make them more stable than prime money market funds 
and therefore these commenters believe that the floating NAV reform 
should not apply to tax-exempt funds. For example, these commenters 
observed that a tax-exempt fund's investments, primarily VRDNs, and, to 
a lesser extent, TOBs,\782\ have structural features (e.g., contractual 
credit enhancements or liquidity support provided by highly rated banks 
and one-to-seven day interest rate resets) that facilitate trading at 
par in the secondary market.\783\ We agree that these features lower 
the risk of portfolio holdings as compared to prime money market funds, 
but also recognize that holding municipal money market funds presents 
higher risks than those associated with government or Treasury funds. 
Not all VRDNs have credit support,\784\ and tax-exempt funds present 
credit risk.\785\ Accordingly, we

[[Page 47806]]

do not agree with commenters that, as noted above, suggest that the 
credit risk of tax-exempt funds is more similar to government funds 
than prime funds.
---------------------------------------------------------------------------

    \782\ Participation by banks and their affiliates in TOB 
programs are subject to the prohibitions and restrictions applicable 
to covered funds under the recently adopted Volcker Rule 
(implemented by Title VI of the Dodd-Frank Act, named for former 
Federal Reserve Chairman Paul Volcker, Section 619 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (12 U.S.C. 1851) 
(``Volcker Rule'')).
    \783\ See, e.g., Fidelity Comment Letter; ICI Comment Letter; 
SIFMA Comment Letter.
    \784\ Based on Form N-MFP data as of February 28, 2014, only 57% 
of VRDNs, which make up a majority of the assets in municipal money 
market funds, have a guarantee that protects a fund in case of 
default. In comparison, the federal government guarantees all 
government securities held by government funds.
    \785\ Credit risk may result from the financial health of the 
issuer itself, such as when the city of Detroit recently filed for 
bankruptcy, becoming the largest municipal issuer default in U.S. 
history, leading to significant outflows from municipal bond funds. 
See Jeff Benjamin, Detroit bankruptcy has surprising long-term 
implications for muni bond market, Crain's Detroit Business (Dec. 3, 
2013) http://www.crainsdetroit.com/article/20131203/NEWS/131209950/detroit-bankruptcy-has-surprising-long-term-implications-for-muni#. 
Although Detroit's credit deteriorated over a long period of time 
and thus the bankruptcy did not cause tax-exempt money market funds, 
which had largely anticipated the event, to experience significant 
losses, in the past there have not have not been significant lead 
times before a municipality evidenced a credit deterioration. See, 
e.g., ICI Comment Letter. For example, Orange County, California, 
had high-quality bond credit ratings just before filing one of the 
largest municipal bankruptcies in U.S. history on December 6, 1994. 
See Handbook of Fixed Income Securities, supra note 745, at 239. 
Orange County caused one money market fund to break the buck and 
several sponsors to inject millions of dollars of additional cash to 
rescue their funds. See, e.g., Viral V. Acharya et al, Regulating 
Wall Street: The Dodd-Frank Act and the New Architecture of Global 
Finance 308 (2011); see also Suzanne Barlyn, Investing Strategy What 
the Orange County Fiasco Means to the Muni Bond Market, Fortune 
(Jan. 16, 1995), http://archive.fortune.com/magazines/fortune/fortune_archive/1995/01/16/201819/index.htm. Another type of credit 
risk arises when financial institutions provide credit enhancement 
to municipal securities. For example, in 1992, Mutual Benefit Life 
Insurance Company (``Mutual Benefit'') went into conservatorship 
with the New Jersey Insurance Commissioner. The company had 
guaranteed forty-three municipal bond issues totaling $600 million, 
which financed money-losing real estate projects. Mutual Benefit's 
insolvency resulted in the termination of its guarantee on the bonds 
and halted interest payments resulting in losses for investors. See 
C. Richard Lehmann, Municipal Bond Defaults, in The Handbook of 
Municipal Bonds 509 (Susan C. Heide et al. eds., 1994).
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    For all of the above reasons, we believe that tax-exempt funds 
should be subject to the fees and gates and floating NAV reforms. As 
discussed, the risk profile of institutional municipal money market 
funds more closely approximates that of prime funds than government 
funds. Tax-exempt funds present credit risk, typically rely on a 
concentrated number of financial sector put or guarantee providers, and 
have portfolios comprised largely of a single type of structured 
investment product--all of which may present future risks that may be 
exacerbated by a potential migration of investors from prime funds that 
are unable or unwilling to invest in a floating NAV money market fund 
or money market fund that may impose fees and gates. Accordingly, we 
believe that tax-exempt funds should be subject to the fees and gates 
and floating NAV reforms adopted today.\786\
---------------------------------------------------------------------------

    \786\ Our rationale is consistent with our finding, discussed 
above, that we no longer believe that exempting institutional prime 
money market funds under section 6(c) of the Act is appropriate. See 
supra note 446 and accompanying text .
---------------------------------------------------------------------------

c. Economic Analysis of FNAV
    Although we expect that many tax-exempt funds will qualify as 
retail money market funds and therefore be able to maintain a stable 
NAV (as they do today), there are, as we discussed above, some 
institutional investors in municipal money market funds that may be 
unable or unwilling to invest in a floating NAV fund.\787\ To the 
extent that institutional investors continue to invest in a floating 
NAV municipal money market fund, the benefits of a floating NAV 
discussed in section III.B extend to these types of funds. Because a 
floating NAV requirement may reduce investment in those funds, however, 
we recognize that there will likely be costs for the sponsors of tax-
exempt funds, the institutions that invest in these types of funds, and 
tax-exempt issuers. These costs are the same as those described in 
section III.B for institutional prime funds and the costs described in 
section III.I for corporate issuers.
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    \787\ We believe that the economic analysis that follows would 
apply equally in the context of the fees and gates reform. For a 
discussion of the economic implications that may arise for 
investors, including retail investors who may be unable or unwilling 
to invest in a fund that can impose fees and gates, including 
potential implications on state and local funding, see infra section 
III.K.
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    To the extent that institutions currently invest in tax-exempt 
funds and are unwilling to invest in a floating NAV tax-exempt fund, 
the demand for municipal securities, for example, may fall and the 
costs of financing for municipalities may rise.\788\ We anticipate the 
impact, however, will likely be relatively small. As of the last 
quarter of 2012, tax-exempt funds held approximately 7% of the 
municipal debt outstanding.\789\ Of that 7%, institutional investors, 
who might divest their municipal fund assets if they do not want to 
invest in a floating NAV fund, held approximately 30% of municipal 
money market fund assets.\790\ Accordingly, we estimate institutional 
tax-exempt funds hold approximately 2% of the total municipal debt 
outstanding and thus 2% is at risk of leaving the municipal debt 
market.\791\ Although this could impact capital formation for 
municipalities, there are several reasons to believe that the impact 
would likely be small (including minimal impact on efficiency and 
competition, if any). First, institutional investors that currently 
invest in municipal funds likely value the tax benefits of these funds 
and many may choose to remain invested in them to take advantage of the 
tax benefits even though they might otherwise prefer stable to floating 
NAV funds. Second, to the extent that institutional investors divesting 
municipal funds lead to a decreased demand for municipal debt 
instruments, other investors may fill the gap. As discussed in the 
Proposing Release, ``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.\792\ 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.'' \793\
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    \788\ A number of commenters argued that applying our floating 
NAV reform to tax-exempt funds would reduce demand for municipal 
securities and raise the costs of financing. See, e.g., Fidelity 
Comment Letter (noting that tax-exempt funds purchase approximately 
65% of short-term municipal securities and that fewer institutional 
investors in tax-exempt funds will lead to less purchasing of short-
term municipal securities by tax-exempt funds and a corresponding 
higher yield paid by municipal issuers to attract new investors); 
BlackRock II Comment Letter; Federated VII Comment Letter; ICI 
Comment Letter; Comment Letter of Mayors, City of Irving, TX, et al 
(Sept. 12, 2013) (``U.S. Mayors Comment Letter'').
    \789\ Other published data is consistent with this estimate. 
See, for example, the Federal Reserve Board ``Flow of Funds Accounts 
of the United States'' (Z.1), which details the flows and levels of 
municipal securities and loans, to estimate outstanding municipal 
debt (March 6, 2014), available at http://www.federalreserve.gov/releases/z1/current/. These estimates are consistent with previous 
estimates presented in U.S. Securities and Exchange Commission. 2012 
Report on the Municipal Securities Market. The estimates in the 2012 
report were based on data from Mergent's Municipal Bond Securities 
Database.
    \790\ See supra note 742 and accompanying text.
    \791\ This estimate is calculated as follows: tax-exempt funds 
hold 7% of municipal debt outstanding x 30% of tax-exempt assets 
held by institutional investors = 2.1% of total tax-exempt debt held 
by institutions.
    \792\ The statistics in this paragraph are based on the Federal 
Reserve Board's Flow of Funds data.
    \793\ See Proposing Release, supra note 25, at 309.
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    Although institutional municipal funds represent a relatively small 
portion of the municipal debt market, we recognize that these funds 
represent a significant portion of the short-term municipal debt 
market.\794\ According to Form N-MFP data, municipal money market funds 
held $256 billion in VRDNs and short-term municipal debt as of the last 
quarter of 2013.\795\ Effectively, municipal money market funds 
absorbed nearly 100% of the outstanding VRDNs and short-term municipal 
debt. Considering that institutional tax-exempt funds represented 
approximately 30% of the municipal money market fund market, it follows 
that institutional tax-exempt funds likely held about $77 billion in 
VRDNs and short-term municipal debt. Any reduction in municipal funds 
therefore could have an appreciable impact on the ability of 
municipalities to obtain short-term lending. That said, this impact 
could be substantially mitigated because, as discussed above, other 
market participants may buy these securities or municipalities will 
adapt to a changing market by, for example, altering their debt 
structure. As discussed in the Proposing Release, ``[t]o make their 
issues attractive to alternative lenders, municipalities lengthened the 
terms of some of their debt securities,'' \796\ in the face of changing 
market conditions in recent years. To the extent that other market 
participants step in and fill the potential gap in demand, competition 
may increase. To the extent other market participants do not step in 
and fill the gap, capital formation may be adversely affected. Finally, 
if municipalities are required to alter their debt structure to foster 
demand for their securities (e.g.,

[[Page 47807]]

because demand declined as a result of our amendments), there may be an 
adverse effect on efficiency. Although we discuss above ways in which 
the short-term municipal debt market may adapt to continue to raise 
capital as it does today, we acknowledge that our floating NAV reform 
will impact institutional investors in tax-exempt funds and therefore 
likely impact the short-term municipal markets. On balance, however, we 
believe that realizing the goals of this rulemaking, including 
recognizing the concerns discussed above with respect to the risks 
presented by tax-exempt funds, justifies the potential adverse effects 
on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \794\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter.
    \795\ Based on data from N-MFP and iMoneyNet.
    \796\ See Proposing Release, supra note 25, at 309.
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4. Implications for Local Government Investment Pools
    As we discussed in the Proposing Release, we recognize that many 
states have established local government investment pools (``LGIPs''), 
money market fund-like investment pools that invest in short-term 
securities,\797\ which are required by law or investment policies to 
maintain a stable NAV per share.\798\ Accordingly, as we discussed in 
the Proposing Release, the floating NAV reform may have implications 
for LGIPs, including the possibility that state statutes and policies 
may need to be amended to permit the operation of investment pools that 
adhere to amended rule 2a-7.\799\ In addition, some commenters 
suggested that our floating NAV reform, as well as the liquidity fees 
and gates requirement, may result in outflows of LGIP assets into 
alternative investments that provide a stable NAV and/or do not 
restrict liquidity.\800\
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    \797\ LGIPs tend to emulate typical money market funds by 
maintaining a stable NAV per share through investments in short-term 
securities. See infra III.K.1, Table 1, note N.
    \798\ See, e.g., Comment Letter of U.S. Chamber of Commerce to 
the Hon. Elisse Walter (Feb. 13, 2013) (``Chamber III Comment 
Letter''), 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.K.1, Table 1, note N.
    \799\ GASB states that LGIPs that are operated in a manner 
consistent with rule 2a-7 (i.e., a ``2a-7-like pool'') may use 
amortized cost to value securities (and presumably, facilitate 
maintaining a stable NAV per share). See GASB, Statement No. 31, 
Accounting and Financial Reporting for Certain Investments and for 
External Investment Pools (Mar. 1997).
    \800\ See, e.g., Comment Letter of TRACS Financial/Institute of 
Public Investment Management (Sept. 17, 2013) (``TRACS Financial 
Comment Letter''); Comment Letter of Treasurer, State of Georgia 
(Sept. 16, 2013) (``Ga. Treasurer Comment Letter''); Comment Letter 
of County of San Diego Treasurer-Tax Collector (Sept. 17, 2013) 
(``San Diego Treasurer Comment Letter''). Because we are unable to 
predict how GASB will respond to our final amendments to rule 2a-7, 
we cannot quantify the extent to which LGIP assets may migrate into 
alternative investments.
---------------------------------------------------------------------------

    A few commenters noted that it is the GASB reference to ``2a-7 
like'' funds that links LGIPs to rule 2a-7, and not state 
statutes.\801\ Some commenters noted that our money market fund reforms 
do not directly affect LGIPs because the decision as to whether LGIPs 
follow our changes to rule 2a-7 is determined by GASB and the states, 
not the Commission.\802\ Some commenters suggested that, in response to 
our floating NAV reform, GASB and the states might decouple LGIP 
regulation from rule 2a-7 and continue to operate at a stable 
value.\803\ A few commenters suggested that we make clear that the 
changes we are adopting to rule 2a-7 are not intended to apply to 
LGIPs,\804\ and also reiterated concerns similar to those raised by 
other commenters on our floating NAV reform more generally (e.g., 
concerns about using market-based valuation, rather than amortized 
cost).\805\
---------------------------------------------------------------------------

    \801\ See, e.g., TRACS Financial Comment Letter; Federated IX 
Comment Letter.
    \802\ See, e.g., Federated II Comment Letter; Ga. Treasurer 
Comment Letter; Va. Treasury Comment Letter.
    \803\ See, e.g., Federated II, Comment Letter; Federated IV 
Comment Letter; TRACS Financial Comment Letter.
    \804\ See, e.g., Ga. Treasurer Comment Letter; Va. Treasury 
Comment Letter.
    \805\ See Ga. Comment Letter; Comment Letter of West Virginia 
Board of Treasury Investments (Sept. 17, 2013) (``WV Bd. of Treas. 
Invs. Comment Letter'').
---------------------------------------------------------------------------

    We acknowledge, as noted by commenters, that there may be effects 
and costs imposed on LGIPs as a result of the reforms we are adopting 
today. We expect it is likely that GASB will reevaluate its accounting 
standards in light of the final amendments to rule 2a-7 that we are 
adopting today and take action as it determines appropriate.\806\ We do 
not, however, have authority over the actions that GASB may or may not 
take, nor do we regulate LGIPs under rule 2a-7 or otherwise. In order 
for certain investors to continue to invest in LGIPs as they do today, 
state legislatures may determine that they need to amend state statutes 
and policies to permit investment in investment pools that adhere to 
rule 2a-7 as amended (unless GASB were to de-couple LGIP accounting 
standards from rule 2a-7). GASB and state legislatures may address 
these issues during the two-year compliance period for the fees and 
gates and floating NAV reforms.\807\ As noted above, a few commenters 
suggested that state statutes and investment policies may need to be 
amended, but did not provide us with information regarding how various 
state legislatures and other market participants might react. 
Accordingly, we remain unable to predict how various state legislatures 
and other market participants will react to our reforms, nor do we have 
the information necessary to provide a reasonable estimate of the 
impact on LGIPs or the potential effects on efficiency, competition, 
and capital formation.\808\
---------------------------------------------------------------------------

    \806\ GASB has currently included as a potential project in 2014 
an agenda item to identify potential alternative pool structures 
that could be suitable in the event that the Commission amends the 
way in which money market funds operate under rule 2a-7, including a 
move to a floating NAV. See Government Accounting Standards Board, 
Technical Plan for the First Third of 2014: Technical Projects (2a7-
Like External Investment Pools), available at http://gasb.org/cs/ContentServer?c=Document_C&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=1176163713461.
    \807\ See infra section III.N.
    \808\ As noted above, we do not have authority over the actions 
of GASB and/or its decision to facilitate the operation of LGIPs as 
stable value investment vehicles through linkage to rule 2a-7 
(including, as amended today).
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5. Unregistered Money Market Funds Operating Under Rule 12d1-1
    Several commenters expressed concern regarding amended rule 2a-7's 
effect on unregistered money market funds that choose to operate under 
certain provisions of rule 12d1-1 under the Investment Company 
Act.\809\ Rule 12d1-1 permits investment companies (``acquiring 
investment companies'') to acquire shares of registered money market 
funds in the same or in a different fund group in excess of the 
limitations set forth in section 12(d)(1) of the Investment Company 
Act.\810\ In

[[Page 47808]]

addition to providing an exemption from section 12(d)(1) of the 
Investment Company Act, rule 12d1-1 also provides exemptions from 
section 17(a) and rule 17d-1, which restrict a fund's ability to enter 
into transactions and joint arrangements with affiliated persons.\811\ 
A fund's investments in unregistered money market funds is not 
restricted by section 12(d)(1).\812\ Nonetheless, these investments are 
subject to the affiliate transaction restrictions in section 17(a) and 
rule 17d-1 and therefore require exemptive relief from such 
restrictions.\813\ Rule 12d1-1 thus permits a fund to invest in an 
unregistered money market fund without having to comply with the 
affiliate transaction restrictions in section 17(a) and rule 17d-1, 
provided that the unregistered money market fund satisfies certain 
conditions in rule 12d1-1.
---------------------------------------------------------------------------

    \809\ Dechert Comment Letter; Comment Letter of Russell 
Investments (Sept. 17, 2013) (``Russell Comment Letter''); 
Oppenheimer Comment Letter; UBS Comment Letter. See also Wells Fargo 
Comment Letter (arguing that proposed amendments to Form PF should 
not apply to unregistered liquidity vehicles owned exclusively by 
registered funds and complying with rule 12d1-1 under the Investment 
Company Act). We address the Form PF requirements for unregistered 
money market funds below. See infra section III.H.
    \810\ Under section 12(d)(1)(A), an investment company (and 
companies or funds it controls) is generally prohibited from 
acquiring more than three percent of another investment company's 
outstanding voting securities, investing more than five percent of 
its total assets in any given investment company, and investing more 
than 10 percent of its total assets in investment companies in the 
aggregate. See also section 12(d)(1)(B) (limiting the sale of 
registered open-end fund shares to other funds).
    \811\ Section 17(a) generally prohibits affiliated persons of a 
registered fund (``first-tier affiliates'') or affiliated persons of 
the fund's affiliated persons (``second-tier affiliates'') from 
selling securities or other property to the fund (or any company the 
fund controls). Section 17(d) of the Investment Company Act makes it 
unlawful for first- and second-tier affiliates, the fund's principal 
underwriters, and affiliated persons of the fund's principal 
underwriters, acting as principal, to effect any transaction in 
which the fund, or a company it controls, is a joint or a joint and 
several participant in contravention of Commission rules. Rule 17d-
1(a) prohibits first- and second-tier affiliates of a registered 
fund, the fund's principal underwriters, and affiliated persons of 
the fund's principal underwriter, acting as principal, from 
participating in or effecting any transaction in connection with any 
joint enterprise or other joint arrangement or profit-sharing plan 
in which the fund (or any company it controls) is a participant 
unless an application regarding the enterprise, arrangement or plan 
has been filed with the Commission and has been granted.
    \812\ Private funds are generally excluded from the definition 
of an ``investment company'' for purposes of the Investment Company 
Act. However, private funds that fall under section 3(c)(1) or 
3(c)(7) are deemed to be an investment company for purposes of the 
limitations set forth in section 12(d)(1)(A)(i) and 12(d)(1)(B)(i) 
governing the purchase or other acquisition by such private fund of 
any security issued by any registered investment company and the 
sale of any securities issued by any registered investment company 
to any such private fund. Although a private fund is subject to the 
limitations set forth in section 12(d) with respect to its 
investment in a registered investment company, a registered 
investment company is not subject to the limitations set forth in 
section 12(d) with respect to its investment in any such private 
fund.
    \813\ See Funds of Funds Investments, Investment Company Act 
Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)].
---------------------------------------------------------------------------

    Unregistered money market funds typically are organized by a fund 
adviser for the purpose of managing the cash of other investment 
companies in a fund complex and operate in almost all respects as a 
registered money market fund, except that their securities are 
privately offered and thus not registered under the Securities 
Act.\814\ For purposes of investments in an unregistered money market 
fund, the rule 12d1-1 exemption from the affiliate transaction 
restrictions is available only for investments in an unregistered money 
market fund that operates like a money market fund registered under the 
Investment Company Act. To be eligible, an unregistered money market 
fund is required to (i) limit its investments to those in which a money 
market fund may invest under rule 2a-7, and (ii) undertake to comply 
with all other provisions of rule 2a-7.\815\ Therefore, unless 
otherwise exempted, unregistered money market funds choosing to operate 
under rule 12d1-1 would need to comply with the amendments to rule 2a-7 
we are adopting today.
---------------------------------------------------------------------------

    \814\ Id.
    \815\ Rule 12d1-1(d)(2)(ii). In addition, the unregistered money 
market fund's adviser must be registered as an investment adviser 
with the Commission. See rule 12d1-1(b)(2)(ii). In order for a 
registered fund to invest in reliance on rule 12d1-1 in an 
unregistered money market fund that does not have a board of 
directors, the unregistered money market fund's investment adviser 
must perform the duties required of a money market fund's board of 
directors under rule 2a-7. See rule 12d1-1(d)(2)(ii)(B). Lastly, the 
investment company is also required to reasonably believe that the 
unregistered money market fund operates like a registered money 
market fund and that it complies with certain provisions of the 
Investment Company Act. See rule 12d1-1(b)(2)(i).
---------------------------------------------------------------------------

    Several commenters argued that unregistered money market funds that 
currently conform their operations to the requirements of rule 12d1-1 
should not be required to comply with certain provisions of our 
amendments to rule 2a-7, particularly our floating NAV and liquidity 
fees and gates amendments,\816\ and no commenters argued otherwise. 
Some of these commenters argued that the ability to invest in 
unregistered money market funds is a valuable tool for investment 
companies, because such unregistered money market funds are designed to 
accommodate the daily inflows and outflows of cash of the acquiring 
investment company, and can be operated at a lower cost than registered 
investment companies.\817\ Some of these commenters also argued that 
requiring unregistered money market funds to adopt a floating NAV would 
reduce the attractiveness of unregistered money market funds and 
possibly eliminate the unregistered fund as a cash management tool for 
an acquiring investment company.\818\
---------------------------------------------------------------------------

    \816\ Dechert Comment Letter; Russell Comment Letter; 
Oppenheimer Comment Letter; UBS Comment Letter.
    \817\ See, e.g., Dechert Comment Letter; Russell Comment Letter; 
UBS Comment Letter.
    \818\ See, e.g., Dechert Comment Letter; Russell Comment Letter.
---------------------------------------------------------------------------

    Although we recognize the benefits of using unregistered money 
market funds for these purposes, we do not believe that these types of 
funds are immune from the risks posed by money market funds generally. 
Several commenters argued that unregistered money market funds relying 
on rule 12d1-1 do not present the type of risk that our amendments are 
designed to reduce.\819\ These commenters also argued that, given that 
unregistered money market funds often are created solely for investment 
by acquiring investment companies and typically have the same sponsor, 
there is little concern of unforeseeable large-scale redemptions or 
runs on these funds.\820\
---------------------------------------------------------------------------

    \819\ Id.
    \820\ Id.
---------------------------------------------------------------------------

    We disagree, and we believe that if registered funds invest in 
unregistered money market funds in a different fund complex, these 
unregistered funds are equally susceptible to the concerns that our 
amendments are designed to address, including concerns about the risks 
of investors' incentives to redeem ahead of other investors in times of 
market stress and the resulting potential dilution of investor shares. 
For example, if multiple registered funds are investing in an 
unregistered money market fund in a different fund complex, a 
registered fund in one fund complex may have an incentive to redeem 
shares in times of market stress prior to the redemption of shares by 
funds in other fund complexes. This redemption could have a potentially 
negative impact on the remaining registered funds that are investing in 
the unregistered money market and could increase the risk of dilution 
of shares for the remaining registered funds.
    We also believe that unregistered money market funds that are being 
used solely as investments by investment companies in the same fund 
complex remain susceptible to redemptions in times of fund and market 
stress. For example, if multiple registered funds are invested in an 
unregistered money market fund in the same fund complex, a portfolio 
manager of one registered fund may have an incentive to redeem shares 
in times of market stress, which could have a potentially negative 
impact on the other registered funds that may also be invested in the 
unregistered fund. After further consideration regarding the 
comparability of risk in these funds, we believe that it is appropriate 
that our floating NAV

[[Page 47809]]

amendments apply to unregistered money market funds that conform their 
operations to the requirements of rule 12d1-1.\821\
---------------------------------------------------------------------------

    \821\ We note that unregistered money market funds that 
otherwise meet the definition of a government money market fund as 
defined in rule 2a-7(c)(2)(iii) would not be subject to the floating 
NAV requirement. See rule 2a-7(a)(16).
---------------------------------------------------------------------------

    Some commenters also argued that our liquidity fees and gates 
amendments are ill-suited for unregistered money market funds.\822\ 
Specifically, these commenters noted that under rule 12d1-1, the 
adviser typically performs the function of the unregistered fund's 
board for purposes of compliance with rule 2a-7.\823\ Therefore, these 
commenters argued, if fees and gates are implemented, the adviser would 
be called upon to make decisions about liquidity fees and gates, which 
could present a potential conflict of interest in situations when an 
affiliated investment company advised by the same adviser would be the 
redeeming shareholder.\824\
---------------------------------------------------------------------------

    \822\ See Dechert Comment Letter; Russell Comment Letter; UBS 
Comment Letter.
    \823\ Id.
    \824\ Id.
---------------------------------------------------------------------------

    We recognize that in many cases the adviser to an unregistered 
money market fund typically performs the function of the fund's 
board,\825\ and that this may create conflicts of interest. We continue 
to believe that, as discussed above in section III.A.2.b and given the 
role of independent directors, a fund's board is in the best position 
to determine whether a fee or gate is in the best interests of the 
fund. However, when there is no board of directors, we believe that it 
is appropriate for the adviser to the fund to determine when and how a 
fund will impose liquidity fees and/or redemption gates. We have 
previously stated that, in order for a registered fund to invest in 
reliance on rule 12d1-1 in an unregistered money market fund that does 
not have a board of directors (because, for example, it is organized as 
a limited partnership), the unregistered money market fund's investment 
adviser must perform the duties required of a money market fund's board 
of directors under rule 2a-7.\826\ In addition, we note that investment 
advisers are subject to a fiduciary duty, which requires them, when 
faced with conflicts of interest, to fully disclose to clients all 
material information, a duty that is intended ``to eliminate, or at 
least expose, all conflicts of interest which might include an 
investment adviser--consciously or unconsciously--to render advice 
which was not disinterested.'' \827\ While we cannot determine whether 
a conflict of interest exists in every case of an adviser advising both 
a registered fund and unregistered money market fund under rule 12d1-1, 
we note that the adviser is subject to the requirement to adopt and 
implement written policies and procedures reasonably designed to 
prevent violation of the Advisers Act and the rules thereunder, as 
required by rule 206(4)-7 under the Advisers Act.\828\
---------------------------------------------------------------------------

    \825\ See supra note 815.
    \826\ See Funds of Funds Release, supra note 813, at n.42. See 
also supra note 815.
    \827\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 
194 (1963).
    \828\ See rule 206(4)-7 of the Advisers Act (making it unlawful 
for an investment adviser registered with the Commission to provide 
investment advice unless the adviser has adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation of the Advisers Act by the adviser or any of its 
supervised persons).
---------------------------------------------------------------------------

6. Master/Feeder Funds--Fees and Gates Requirements
    We are adopting, as suggested by a commenter, a provision 
specifying the treatment of feeder funds in a master/feeder fund 
structure under the fees and gates requirements.\829\ This provision 
will not allow a feeder fund to independently impose a fee or gate in 
reliance on today's amendments.\830\ However, under the amended rule, a 
feeder fund will be required to pass through to its investors a fee or 
gate imposed by the master fund in which it invests.\831\ In response 
to our request for comment on whether particular funds or redemptions 
should not be subject to fees and gates, a commenter recommended that 
we permit a master fund and its board, but not a feeder fund and its 
board, to impose and set the terms of a fee or gate.\832\ The feeder 
fund would then have to ``institute'' the fee or gate on its 
redemptions ``at the times and in the amounts instituted by the master 
fund.'' \833\ Another commenter suggested, however, that fund boards 
should be given discretion to impose fees and/or gates on either or 
both a master or feeder fund(s).\834\
---------------------------------------------------------------------------

    \829\ See rule 2a-7(c)(2)(v) (defining ``feeder fund'' as any 
money market fund that owns, pursuant to section 12(d)(1)(E), shares 
of another money market fund).
    \830\ See id.
    \831\ Id.
    \832\ See Stradley Ronon Comment Letter.
    \833\ Id.
    \834\ See UBS Comment Letter.
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    We have considered the comments received and have been persuaded 
that a feeder fund in a master/feeder structure should only be 
permitted to pass through the fees and gates imposed by the master 
fund.\835\ The master/feeder structure is unique in that the feeder 
fund serves as a conduit to the master fund--the master fund being the 
fund that actually invests in money market securities. As a commenter 
pointed out, ``the master feeder structure comprises one pool of 
assets, managed by the master fund's investment adviser, under the 
oversight of the master fund's board of directors.'' \836\ Because the 
feeder fund's investments consist of the master fund's securities, its 
liquidity is determined by the master fund's liquidity. Accordingly, 
because a feeder fund's liquidity is dictated by the liquidity of the 
master fund, we believe the master fund and its board are best suited, 
in consultation with the master fund's adviser, to determine whether 
liquidity is under stress and a fee or gate should be imposed. We note 
that we took a similar approach with respect to master/feeder funds in 
rule 22e-3.\837\
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    \835\ For example, if a master fund's board determines that the 
master fund should impose a liquidity fee, a feeder fund must pass 
through that liquidity fee to its investors and we would expect it 
would subsequently remit such fee to the master fund.
    \836\ See Stradley Ronon Comment Letter. We note that only the 
master fund has an investment adviser because a master fund's shares 
are the only investment securities that may be held by the feeder 
fund. See section 12(d)(1)(E).
    \837\ See rule 22e-3(b).
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7. Application of Fees and Gates to Other Types of Funds and Certain 
Redemptions
    We have determined that all money market funds, other than 
government money market funds and feeder funds in a master/feeder fund 
structure, should be subject to the fees and gates requirements. We 
received a number of comments suggesting types of funds that should not 
be subject to the fees and gates requirements.\838\ In addition to the 
comments we received regarding the application of fees and gates to the 
types of funds discussed above, commenters also proposed other specific 
types of funds or entities that should not be subject to the fees and 
gates requirements, including, for example, money market funds with 
assets of less than $25 billion under management,\839\ or securities 
lending cash collateral reinvestment pools.\840\
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    \838\ See, e.g., supra sections III.C.2 and III.C.3 (discussing 
commenter support for excluding retail and municipal money market 
funds); but see, HSBC Comment Letter (``[W]e believe all MMFs should 
be required to have the power to apply a liquidity fee or gate so 
that the MMF provider can manage a low probability but high impact 
event.''); U.S. Bancorp Comment Letter.
    \839\ See PFM Asset Mgmt. Comment Letter.
    \840\ See State Street Comment Letter.
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    Because of the board flexibility and discretion included in the 
fees and gates amendments we are adopting today, as well as for the 
reasons discussed

[[Page 47810]]

below,\841\ we are requiring all funds, other than government money 
market funds and feeder funds in a master/feeder structure (for the 
reasons discussed above),\842\ to comply with the fees and gates 
requirements. As noted above, the fees and gates amendments do not 
require a fund to impose fees and gates if it is not in the fund's best 
interests. Thus, even if a particular type of fund is subject to the 
fees and gates provisions, it does not have to impose fees and gates. 
Rather, a fund's board may use fees and gates as tools to limit heavy 
redemptions and must act in the best interests of the fund in 
determining whether fees and gates should be imposed.
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    \841\ See also supra sections III.C.2-III.C.5 for a discussion 
of reasons specific to certain types of funds.
    \842\ See supra sections III.C.1 and III.C.6. As discussed above 
with respect to feeder funds, we believe feeder funds in a master/
feeder structure are distinguishable from other funds in that their 
liquidity is dictated by the liquidity of the master fund. Thus, we 
believe the flexibility and discretion afforded to boards in today's 
amendments should be limited to a master fund's board. We note that 
although feeder funds may not individually impose fees and gates in 
reliance on today's amendments, master funds are subject to today's 
amendments and their imposition of fees and gates will be passed 
through to feeder funds' investors.
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    In addition, we note that the fees and gates amendments will not 
affect a money market fund's investors unless the fund's weekly liquid 
assets fall below 30% of its total assets--i.e., the fund shows 
possible signs of heavy redemption pressure--and even then, it is up to 
the board to determine whether or not such measures are in the best 
interests of the fund. Allowing specific types of money market funds 
(other than government funds and feeder funds for the reasons discussed 
above) to not be subject to the fees and gates requirements could leave 
funds and their boards without adequate tools to protect shareholders 
in times of stress. Also, allowing funds not to comply with the fees 
and gates requirements would merely relieve a fund during normal market 
conditions of the costs and burdens created by the prospect that the 
fund could impose a fee or gate if someday it was subject to heavy 
redemptions.\843\ In considering these risks, costs, and burdens, as 
well as the possibility of unprotected shareholders and broader 
contagion to the short-term funding markets, we believe it is 
appropriate to subject all money market funds (other than government 
funds and feeder funds for the reasons discussed above) to the fees and 
gates requirements.
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    \843\ We noted in the Proposing Release that retail money market 
funds experienced fewer redemptions than institutional money market 
funds during the financial crisis and thus may be less likely to 
suffer heavy redemptions in the future. Nonetheless, we cannot 
predict if this will be the case if there is a future financial 
crisis.
---------------------------------------------------------------------------

    In addition to the reasons discussed above, we describe more fully 
below our rationale for subjecting particular types of funds and 
redemptions to the fees and gates amendments.
a. Small Redemptions and Irrevocable Redemptions
    Some commenters suggested that small redemptions should not be 
subject to fees and gates because they are less likely to materially 
impact the liquidity position of a fund.\844\ As discussed in the 
Proposing Release, we also have considered whether irrevocable 
redemption requests (i.e. requests that cannot be rescinded) that are 
submitted at least a certain period in advance should not be subject to 
fees and gates as the fund should be able to plan for such liquidity 
demands and hold sufficient liquid assets.\845\ We are concerned, 
however, that shareholders could try to ``game'' the fees and gates 
requirements if we took such an approach with respect to these 
redemptions, for example, by redeeming small amounts every day to fit 
under a redemption size limit or by redeeming a certain irrevocable 
amount every week and then reinvesting the redemption proceeds 
immediately if the cash is not needed.\846\ We also remain concerned 
that allowing certain redemptions to not be subject to fees and gates 
could add cost and complexity to the fees and gates requirements both 
as an operational matter (e.g., fund groups would need to be able to 
separately track which shares are subject to a fee or gate and which 
are not, and create the system and policies to do so) and in terms of 
ease of shareholder understanding without providing substantial 
benefits.\847\
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    \844\ See, e.g., Fin. Info. Forum Comment Letter.
    \845\ See Proposing Release, supra note 25, at 200-201.
    \846\ See supra note 315 and accompanying text. Commenters 
suggested that concerns over gaming could be addressed by putting 
additional policies in place, such as placing limits on the number 
of redemptions in any given period. See, e.g., Fin. Info. Forum 
Comment Letter. We believe that such a solution to gaming, much like 
an exception to the fees and gates requirements, would create 
additional cost and complexity to the amendments without substantial 
benefit.
    \847\ See supra note 315 and accompanying text.
---------------------------------------------------------------------------

b. ERISA and Other Tax-Exempt Plans
    Many commenters raised concerns regarding the application of fees 
and gates to funds offered in Employee Retirement Income Security Act 
(``ERISA'') and/or other tax-exempt plans.\848\ Some commenters 
expressed concern that fees and gates would create issues for these 
plans.\849\ For example, commenters were worried about potential 
violations of certain minimum required distribution rules that could be 
impeded by the imposition of a gate,\850\ potential taxation as a 
result of an inability to process certain mandatory refunds on a timely 
basis,\851\ problems arising in plan conversions or rollovers in the 
event of a fee or gate,\852\ possible conflicts with the Department of 
Labor's (``DOL'') qualified default investment (``QDIA'') rules,\853\ 
and certain general fiduciary requirements on plan fiduciaries with 
respect to adequate liquidity in their plan.\854\
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    \848\ See, e.g., Schwab Comment Letter; Fin. Svcs. Inst. Comment 
Letter; Oppenheimer Comment Letter; TIAA-CREF Comment Letter.
    \849\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab 
Comment Letter; Comment Letter of American Benefits Council (Sept. 
16, 2013) (``American Benefits Council Comment Letter'').
    \850\ See, e.g., Schwab Comment Letter; American Benefits 
Council Comment Letter; SPARK Comment Letter.
    \851\ See, e.g., id.
    \852\ See, e.g., American Benefits Council Comment Letter (``In 
some circumstances, retirement assets must be moved because of 
mandatory rollover requirements or because a plan has been 
abandoned. Certain safe harbor regulations and prohibited 
transaction class exemptions effectively require that funds be 
placed in an investment that seeks to maintain the dollar value that 
is equal to the amount invested, generally is liquid and does not 
impose `substantial restrictions' on redemptions.'') (citations 
omitted); Schwab Comment Letter.
    \853\ See, e.g., Schwab Comment Letter; American Benefits 
Council Comment Letter.
    \854\ See, e.g., American Bankers Ass'n Comment Letter; American 
Benefits Council Comment Letter.
---------------------------------------------------------------------------

    As an initial point, we note that money market funds are currently 
permitted to use a redemption gate and liquidate under rule 22e-3, and 
they still continue to be offered as investment options under tax-
qualified plans. However, in light of the commenters' concerns, we have 
consulted the DOL's Employee Benefits Security Administration 
(``EBSA'') regarding potential issues under ERISA. With respect to 
general fiduciary requirements on plan fiduciaries obligating them to 
prudently manage the anticipated liquidity needs of their plan, EBSA 
staff advised our staff that a money market fund's liquidity and its 
potential for redemption restrictions is just one of many factors a 
plan fiduciary would consider in evaluating the role that a money 
market fund would play in assuring adequate liquidity in a plan's 
investment portfolio.
    Additionally, we believe that certain other potential concerns 
presented by commenters, such as concerns regarding QDIAs and the 
imposition of a fee or

[[Page 47811]]

gate within 90 days of a participant's first investment, are unlikely 
to materialize. We understand that the imposition of a liquidity fee or 
gate would have to relate to a liquidation or transfer request within 
this 90-day period in order to create an issue with QDIA fiduciary 
relief. Even if this occurred with respect to a specific participant, 
steps may be taken to avoid concerns with the QDIA. We understand, for 
instance, that a liquidity fee otherwise assessed to the account of a 
plan participant or beneficiary could be paid by the plan sponsor or a 
service provider, and not by the participant, beneficiary or plan.\855\ 
In addition, a plan sponsor or other party in interest could loan funds 
to the plan for the payment of ordinary operating expenses of the plan 
or for a purpose incidental to the ordinary operation of the plan to 
avoid the effects of a gate.\856\ We understand that if necessary, 
other steps may also exist.
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    \855\ See Department of Labor, Employee Benefits Security 
Administration Field Assistance Bulletin 2008-03, Q11 (Apr. 29, 
2008).
    \856\ See Prohibited Transaction Exemption 80-26, [45 FR 28545 
(Apr. 29, 1980)], as amended at, [65 FR 17540 (Apr. 3, 2000)], [67 
FR 9485 (Mar. 1, 2002)] and [71 FR 17917 (Apr. 7, 2006)].
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    DOL staff has also advised the SEC that the ``substantial 
restrictions'' requirement, contained in Prohibited Transaction 
Exemptions 2004-16 \857\ and 2006-06,\858\ does not apply to money 
market funds.\859\ DOL staff further indicated to us, however, that a 
liquidity fee could raise issues under the conditions of these 
prohibited transaction exemptions that require that the IRA owner be 
able to transfer funds to another investment or another IRA ``within a 
reasonable period of time after his or her request and without penalty 
to the principal amount of the investment.'' \860\ We understand that 
while a gate of no longer than 10 business days would not amount to an 
unreasonable period of time under the conditions, DOL staff has advised 
us that, in order for a fiduciary to continue to rely on the exemptions 
for the prohibited transactions arising from the initial decision to 
roll over amounts to a money market fund that is sponsored by or 
affiliated with the fiduciary, additional steps would need to be taken 
to protect the principal amount rolled over in the event that a 
liquidity fee is imposed. We understand that examples of such 
additional steps would include a contractual commitment by the 
fiduciary or its affiliate to pay any liquidity fee otherwise assessed 
to the IRA, to the extent such fee would be deducted from the principal 
amount rolled over. Additionally, to the extent plan fiduciaries do not 
wish to take such steps, they can instead select government money 
market funds, which are not subject to the fees and gates amendments, 
or other funds that do not create prohibited transactions issues.
---------------------------------------------------------------------------

    \857\ [69 FR 57964 (Sept. 28, 2004)].
    \858\ [71 FR 20856 (Apr. 21, 2006)], as amended, [73 FR 58629 
(Oct. 7, 2008)].
    \859\ See section IV(e) of PTE 2004-16 and section V(c) of PTE 
2006-06.
    \860\ See section II(i) of PTE 2004-16 and section III(h) of PTE 
2006-06.
---------------------------------------------------------------------------

    Staff at EBSA have communicated that they will work with staff at 
the SEC to provide additional guidance as needed.
    With respect to the minimum distribution requirement and the 
ability to process certain mandatory distributions or refunds on a 
timely basis, we understand that although gates can hypothetically 
prevent required distributions or refunds, in practice it will be 
unlikely to occur as participants are unlikely to have their entire 
account invested in prime money market funds or, more precisely, one or 
more prime money market funds that determine to impose a gate at the 
same time.\861\ In addition, to the extent a gate does prevent a timely 
minimum distribution or refund, we understand that there are potential 
steps an individual or plan/IRA can take to avoid the negative 
consequences that may result from failure to meet the minimum 
distribution or refund requirements. For example, with respect to the 
minimum distribution requirement, an individual who fails to meet this 
requirement as a result of a gate is entitled to request a waiver with 
respect to potential excise taxes by filing a form with the IRS that 
explains the rationale for the waiver.\862\ In addition, with respect 
to plan qualification issues that may arise in the event a plan does 
not make timely minimum required distributions or refunds as a result 
of a gate, we understand that a plan sponsor may obtain relief pursuant 
to the Employee Plans Compliance Resolution System (``EPCRS'').\863\
---------------------------------------------------------------------------

    \861\ In addition, with respect to the minimum distribution 
requirement, we note that participants could be encouraged to take 
required distributions before the deadline to avoid the possibility 
that a gate could prevent them from meeting the requirements.
    \862\ See section 4974(d) of the Tax Code. We understand that to 
request a waiver, a taxpayer would file Form 5329 with the IRS. 
Whether to grant a waiver request is within the IRS's discretion.
    \863\ See Rev. Proc. 2013-12. We understand that, pursuant to 
the EPCRS, if a minimum required distribution or refund timing 
failure is insignificant or is corrected within a limited time 
period, and certain other requirements are satisfied, then the 
failure can be voluntarily corrected without filing with the IRS. 
Otherwise, we understand that a filing is required to correct 
qualification failures.
---------------------------------------------------------------------------

c. Insurance Funds
    A few commenters requested special treatment for money market funds 
underlying variable annuity contracts or other insurance products, 
citing contractual and state law restrictions affecting insurance and 
annuity products that would conflict with the ability of a money market 
fund's board to impose a fee or gate.\864\ Some commenters further 
noted that money market funds underlying variable contract separate 
accounts are not prone to runs.\865\ Another commenter noted that most 
insurance products have ``free-look'' provisions, allowing an owner to 
return his/her contract for full value if he/she is not satisfied with 
its terms.\866\ During such initial periods, insurance companies 
typically keep client funds in money market funds, which might be 
incompatible with fees and gates.\867\
---------------------------------------------------------------------------

    \864\ See, .e.g., Dechert Comment Letter; Comment Letter of 
American Council of Life Insurers (Sept. 17, 2013) (``ACLI Comment 
Letter''); TIAA-CREF Comment Letter.
    \865\ See ACLI Comment Letter; Comment Letter of Committee of 
Annuity Insurers (Sept. 17, 2013) (``CAI Comment Letter'').
    \866\ See Comment Letter of John Sklar (July 9, 2013) (``Sklar 
Comment Letter'').
    \867\ See id.
---------------------------------------------------------------------------

    We have determined not to provide special treatment for money 
market funds underlying variable annuity contracts or other insurance 
products for the fees and gates requirements. We recognize money market 
funds underlying variable annuity contracts or other insurance products 
may be indirectly subject to certain restrictions or requirements that 
do not apply to other money market funds. We note, however, that these 
same funds currently are permitted to suspend redemptions pursuant to 
rule 22e-3 and their ability to do so has not prevented them from being 
offered in connection with variable annuity and other insurance 
products. In addition, to the extent today's fees and gates amendments 
are incompatible with contractual or state law, or with free look 
provisions, we note that an insurance company can instead offer a 
government money market fund as an investment option under its 
contract(s).\868\ Moreover, fees and gates will not affect the everyday 
activities of money market funds. They are instead

[[Page 47812]]

designed to be used during times of potential stress.\869\ If the 
market or a money market fund is experiencing stress, an insurance 
company could choose not to place contract holders' investments into a 
money market fund during free look periods, subject to contractual 
provisions and prospectus disclosures.
---------------------------------------------------------------------------

    \868\ To the extent an insurance company determines to offer a 
government money market fund as a new investment option under a 
contract, we recognize that there may be costs associated with this 
process, including costs associated with disclosing a new investment 
option to contract-holders, negotiating arrangements with new 
government money market funds, and filing with the Commission a 
substitution application under section 26(c).
    \869\ We note that if, as suggested by commenters, money market 
funds underlying variable annuity or other insurance contracts are 
less prone to runs, then under the terms of our final rule 
amendments, such funds may be less likely to reach the liquidity 
thresholds that would trigger board consideration of fees or gates 
and, thus, may be less likely to be affected by today's amendments. 
See supra text accompanying note 865.
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D. Guidance on the Amortized Cost Method of Valuation and Other 
Valuation Concerns

    After further consideration, and as suggested by a number of 
commenters, our final rules will permit stable NAV money market funds 
(i.e., government and retail money market funds) to maintain a stable 
NAV by using amortized cost valuation and/or the penny rounding method 
of pricing.\870\ In addition, all other registered investment companies 
and business development companies (including floating NAV money market 
funds under our amendments) may, in accordance with Commission 
guidance, continue to use amortized cost to value debt securities with 
remaining maturities of 60 days or less if fund directors, in good 
faith, determine that the fair value of the debt securities is their 
amortized cost value, unless the particular circumstances warrant 
otherwise.\871\ Accordingly, even for floating NAV money market funds, 
amortized cost will continue to be an important part of the valuation 
of money market fund portfolio securities.\872\
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    \870\ See supra section III.B.5.
    \871\ See ASR 219, Financial Reporting Codification (CCH) 
section 404.05.a and .b (May 31, 1977), supra note 5. 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.' ''
    \872\ For a mutual fund not regulated under rule 2a-7, the 
Investment Company Act and applicable rules generally require that 
it price its shares at the current NAV by valuing portfolio 
securities for which market quotations are readily available 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) and rules 2a-4 and 22c-1. 
Notwithstanding these provisions, rule 2a-7 currently permits money 
market funds to use the amortized cost method of valuation and/or 
the penny rounding method of pricing. See current rule 2a-7(c).
---------------------------------------------------------------------------

    We believe the expanded valuation guidance, discussed below, will 
help advance the goals of our money market fund reform rulemaking, 
because, among other things, stronger valuation practices may lessen a 
money market fund's susceptibility to heavy redemptions by decreasing 
the likelihood of sudden portfolio write-downs that may encourage 
financially sophisticated investors to redeem early. We provide below 
expanded guidance on the use of amortized cost valuation as well as 
other related valuation issues.\873\
---------------------------------------------------------------------------

    \873\ Although discussed here primarily in the context of money 
market funds, except as noted below, this guidance is applicable to 
all registered investment companies and business development 
companies. For ease of reference, throughout this section we refer 
to all of these entities as ``funds.'' We note that stable NAV money 
market funds that qualify as retail or government money market funds 
may use the amortized cost method of valuation to compute the 
current share price provided, among other things, the board of 
directors believes that the amortized cost method of valuation 
fairly reflects the market-based NAV and does not believe that such 
valuation may result in material dilution or other unfair results to 
investors or existing shareholders. See generally rule 2a-7(c)(1)(i) 
and rule 2a-7(g)(1)(i)(A)-(C). We also note that stable NAV money 
market funds that qualify as retail or government money market funds 
may not rely on this guidance to use amortized cost valuation in 
shadow pricing because rule 2a-7 specifically requires shadow prices 
to reflect ``the current net asset value per share calculated using 
available market quotations (or an appropriate substitute that 
reflects current market conditions),'' and we would not consider 
amortized cost valuation to be an appropriate substitute that 
reflects current market conditions. See also 1983 Adopting Release, 
supra note 3, at n.44 and accompanying text (``In determining the 
market-based value of the portfolio for purposes of computing the 
amount of deviation, all portfolio instruments, regardless of the 
time to maturity, should be valued based upon market factors and not 
their amortized cost value.'').
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1. Use of Amortized Cost Valuation
    We consider it important, for a number of reasons, that funds and 
their investment advisers and boards of directors have clear guidance 
regarding amortized cost valuation. Typically, money market funds hold 
a significant portion of portfolio securities with remaining maturities 
of 60 days or less,\874\ and therefore, a floating NAV money market 
fund may use the amortized cost method to value these portfolio 
securities if the fund's board determines that the amortized cost value 
of the security is fair value. In addition, managers of floating NAV 
money market funds may have an incentive to use amortized cost 
valuation whenever possible in order to help stabilize the funds' NAV 
per share.
---------------------------------------------------------------------------

    \874\ For example, we estimate that approximately 56% of prime 
money market funds' portfolio securities had remaining maturities of 
60 days or less (not including interest-rate resets) as of February 
28, 2014. This estimate is based on Form N-MFP data.
---------------------------------------------------------------------------

    As noted above, under existing Commission guidance, funds would not 
be able to use amortized cost valuation to value certain debt 
securities when circumstances dictate that the amortized cost value of 
the security is not fair value.\875\ The Commission's guidance in the 
Proposing Release construed the statute to effectively limit the use of 
amortized cost valuation to circumstances where it is the same as 
valuation using market-based factors.\876\ Some commenters objected to 
this interpretation and suggested that the Commission more generally 
clarify this guidance.\877\
---------------------------------------------------------------------------

    \875\ See ASR 219, Financial Reporting Codification (CCH) 
section 404.05.a and .b (May 31, 1977), supra note 5 (``Although 
debt securities with remaining maturities in excess of 60 days 
should not be valued at amortized cost, the Commission will not 
object if the board of directors of a money market fund, in good 
faith, determines that the fair value of debt securities originally 
purchased with remaining maturities of 60 days or less shall be 
their amortized cost value, unless the particular circumstances 
dictate otherwise. Nor will the Commission object if, under similar 
circumstances, the fair value of debt securities originally 
purchased with maturities of in excess of 60 days, but which 
currently have maturities of 60 days or less, is determined by using 
amortized cost valuation for the 60 days prior to maturity, such 
amortization being based upon the market or fair value of the 
securities on the 61st day prior to maturity'' (footnotes omitted)).
    \876\ See Proposing Release, supra note 25, n.136.
    \877\ See, e.g., Invesco Comment Letter (``one of the footnotes 
to the Proposed Rule . . . refers to amortized cost pricing being 
available when it is the same as valuation based on market factors, 
implying that MMF could be barred from using amortized cost pricing 
if it differs even minutely from the market value of the securities. 
While we believe this implication to have been unintentional, we 
nevertheless request the Commission to reaffirm clearly that MMFs, 
as all other mutual funds, can continue to use amortized cost 
pricing for securities with maturities of 60 days and less.'' 
(internal citations omitted)); ICI Comment Letter (also referring to 
this footnote and stating ``It is unclear whether this means that 
amortized cost must at all times be identical to market-based price, 
or whether it is just another way of saying funds must use market-
based pricing and not amortized cost. We urge the SEC to clarify 
that ASR 219 and its interpretations remain unchanged.'').
---------------------------------------------------------------------------

    We recognize that existing valuation guidance may not be clear on 
how frequently funds should compare a debt security's amortized cost 
value to its fair value determined using market-based factors and what 
extent of deviation between the two values is permissible. We generally 
believe that a fund may only use the amortized cost method to value a 
portfolio security with a remaining maturity of 60 days or less when it 
can reasonably conclude, at each time it makes a valuation 
determination,\878\ that the amortized

[[Page 47813]]

cost value of the portfolio security is approximately the same as the 
fair value of the security as determined without the use of amortized 
cost valuation. Existing credit, liquidity, or interest rate conditions 
in the relevant markets and issuer specific circumstances at each such 
time should be taken into account in making such an evaluation.
---------------------------------------------------------------------------

    \878\ As discussed below, we believe that, in some circumstances 
(e.g., intraday), a fund may rely on the last obtained market-based 
data to assist it when valuing its portfolio securities using 
amortized cost.
---------------------------------------------------------------------------

    Accordingly, it would not be appropriate for a fund to use 
amortized cost to value a debt security with a remaining maturity of 60 
days or less and thereafter not continue to review whether amortized 
cost continues to be approximately fair value until, for example, there 
is a significant change in interest rates or credit deterioration. We 
generally believe that a fund should, at each time it makes a valuation 
determination, evaluate the use of amortized cost for portfolio 
securities, not only quarterly or each time the fund produces financial 
statements. We note that, under the final rules, each money market fund 
will be required to value, on a daily basis, the fund's portfolio 
securities using market-based factors and disclose the fund's share 
price (or shadow price) rounded to four decimal places on the fund's 
Web site. As a result, we believe that each money market fund should 
have readily available market-based data to assist it in monitoring any 
potential deviation between a security's amortized cost and fair value 
determined using market-based factors. We believe that, in certain 
circumstances, such as intraday, a fund may rely on the last obtained 
market-based data to assist it when valuing its portfolio securities 
using amortized cost. To address this, a fund's policies and procedures 
could be designed to ensure that the fund's adviser is actively 
monitoring both market and issuer-specific developments that may 
indicate that the market-based fair value of a portfolio security has 
changed during the day, and therefore indicate that the use of 
amortized cost valuation for that security may no longer be 
appropriate.
2. Other Valuation Matters
    Rule 2a-4 under the Investment Company Act provides that 
``[p]ortfolio securities with respect to which market quotations are 
readily available shall be valued at current market value, and other 
securities and assets shall be valued at fair value as determined in 
good faith by the board of directors of the registered company.'' As we 
discussed in the Proposing Release, the vast majority of money market 
fund portfolio securities do not have readily available market 
quotations because most portfolio securities such as commercial paper, 
repos, and certificates of deposit are not actively traded in the 
secondary markets.\879\ Accordingly, most money market fund portfolio 
securities are valued largely based upon ``mark-to-model'' or ``matrix 
pricing'' estimates.\880\ In matrix pricing, portfolio asset values are 
derived from a range of different inputs, with varying weights attached 
to each input, such as pricing of new issues, yield curve information, 
spread information, and yields or prices of securities of comparable 
quality, coupon, maturity, and type.\881\ Money market funds also may 
consider evaluated prices from third-party pricing services, which may 
take into account these inputs as well as prices quoted from dealers 
that make markets in these instruments and financial models.\882\
---------------------------------------------------------------------------

    \879\ See Proposing Release, supra note 25, at section II.B.1.
    \880\ See, e.g., Harvard Business School FSOC Comment Letter 
(``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 therefore there are relatively few prices from the 
secondary market or broker quotes).
    \881\ See, e.g., Federated VI Comment Letter; Hai Jin, et al., 
Liquidity Risk and Expected Corporate Bond Returns, 99 J. of Fin. 
Econ. 628, at n.4 (2011) (``Matrix prices are set according to some 
algorithm based on prices of bonds with similar characteristics'').
    \882\ See, e.g., Federated VI Comment Letter; Angel Comment 
Letter.
---------------------------------------------------------------------------

    We received a number of comments regarding the utility of market-
based valuation for money market securities and other securities that 
do not frequently trade in secondary markets. We also received comments 
discussing certain other valuation matters more generally, such as the 
use of pricing services in valuing such securities. Together, these 
comments indicated to us the need for further guidance in this area, 
which we provide below.
a. Fair Value for Thinly Traded Securities
    First, some commenters suggested that market-based valuations of 
money market fund portfolio securities are not particularly meaningful, 
given the infrequent trading in money market fund portfolio securities 
and the use of matrix or model-based pricing or evaluated prices from 
third-party pricing services.\883\ One commenter stated that ``it does 
not follow that the normal arguments for using actual market prices for 
calculating mutual fund NAVs apply to using noisy guesstimates of true 
value of non-traded assets.'' \884\ Another commenter stated that, with 
regard to matrix-priced money market fund portfolio securities, 
``[m]arket-based valuations are not more accurate valuations than 
amortized cost.'' \885\
---------------------------------------------------------------------------

    \883\ See, e.g., Federated IV Comment Letter; Legg Mason & 
Western Asset Comment Letter; Chamber II Comment Letter.
    \884\ See Angel Comment Letter.
    \885\ See Federated VI Comment Letter (``Pricing experts have 
confirmed to us that only a small percentage of money market 
instruments actually trade daily in secondary markets. While the 
amortized cost method of valuing MMF portfolios is a simple and 
accurate means of valuing these types of high-quality, short-term 
instruments that generally are held to maturity, the effort to 
arrive at market-based valuations for these types of instruments is 
time-consuming, complicated and less exact.'').
---------------------------------------------------------------------------

    We acknowledge that matrix pricing and similar pricing methods 
involve estimates and judgments--and thus may introduce some ``noise'' 
into portfolio security prices, and therefore into the fund's NAV per 
share when rounded to one basis point. However, we do not agree that 
market-based prices of portfolio securities do not provide meaningful 
information or that amortized cost generally provides better or more 
accurate values of securities that do not frequently trade or that may 
or may not be held to maturity given the fund's statutory obligation to 
investors to satisfy redemptions within seven days (and a fund's 
disclosure commitment to generally satisfy redemptions much 
sooner).\886\ Indeed, many debt securities held by other types of funds 
do not frequently trade, but our long-standing guidance on the use of 
amortized cost valuation is limited to debt securities with remaining 
maturities of 60 days or less and even then only if the amortized cost 
value of these securities is fair value.\887\ This guidance was based 
on our concern that ``the use of the amortized cost method i[n] valuing 
portfolio securities of registered investment companies may result in 
overvaluation or undervaluation of the portfolios of such

[[Page 47814]]

companies, relative to the value of the portfolios determined with 
reference to current market-based factors.'' \888\ Such guidance is 
based on a preference embodied in the Investment Company Act that funds 
value portfolio securities taking into account current market 
information.\889\
---------------------------------------------------------------------------

    \886\ Many money market funds promise in fund disclosures to 
satisfy redemption requests on the same day as the request, except 
in extraordinary conditions. In addition, funds that are sold 
through broker-dealers seek to satisfy redemption requests within 
three business days because broker-dealers are subject to Securities 
Exchange Act rule 15c6-1, which establishes three business days as 
the standard settlement period for securities trades effected by a 
broker or a dealer.
    \887\ See ASR 219, Financial Reporting Codification (CCH) 
section 404.05.a and .b (May 31, 1977), supra note 5. We have said 
that it is inconsistent with rule 2a-4 to use the amortized cost 
method of valuation to determine the fair value of debt securities 
that mature at a date more than 60 days after the valuation date.
    \888\ Id.
    \889\ Section 22(c) and rules 2a-4 and 22c-1(a).
---------------------------------------------------------------------------

    Because most money market fund portfolio securities are not 
frequently traded and thus are not securities for which market 
quotations are readily available, we understand that they are typically 
fair valued in good faith by the fund's board.\890\ As a general 
principle, the fair value of a security is the amount that a fund might 
reasonably expect to receive for the security upon its current 
sale.\891\ Determining fair value requires taking into account market 
conditions existing at that time. Accordingly, funds holding debt 
securities generally should not fair value these securities at par or 
amortized cost based on the expectation that the funds will hold those 
securities until maturity, if the funds could not reasonably expect to 
receive approximately that value upon the current sale of those 
securities under current market conditions.\892\ We recognize that 
valuing thinly traded debt securities can be more complicated and time-
consuming than valuing liquid equity securities based on readily 
available market quotations or than valuing debt securities using the 
amortized cost method. However, given the redeemable nature of mutual 
fund shares and the mandates of the Investment Company Act to sell and 
redeem fund shares at prices based on the current net asset values of 
those shares, we believe it is important for funds to take steps to 
ensure that they are properly valuing fund shares and treating all 
shareholders fairly.
---------------------------------------------------------------------------

    \890\ As discussed further below, although a fund's directors 
cannot delegate their statutory duty to determine the fair value of 
fund portfolio securities, the board may appoint others, such as the 
fund's investment adviser or a valuation committee, to assist them 
in determining fair value. See infra note 898 and accompanying text.
    \891\ See Securities and Exchange Commission Codification of 
Financial Reporting Policies, Statement Regarding ``Restricted 
Securities,'' Investment Company Act Release No. 5847 (Oct. 21, 
1969) [35 FR 19989 (Dec. 31, 1970)] (``ASR 113''); Investment 
Companies, Investment Company Act Release No. 6295 (Dec. 23, 1970) 
[35 FR 19986 (Dec. 31, 1970)], Financial Reporting Codification 
(CCH) section 404.03 (Apr. 15, 1982) (``ASR 118''). We generally 
believe that the current sale standard appropriately reflects the 
fair value of securities and other assets for which market 
quotations are not readily available within the meaning of section 
2(a)(41)(B). The price that an unrelated willing buyer would pay for 
a security or other asset under current market conditions is 
indicative of the value of the security or asset. See also FASB ASC 
paragraph 820-10-35-3 and FASB ASC paragraph 820-10-20 (``A fair 
value measurement assumes that the asset or liability is exchanged 
in an orderly transaction between market participants to sell the 
asset or transfer the liability at the measurement date under 
current market conditions.''; Fair Value means ``the price that 
would be received to sell an asset or paid to transfer a liability 
in an orderly transaction between market participants at the 
measurement date'').
    \892\ As we have previously stated: ``Fair value cannot be based 
on what a buyer might pay at some later time, such as when the 
market ultimately recognizes the security's true value as currently 
perceived by the portfolio manager. Funds also may not fair value 
portfolio securities at prices not achievable on a current basis on 
the belief that the fund would not currently need to sell those 
securities.'' See, e.g., In the Matter of Jon D. Hammes, et al., 
Investment Company Act Release No. 26290 (Dec. 11, 2003) at n.5 
(settlement). See also FASB ASC 820, at paragraph 820-10-35-54H (``A 
reporting entity's intention to hold the asset or to settle or 
otherwise fulfill the liability is not relevant when measuring fair 
value because fair value is a market-based measurement, not an 
entity-specific measurement.'').
---------------------------------------------------------------------------

b. Use of Pricing Services
    As noted above, many funds, including many money market funds, use 
evaluated prices provided by third-party pricing services to assist 
them in determining the fair values of their portfolio securities. Some 
commenters have raised concerns that money market funds will place 
undue reliance on a small market of third-party pricing vendors, even 
though they acknowledge that they provide only ``good faith'' opinions 
on valuation.\893\ A few commenters argued that eliminating amortized 
cost valuation for money market funds and requiring market-based 
pricing could provide third-party pricing services with a much greater 
degree of influence on fund's portfolio valuation, which could increase 
operational complexity and risks.\894\
---------------------------------------------------------------------------

    \893\ See, e.g., Federated VI Comment Letter; SIFMA Comment 
Letter; Angel Comment Letter.
    \894\ See, e.g., Federated VI Comment Letter; Chamber II Comment 
Letter.
---------------------------------------------------------------------------

    We recognize that pricing services employ a wide variety of pricing 
methodologies in arriving at the evaluated prices they provide, and the 
quality of those prices may vary widely. We note that the evaluated 
prices provided by pricing services are not, by themselves, ``readily 
available'' market quotations or fair values ``as determined in good 
faith by the board of directors'' as required under the Investment 
Company Act.\895\ To the extent that certain money market funds are no 
longer permitted to use the amortized cost method to value all of their 
portfolio securities and all money market funds will be required to 
perform daily market-based valuations, funds may decide to rely more 
heavily on third parties, such as pricing services, to provide market-
based valuation data. Accordingly, we believe it is important to 
provide guidance to funds and their boards regarding reliance on 
pricing services.
---------------------------------------------------------------------------

    \895\ See section 2(a)(41)(B) and rule 2a-4.
---------------------------------------------------------------------------

    We note that a fund's board of directors has a non-delegable 
responsibility to determine whether an evaluated price provided by a 
pricing service, or some other price, constitutes a fair value for a 
fund's portfolio security.\896\ In addition, we have stated that ``it 
is incumbent upon the [fund's] Board of Directors to satisfy themselves 
that all appropriate factors relevant to the value of securities for 
which market quotations are not readily available have been 
considered,'' and that fund directors ``must . . . continuously review 
the appropriateness of the method used in valuing each issue of 
security in the [fund's] portfolio.'' \897\ Although a fund's directors 
cannot delegate their statutory duty to determine the fair value of 
fund portfolio securities for which market quotations are not readily 
available, the board may appoint others, such as the fund's investment 
adviser or a valuation committee, to assist them in determining fair 
value, and to make the actual calculations pursuant to the fair 
valuation methodologies previously approved by the directors.\898\
---------------------------------------------------------------------------

    \896\ See ASR 118, supra note 891 (``[i]t is incumbent upon the 
Board of Directors to satisfy themselves that all appropriate 
factors relevant to the fair value of securities for which market 
quotations are not readily available have been considered and to 
determine the method of arriving at the fair value of each such 
security.'' A fund's directors cannot delegate this responsibility 
to anyone else). See, e.g., In the Matter of Seaboard Associates, 
Inc. (Report of Investigation Pursuant to Section 21(a) of the 
Exchange Act), Investment Company Act Release No. 13890 (Apr. 16, 
1984) (``The Commission wishes to emphasize that the directors of a 
registered investment company may not delegate to others the 
ultimate responsibility of determining the fair value of any asset 
not having a readily ascertainable market value. . . .'').
    \897\ See ASR 118, supra note 891.
    \898\ See id.
---------------------------------------------------------------------------

    Before deciding to use evaluated prices from a pricing service to 
assist it in determining the fair values of a fund's portfolio 
securities, the fund's board of directors may want to consider the 
inputs, methods, models, and assumptions used by the pricing service to 
determine its evaluated prices, and how those inputs, methods, models, 
and assumptions are affected (if at all) as market conditions change. 
In choosing a particular pricing service, a fund's board may want to 
assess, among other things, the quality of the evaluated prices 
provided by the service and the extent to which the service determines 
its evaluated prices as close as possible to the time as of which the 
fund calculates its net asset value. In addition, the

[[Page 47815]]

fund's board should generally consider the appropriateness of using 
evaluated prices provided by pricing services as the fair values of the 
fund's portfolio securities where, for example, the fund's board of 
directors does not have a good faith basis for believing that the 
pricing service's pricing methodologies produce evaluated prices that 
reflect what the fund could reasonably expect to obtain for the 
securities in a current sale under current market conditions.\899\
---------------------------------------------------------------------------

    \899\ See ASR 113 and ASR 118, supra note 891; see also 1983 
Adopting Release supra note 3 (``If the [money market] fund uses an 
outside service to provide this type of pricing for its portfolio 
instruments, it may not delegate to the provider of the service the 
ultimate responsibility to check the accuracy of the system.'').
---------------------------------------------------------------------------

E. Amendments to Disclosure Requirements

    We are amending a number of disclosure requirements related to the 
liquidity fees and gates and floating NAV requirements adopted today, 
as well as other disclosure enhancements discussed in the proposal. 
These disclosure amendments improve transparency related to money 
market funds' operations, as well as their overall risk profile and any 
use of affiliate financial support. In the sections that follow, we 
first discuss amendments to rule and form provisions applicable to 
various disclosure documents, including disclosures in money market 
funds' advertisements, the summary section of the prospectus, and the 
statement of additional information (``SAI'').\900\ Next, we discuss 
amendments to the disclosure requirements applicable to money market 
fund Web sites, including information about money market funds' 
liquidity levels, shareholder flows, market-based NAV per share 
(rounded to four decimal places), imposition of liquidity fees and 
gates, and any use of affiliate sponsor support.
---------------------------------------------------------------------------

    \900\ In keeping with the enhanced disclosure framework we 
adopted in 2009, the amendments are intended to provide a layered 
approach to disclosure in which key information about the 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. 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).
---------------------------------------------------------------------------

1. Required Disclosure Statement
a. Overview of Disclosure Statement Requirements
    As discussed in the Proposing Release, and as modified to reflect 
commenters' concerns, we are adopting amendments to rule 482 under the 
Securities Act and Item 4 of Form N-1A to revise the disclosure 
statement requirements concerning the risks of investing in a money 
market fund in its advertisements or other sales materials that it 
disseminates (including on the fund Web site) and in the summary 
section of its prospectus (and, accordingly, in any summary prospectus, 
if used).
    Money market funds are currently required to include a specific 
statement concerning the risks of investing in their advertisements or 
other sales materials and in the summary section of the fund's 
prospectus (and, accordingly, in any summary prospectus, if used).\901\ 
In the Proposing Release, we proposed to modify the format and content 
of this required disclosure. Specifically, we proposed to require money 
market funds to present certain disclosure statements in a bulleted 
format. The content of the proposed disclosure statements would have 
differed under each of the proposed reform alternatives. Under each 
reform alternative, the proposed statement would have included 
identical wording changes designed to clarify, and inform investors 
about, the primary risks of investing in money market funds generally, 
including new disclosure emphasizing that money market fund sponsors 
are not obligated to provide financial support. Additionally, the 
proposed statement under the fees and gates alternative would have 
included disclosure that would call attention to the risks of investing 
in a money market fund that could impose liquidity fees or gates, and 
the proposed statement under the floating NAV alternative would have 
included disclosure to emphasize the particular risks of investing in a 
floating NAV money market fund.
---------------------------------------------------------------------------

    \901\ Rule 482(b)(4); Item 4(b)(1)(ii) of Form N-1A. Money 
market funds are currently required to include the following 
statement: 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.
---------------------------------------------------------------------------

    Comments regarding the amended disclosure statement were mixed. Two 
commenters generally supported the proposed amendments to the 
disclosure statement under both alternatives, and one commenter 
expressed general support for the proposed disclosure under the fees 
and gates alternative.\902\ Two commenters generally opposed the 
proposed disclosure statement, arguing that it would overstate the 
risks relative to other mutual funds and overwhelm investors with 
standardized mandated legends, which investors might ignore as 
``boilerplate.'' \903\ Some commenters expressed concerns with 
particular aspects of the proposed disclosure, such as the required 
disclosure regarding sponsor support.\904\ These comments are discussed 
in more detail below.
---------------------------------------------------------------------------

    \902\ See CFA Institute Comment Letter (noting that the proposed 
disclosures would put investors on notice that money market funds 
are not riskless and would provide the information in a clear and 
succinct manner); HSBC Comment Letter (generally supporting both 
statements but suggesting additions to cross-reference the 
prospectus's risk warnings and to make clear fees and gates would be 
used to protect investors); Federated II Comment Letter; Comment 
Letter of Federated Investors (Disclosure Requirements for Money 
Market Funds and Current Requirements of Rule 2a-7) (Sept. 17, 2013) 
(``Federated VIII Comment Letter'') (concurring with the risk 
disclosure under the fees and gates alternative).
    \903\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter.
    \904\ See, e.g., Dreyfus Comment Letter; NYC Bar Committee 
Comment Letter.
---------------------------------------------------------------------------

    Today we are adopting amendments to the requirements for disclosure 
statements that must appear in money market funds' advertisements or 
other sales materials, and in the summary section of money market 
funds' statutory prospectus. As discussed in more detail below, these 
amendments are being adopted largely as proposed, but with some 
modifications to the proposed format and content. These modifications 
respond to comments we received and also reflect that we are adopting a 
liquidity fees and gates requirement for all non-government money 
market funds, including municipal money market funds, as well as a 
floating NAV requirement for institutional prime funds. As we stated in 
the Proposing Release, we are modifying the current disclosure 
requirements because we believe that enhancing the disclosure required 
to be included in fund advertisements and other sales materials, and in 
the summary section of the prospectus, will help change the investment 
expectations of money market fund investors, including any erroneous 
expectation that a money market fund is a riskless investment.\905\ In 
addition, without such modifications, we believe that investors may not 
be fully aware of potential restrictions on fund redemptions or, for 
floating NAV funds, the fact that the value of their money market fund 
shares will, as a result of

[[Page 47816]]

these reforms, increase and decrease as a result of the changes in the 
value of the underlying securities.\906\
---------------------------------------------------------------------------

    \905\ See Proposing Release, supra note 25, at sections III.A.8 
and III.B.8.
    \906\ Id.
---------------------------------------------------------------------------

    Specifically, we are requiring money market funds that maintain a 
stable NAV to include the following disclosure statement in their 
advertisements or other sales materials and in the summary section of 
the statutory prospectus:

    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. The Fund may impose a fee upon 
the sale of your shares or may temporarily suspend your ability to 
sell shares if the Fund's liquidity falls below required minimums 
because of market conditions or other factors.\907\ 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.\908\
---------------------------------------------------------------------------

    \907\ Government funds that are not subject to the fees and 
gates requirements pursuant to rule 2a-7(c)(2)(iii) may omit the 
following sentence: ``The Fund may impose a fee upon the sale of 
your shares or may temporarily suspend your ability to sell shares 
if the fund's liquidity falls below required minimums because of 
market conditions or other factors.'' See rule 482(b)(4)(iii); Form 
N-1A Item 4(b)(1)(ii)(C).
    \908\ See Rule 482(b)(4)(ii); Form N-1A Item 4(b)(1)(ii)(B). 
Besides the amendments to the disclosure statement requirements set 
forth in Rule 482(b)(4)(ii) and Form N-1A Item 4(b)(1)(ii)(B), we 
also are adopting non-substantive changes to the text of these rule 
and form provisions. If an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
contractually committed to provide financial support to the fund, 
the fund would be permitted to omit the last sentence from the 
disclosure statement in advertisements and sales materials for the 
term of the agreement. See Note to paragraph (b)(4), rule 482(b)(4). 
Likewise, if an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
contractually committed 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 sentence from the 
disclosure statement that appears in the fund's registration 
statement. See Instruction to Item 4(b)(1)(ii) of Form N-1A.
    The proposal likewise would have permitted a similar omission 
from the proposed disclosure statement. See Proposing Release, supra 
note 25, at nn.429 and 431. As proposed, such omission would have 
been permitted 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.'' We have modified the language of the Note to paragraph 
(b)(4), rule 482(b)(4) and the Instruction to Item 4(b)(1)(ii) of 
Form N-1A to clarify that the omission would be permitted only in 
the case of contractual commitments to provide financial support, 
and not in the case of informal agreements that may not be 
enforceable.
    As discussed in more detail below, we are adopting amendments 
that would require money market funds to disclose current and 
historical instances of affiliate financial support on Form N-CR and 
Form N-1A, respectively. See infra sections III.F.3, III.E.7.

    Funds with a floating NAV will also be required to include a 
similar disclosure statement in their advertisements or other sales 
materials and in the summary section of the statutory prospectus, 
modified to account for the characteristics of a floating NAV, as 
---------------------------------------------------------------------------
follows:

    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may 
be worth more or less than what you originally paid for them. The 
Fund may impose a fee upon the sale of your shares or may 
temporarily suspend your ability to sell shares if the Fund's 
liquidity falls below required minimums because of market conditions 
or other factors. 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.\909\
---------------------------------------------------------------------------

    \909\ See Rule 482(b)(4)(i); Form N-1A Item 4(b)(1)(ii)(A). 
Besides the amendments to the disclosure statement requirements set 
forth in Rule 482(b)(4)(i) and Form N-1A Item 4(b)(1)(ii)(A), we 
also are adopting non-substantive changes to the text of these rule 
and form provisions. Funds may omit the last sentence regarding 
sponsor support under certain circumstances, such as when a fund's 
sponsor has contractually committed to provide support to the fund. 
See supra note 908; Instructions to Item 4(b)(1)(ii) of Form N-1A; 
Note to paragraph (b)(4), rule 482(b)(4). The proposal likewise 
would have permitted this omission from the proposed disclosure 
statement. See Proposing Release, supra note 25, at nn.307 and 313. 
As discussed in more detail below, we are adopting amendments that 
would require money market funds to disclose current and historical 
instances of affiliate financial support on Form N-CR and Form N-1A, 
respectively. See infra sections III.F.3, III.E.7.

    Below we describe in detail the ways in which the format and 
content of the required disclosure statement that we are adopting today 
differ from that which we proposed, as well as the reasons for these 
differences.
b. Format of the Statement
    We have decided not to adopt the proposed requirement that funds 
provide the statement in a bulleted format. One commenter argued that 
prescribing a specific graphical format is not necessary and might be 
difficult to execute in certain forms of advertising, such as social 
media.\910\ We agree. We also believe that refraining from requiring 
funds to provide the disclosure statement in a bulleted format, in 
combination with other modifications discussed below that shorten the 
disclosure statement, addresses concerns raised by commenters that the 
length of the proposed disclosure statement could draw attention away 
from other important information in an advertisement or sales 
materials.\911\
---------------------------------------------------------------------------

    \910\ See ABA Business Law Section Comment Letter.
    \911\ See NYC Bar Committee Comment Letter (noting that, 
particularly in inherently brief formats like advertisements, there 
is a risk that mandated legends may crowd out material informational 
content); ABA Business Law Section Comment Letter (arguing that the 
proposed disclosure statement could take up so much of the space 
available in an advertisement that it will discourage investors from 
viewing other important information in the communication).
---------------------------------------------------------------------------

c. Disclosure Concerning General Risk of Investment Loss
    As proposed, the required disclosure statement would have included 
a bulleted statement providing: ``You could lose money by investing in 
the Fund.'' We are adopting identical content in the required 
disclosure statement. As discussed in the proposal, we have taken into 
consideration investor preferences for clear, concise, and 
understandable language in adopting the required disclosure and also 
have considered whether strongly-worded disclaimer language would more 
effectively convey the particular risks associated with money market 
funds than more moderately-worded language would.\912\ We received one 
comment on this language arguing that it is duplicative with other 
language in the required disclosure statement.\913\ We have responded 
to this comment by shortening and modifying the required disclosure 
statement.\914\
---------------------------------------------------------------------------

    \912\ See Proposing Release, supra note 25, at nn.316-317.
    \913\ See Federated VIII Comment Letter.
    \914\ As proposed, the required disclosure statement included 
the statements ``You could lose money by investing in the Fund'' and 
``Your investment in the Fund therefore may experience losses.'' As 
adopted, the required disclosure statement no longer includes the 
second statement, which could be construed to be repetitive with the 
first.
---------------------------------------------------------------------------

d. Disclosure Concerning Fees and Gates
    As proposed, the required disclosure statement would have included 
bulleted statements providing: ``The Fund may impose a fee upon sale of 
your shares when the Fund is under considerable stress'' and ``The Fund 
may temporarily suspend your ability to sell shares of the Fund when 
the Fund is under considerable stress.'' Instead of including these 
bullet points in the required disclosure, we are adopting similar 
content in the required disclosure statement providing: ``The Fund may 
impose a fee upon the sale of your shares or may temporarily suspend 
your ability to sell shares if the Fund's liquidity falls below 
required

[[Page 47817]]

minimums because of market conditions or other factors.'' One 
commenter, while generally supporting the proposed statement, suggested 
that the statement be amended to say that the fund could impose a fee 
or a gate ``in order to protect shareholders of the Fund.'' \915\ One 
commenter expressed concerns about requiring the inclusion of 
statements about fees and gates in advertisements or other sales 
materials, arguing that the description of circumstances and conditions 
under which fees and gates might be imposed is difficult to reduce to a 
brief statement.\916\ No commenters explicitly supported the inclusion 
of the term ``considerable stress,'' and several commenters argued that 
this term was not clear, and may cause investors to believe that funds 
could impose fees and gates arbitrarily or, conversely, only during 
extreme market events.\917\ To address this concern, one commenter 
suggested requiring a different term than ``considerable stress,'' 
arguing that this term overstates the prospect for imposing fees or 
gates.\918\ Other commenters suggested that the disclosure state 
explicitly that a fee or gate could be imposed as a result of a 
reduction in the fund's liquidity.\919\ Commenters also suggested that 
any disclosure regarding fees and gates could be combined into a single 
statement.
---------------------------------------------------------------------------

    \915\ See HSBC Comment Letter.
    \916\ See NYC Bar Committee Comment Letter.
    \917\ See NYC Bar Committee Comment Letter; ABA Business Law 
Section Comment Letter; Dreyfus Comment Letter.
    \918\ See Dreyfus Comment Letter.
    \919\ See NYC Bar Committee Comment Letter; ABA Business Law 
Section Comment Letter.
---------------------------------------------------------------------------

    After considering the comments, we continue to believe that 
disclosure about fees or gates should be included in advertisements, 
sales materials, and the summary section of the prospectus. Even some 
commenters that expressed concerns about including the disclosure in 
advertisements acknowledged that the possible imposition of fees and 
gates is information that is likely to be important to investors.\920\ 
As we stated in the Proposing Release, we are concerned that investors 
will not be fully aware of potential restrictions on fund redemptions. 
To address commenters' concerns regarding the ambiguity of the term 
``considerable stress,'' we have revised the statement, as suggested by 
commenters, to make clear that funds could impose a fee or gate in 
response to a reduction in the fund's liquidity. The statement does not 
include a reference that a fee or gate could be imposed ``to protect 
investors of the fund,'' as suggested by one commenter. We believe that 
including the additional suggested language could detract from the 
statement's emphasis that a fee or gate could be imposed, which could 
in turn diminish shareholders' awareness of potential restrictions on 
fund redemptions. The language we have adopted reflects commenter 
suggestions that any disclosure regarding fees or gates be combined 
into a single statement. We believe that the adopted language also 
responds to commenter concerns about the difficulty of briefly 
describing the conditions under which fees and gates might be imposed 
by providing that fees and gates could be imposed if ``the Fund's 
liquidity falls below required minimums because of market conditions or 
other factors.''
---------------------------------------------------------------------------

    \920\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter.
---------------------------------------------------------------------------

e. Disclosure Concerning Sponsor Support
    As proposed, the required disclosure statement would have included 
a bulleted statement providing: ``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.'' We are adopting identical content in the required 
disclosure statement. Several commenters opposed the inclusion of a 
reference to sponsor support in the required disclosure statement.\921\ 
Some commenters argued that the disclosure would raise sponsor support 
to an unwarranted level of prominence, noting that there have not been 
any studies to determine whether investors actually rely on the 
potential for sponsor support as a factor when determining whether to 
invest in a money market fund.\922\ Commenters also were concerned that 
investors will not understand the disclosure in fund advertisements, 
since advertisements will not afford space or opportunity to explain to 
investors who the fund's ``sponsor'' is and what ``financial support'' 
means.\923\
---------------------------------------------------------------------------

    \921\ See Dreyfus Comment Letter; NYC Bar Committee Comment 
Letter; ABA Business Law Section Comment Letter. But see CFA 
Institute Comment Letter; HSBC Comment Letter (both generally 
supporting the proposed disclosure statement, including the language 
discussing sponsor support).
    \922\ See, e.g., ABA Business Law Section Comment Letter; NYC 
Bar Committee Comment Letter.
    \923\ Id.
---------------------------------------------------------------------------

    We continue to believe that the disclosure statement should include 
a statement that the fund's sponsor has no obligation to provide 
financial support. In the Proposing Release, we recognized that 
particular instances of sponsor support were not particularly 
transparent to investors in past years because sponsor support 
generally was not immediately disclosed, and was not required to be 
disclosed by the Commission.\924\ But although investors might not have 
known of particular instances of sponsor support, we believe that many 
investors, particularly institutional investors, have historically 
understood that there was a possibility of financial support from the 
money market fund's sponsor and that this possibility has affected 
investors' perceptions about the level of risk in investing in money 
market funds.\925\ We therefore disagree with the commenter who 
suggested that investors were generally unaware of this practice 
preceding and during the financial crisis.\926\ For this reason, we 
believe that it is important to emphasize to investors that they should 
not expect a fund sponsor to provide financial support to the fund.
---------------------------------------------------------------------------

    \924\ Proposing Release, supra note 25, at section II.B.3.
    \925\ See, e.g., Roundtable Transcript, supra note 63 (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 
fund sponsors. So once they perceive that they are not able to get 
that additional assurance, I believe that was one probably cause of 
the run.'').
    \926\ See NYC Bar Committee Comment Letter (arguing that the 
Commission's discussion of the lack of transparency regarding 
instances of sponsor support shows that the proposed risk statement 
addresses a practice that investors were not aware of during the 
financial crisis).
---------------------------------------------------------------------------

    For similar reasons, we disagree with one commenter who argued that 
requiring this disclosure is at odds with the requirement that funds 
publicly disclose instances of sponsor support.\927\ As discussed 
below, we are requiring funds to disclose current and historical 
instances of sponsor support because we believe that such disclosure 
will help investors better understand the risks of investing in the 
funds.\928\ This reporting, which should help investors understand 
instances when the fund has come under stress, provides historical 
information about the fund. The required disclosure statement, on the 
other hand, is a forward-looking risk statement that reminds current 
and prospective investors that sponsors do not have an obligation to 
provide sponsor support and that investors should not expect that 
sponsors will provide support in the future.
---------------------------------------------------------------------------

    \927\ See Dreyfus Comment Letter.
    \928\ See infra notes 1007-1010, 1132 and accompanying text.

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

[[Page 47818]]

    Finally, we are not persuaded that the disclosure regarding sponsor 
support should not appear in advertisements because this disclosure 
will not be understood by investors. We recognize that upon reading the 
disclosure statement, investors might have questions regarding 
financial support from sponsors, as commenters indicated, including 
questions regarding who the fund's ``sponsor'' is, or what constitutes 
``financial support.'' \929\ We believe, however, that funds can 
address this issue through more complete disclosure elsewhere in the 
fund prospectus if they believe it is necessary.
---------------------------------------------------------------------------

    \929\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter.
---------------------------------------------------------------------------

f. Disclosure for Floating NAV Funds
    As proposed, the required disclosure statement for floating NAV 
funds would have included bulleted statements providing: ``You should 
not invest in the Fund if you require your investment to maintain a 
stable value'' and ``The value 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.'' 
Instead of including these bullet points in the required disclosure, we 
are adopting similar content in the required disclosure statement 
providing: ``Because the share price of the Fund will fluctuate, when 
you sell your shares they may be worth more or less than what you 
originally paid for them.'' While one commenter questioned whether the 
proposed disclosure was necessary for investors in institutional prime 
funds,\930\ we believe it is important to emphasize to investors the 
potential impact of a floating NAV.\931\ In response to suggestions by 
commenters,\932\ we have decided not to require that the disclosure 
statement include the proposed statement that investors that require a 
stable value not invest in the fund. We were persuaded by commenters 
that the term ``stable value'' is often used by financial advisers when 
referring to certain investment products, at least some of which do 
have a variable NAV.\933\ We are also not including in the disclosure 
requirements the proposed statements about the relationship between the 
fund share price and the value of the fund's underlying securities and 
the risk factors that can affect the value of the fund's underlying 
securities. We were persuaded by one commenter who noted that 
discussion of specific risk factors will be addressed in other areas of 
the prospectus, including the summary prospectus.\934\ We also believe 
that not including these statements addresses more general concerns 
expressed by commenters regarding the length and efficacy of the 
proposed disclosure statement.\935\
---------------------------------------------------------------------------

    \930\ See Dreyfus Comment Letter (``[W]e also question the 
Commission's concern that investors will fail to understand that the 
value of the [floating NAV] MMF will fluctuate. We question at what 
point investors will be given the benefit of the doubt for 
understanding the product in which they are invested and when such 
concerns will cease to drive additional regulatory action.'')
    \931\ Cf. ABA Business Law Section Comment Letter (suggesting 
that ``floating NAV money market funds include in their 
advertisements a statement that their principal value will fluctuate 
so that an investor's shares, when redeemed may be worth more or 
less than their original cost''); CFA Institute Comment Letter 
(stating that ``[d]isclosures are needed to alert investors to the 
potential for loss of principal and interest'').
    \932\ See NYC Bar Committee Comment Letter; ABA Business Law 
Section Comment Letter.
    \933\ See NYC Bar Committee Comment Letter (noting that ``stable 
value'' commonly refers to a ``retirement product that will use a 
combination of government bonds, guaranteed return insurance 
wrappers and potentially other synthetic instruments to deliver a 
minimum rate of return'').
    \934\ See Dreyfus Comment Letter.
    \935\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter. The required disclosure statement that we 
are adopting today (see supra text accompanying note 909) is about 
30% shorter than the proposed bulleted disclosure statement. (We 
have modified the proposed bulleted disclosure statement to 
encompass the proposed language referencing fluctuating share price 
as well as the ability of a fund to impose fees or gates. The 
Proposing Release conceived of two separate reform approaches, each 
with its own disclosure statement, while this Release combines the 
approaches into a single reform package, and the disclosure 
statement we are adopting therefore references both reform elements, 
as appropriate.)
---------------------------------------------------------------------------

2. Disclosure of Tax Consequences and Effect on Fund Operations--
Floating NAV
    As discussed in the Proposing Release, the requirement that 
institutional prime money market funds transition to a floating NAV 
will entail certain additional tax- and operations-related disclosure, 
but these disclosure requirements do not necessitate rule and form 
amendments.\936\ As noted above, taxable investors in institutional 
prime money market funds, like taxable investors in other types of 
mutual funds, may now experience taxable gains and losses.\937\ 
Currently, funds are required to describe in their prospectuses the tax 
consequences to shareholders of buying, holding, exchanging, and 
selling the fund's shares.\938\ 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 changes resulting from the fund's use of a 
floating NAV.\939\ We also expect that a fund that intends to qualify 
as a retail money market fund would disclose in its prospectus that it 
limits investment to accounts beneficially owned by natural 
persons.\940\ The Proposing Release requested 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 shares of the fund, as well as the 
effects (if any) on fund operations resulting from the transition to a 
floating NAV. We received no comments directly discussing this 
disclosure.
---------------------------------------------------------------------------

    \936\ Prospectus disclosure regarding the tax consequences of 
these activities is currently required by Form N-1A. See Item 11(f) 
of Form N-1A.
    \937\ See supra section III.B.6.
    \938\ See Item 11(f) of Form N-1A.
    \939\ We expect that a floating NAV 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.
    \940\ See supra note 692 and accompanying text.
---------------------------------------------------------------------------

3. Disclosure of Transition to Floating NAV
    Currently, 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.\941\ As discussed in the Proposing Release, we would 
expect that, to meet this existing 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), it 
would update its registration statement to include relevant related 
disclosure, as discussed in sections III.E.1 and III.E.2 of this 
Release, by means of a post-effective amendment or a prospectus 
supplement. Two commenters explicitly supported that such disclosures 
be made when transitioning to a floating NAV.\942\ We continue to 
believe that a money market fund must update its registration statement 
by means of a post-effective amendment or ``sticker''

[[Page 47819]]

to reflect relevant disclosure related to a transition to a floating 
NAV.
---------------------------------------------------------------------------

    \941\ See 17 CFR 230.497.
    \942\ See HSBC Comment Letter; PWC Comment Letter.
---------------------------------------------------------------------------

4. Disclosure of the Effects of Fees and Gates on Redemptions
    As we discussed in the proposal, pursuant to the existing 
requirements in Form N-1A, funds must disclose any restrictions on fund 
redemptions in their registration statements.\943\ As discussed in more 
detail below, we expect that, to comply with these existing 
requirements, money market funds (other than government money market 
funds that are not subject to the fees and gates requirements pursuant 
to rule 2a-7(c)(2)(iii) and that have not chosen to rely on the ability 
to impose liquidity fees and suspend redemptions) will disclose in the 
registration statement the effects that the potential imposition of 
fees and/or gates, including a board's discretionary powers regarding 
the imposition of fees and gates, may have on a shareholder's ability 
to redeem shares of the fund. This disclosure should help investors 
evaluate the costs they could incur in redeeming fund shares--one of 
the goals of this rulemaking.
---------------------------------------------------------------------------

    \943\ See Items 11(c)(1) and 23 of Form N-1A.
---------------------------------------------------------------------------

    Commenters generally agreed that this disclosure would help 
investors understand the effects of fees and gates on redemptions.\944\ 
One commenter specifically agreed that Items 11(c)(1) and 23 of Form N-
1A would require money market funds to fully describe the circumstances 
under which liquidity fees could be charged or redemptions could be 
suspended or reinstated.\945\ In addition, two commenters noted that 
the prospectus should include disclosure of a board's discretionary 
powers regarding the imposition of fees and gates, which would serve to 
emphasize further the nature of money market funds as investments 
subject to risk.\946\ The Proposing Release requested comment on the 
utility of including additional disclosure about the operations and 
effects of fees and redemption gates, including (i) requiring 
information about the basic operations of fees and gates to be 
disclosed in the summary section of the statutory prospectus (and any 
summary prospectus, if used) and (ii) requiring details about the 
fund's liquidation process. One commenter argued against the utility of 
such additional disclosure in helping investors to understand the 
effects of fees and gates on redemptions.\947\ We agree and decided 
against making any changes to the rule text in this regard.
---------------------------------------------------------------------------

    \944\ See, e.g., UBS Comment Letter; Chamber II Comment Letter; 
Federated VIII Comment Letter.
    \945\ See Federated VIII Comment Letter (suggesting that Form N-
1A also would require money market funds to describe how 
shareholders would be notified thereof, as well as other 
implications for shareholders, such as the tax consequences 
associated with the money market fund's receipt of liquidity fees).
    \946\ See UBS Comment Letter; Chamber II Comment Letter.
    \947\ See Federated VIII Comment Letter (arguing that: (i) 
Requiring disclosure in the summary prospectus about ``an exigent 
circumstance (i.e., charging liquidity fees or suspending 
redemptions) which is highly unlike[ly] to ever occur '' would be 
``highly inconsistent with the Commission's goal of `providing 
prospectuses that are simpler, clearer, and more useful to 
investors' '' and (ii) no money market funds have relied on rule 
22e-3 to suspend the redemption of shares and liquidate the fund 
since the rule's adoption, and thus suggesting that disclosure about 
a fund's liquidation process would not be useful to investors).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we expect money market funds 
to explain in the prospectus the various situations in which the fund 
may impose a liquidity fee or gate.\948\ For example, money market 
funds would briefly explain in the prospectus that if the fund's weekly 
liquid assets fall below 30% of its total assets and the fund's board 
determines it is in the best interests of the fund, the fund board may 
impose a liquidity fee of no more than 2% and/or temporarily suspend 
redemptions for a limited period of time.\949\ We also expect money 
market funds to briefly explain in the prospectus that if the fund's 
weekly liquid assets fall below 10% of its total assets, the fund will 
impose a liquidity fee of 1% 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 
interests of the fund or determines that a lower or higher fee (not to 
exceed 2%) would be in the best interests of the fund.\950\
---------------------------------------------------------------------------

    \948\ Proposing Release, supra note 25, at section III.B.8.
    \949\ See Items 11(c)(1) and 23 of Form N-1A.
    \950\ See Items 11(c)(1) and 23 of Form N-1A.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we 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. Prospectus disclosure regarding any restrictions 
on redemptions is currently required by Item 11(c)(1) of Form N-1A. In 
addition to the disclosure required by Item 11(c)(1), 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 and/or to 
what extent 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 ``would be 
most useful to typical or average investors in making an investment 
decision.'' \951\ 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.\952\
---------------------------------------------------------------------------

    \951\ 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.
    \952\ Id.
---------------------------------------------------------------------------

    Based on this principle, we anticipate that funds generally would 
consider the following disclosure to be appropriate for the prospectus, 
as disclosure regarding redemption restrictions provided in response to 
Item 11(c)(1) of Form N-1A: (i) Means of notifying shareholders about 
the imposition and lifting of fees and/or gates (e.g., press release, 
Web site announcement); (ii) timing of the imposition and lifting of 
fees and gates, including (a) an explanation that if a fund's weekly 
liquid assets fall below 10% of its total assets at the end of any 
business day, the next business day it must impose a 1% liquidity fee 
on shareholder redemptions unless the fund's board of directors 
determines that doing otherwise is in the best interests of the fund, 
(b) an explanation that if a fund's weekly liquid assets fall below 30% 
of its total assets, it may impose fees or gates as early as the same 
day, and (c) an explanation of the 10 business day limit for imposing 
gates; (iii) use of fee proceeds by the fund, including any possible 
return to shareholders in the form of a distribution; (iv) the tax 
consequences to the fund and its shareholders of the fund's receipt of 
liquidity fees; and (v) general description of the process of fund 
liquidation\953\ if the fund's weekly liquid assets fall below 10%, and 
the fund's board of directors determines that it would not be in the 
best interests of the fund to continue operating.\954\
---------------------------------------------------------------------------

    \953\ See supra section III.A.4.
    \954\ One commenter argued that it was unnecessary to describe 
the process of fund liquidation in either the prospectus or SAI. See 
Federated VIII Comment Letter. We note that we are not mandating 
particular disclosures, but rather providing examples of the types 
of disclosures we believe that money market funds could provide in 
the prospectus or SAI. We further note that it is important for 
funds to ensure that investors are fully aware of the ability of the 
fund to permanently suspend redemptions and liquidate.
---------------------------------------------------------------------------

    In addition, we expect that a government money market fund that is 
not subject to the fees and gates

[[Page 47820]]

requirements pursuant to rule 2a-7(c)(2)(iii), but that later decides 
to rely on the ability to impose liquidity fees and suspend 
redemptions, would update its registration statement to reflect the 
changes by means of a post-effective amendment or a prospectus 
supplement pursuant to rule 497 under the Securities Act. In addition, 
a government fund that later opts to rely on the ability to impose fees 
and gates provided in rule 2a-7(c)(2)(iii) should consider whether to 
provide any additional notice to its shareholders of that 
election.\955\
---------------------------------------------------------------------------

    \955\ We note that 60-day notice is required by our rules for 
other significant changes by funds, for example, when a fund changes 
its name. See rules 35d-1(a)(2)(ii) and (a)(3)(iii).
---------------------------------------------------------------------------

5. Historical Disclosure of Liquidity Fees and Gates
    We are amending Form N-1A, generally as proposed, but with certain 
modifications as discussed below, to require that money market funds 
provide disclosure in their SAIs about historical occasions in which 
the fund has considered or imposed liquidity fees or gates.\956\ As 
proposed, we would have required 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.\957\ As discussed below, we are adopting modified 
thresholds for imposing fees and gates from what was proposed; 
consequently, the amendments we are adopting to Form N-1A to require 
historical disclosure of liquidity fees and gates have been modified 
from the proposed amendments to conform to these amended threshold 
levels. In addition, in a change from the proposed historical 
disclosure requirements, the Form N-1A amendments we are adopting 
require a fund to disclose the size of any liquidity fee imposed during 
the specified look-back period. We have also determined not to adopt 
the proposed requirement to disclose ``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'' for the reasons detailed below.
---------------------------------------------------------------------------

    \956\ As we proposed, this historical disclosure would only 
apply to such events that occurred after the compliance date of the 
amendments. See Proposing Release, supra note 25, at n.983.
    \957\ See Proposing Release, supra note 25, at section 
III.B.8.d.
---------------------------------------------------------------------------

    Specifically, we are amending Form N-1A to require that money 
market funds (other than government money market funds that are not 
subject to the fees and gates requirements pursuant to rule 2a-
7(c)(2)(iii)) \958\ provide disclosure in their SAIs regarding any 
occasion during the last 10 years (but not for occasions that occurred 
before the compliance date of these amended rules) \959\ on which (i) 
the fund's weekly liquid assets have fallen below 10%, 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, or 
(ii) the fund's weekly liquid assets have fallen below 30% (but not 
less than 10%) and the fund's board of directors determined to impose a 
liquidity fee and/or suspend the fund's redemptions.\960\ With respect 
to each occasion, we are requiring funds to disclose: (i) The length of 
time for which the fund's weekly liquid assets remained below 10% (or 
30%, as applicable); (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) the size of any 
liquidity fee imposed.\961\
---------------------------------------------------------------------------

    \958\ Rule 2a-7(c)(2)(iii).
    \959\ See infra section III.N.
    \960\ See amended Item 16(g)(1) of Form N-1A. The disclosure 
required by Item 16(g)(1) should incorporate, as appropriate, any 
information that the fund is required to report to the Commission on 
Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR. See 
Instruction 2 to Item 16(g)(1). This represents a slight change from 
the proposal, in that the required disclosure is now the same as 
what would be disclosed in the initial filings of Form N-CR. We have 
made this change to reduce the burdens associated with such 
disclosure so that funds need only prepare this information once in 
a single manner. For the reasons discussed in section III.F of this 
Release, Form N-CR includes a new requirement that funds report 
their level of weekly liquid assets at the time of the imposition of 
fees or gates, and accordingly, we are also requiring similar 
disclosure here. See Form N-CR Items E.3 and F.1.
    \961\ See Instructions to amended Item 16(g)(1) of Form N-1A.
---------------------------------------------------------------------------

    We proposed to require a fund to provide disclosure in its SAI 
regarding any occasion during the last 10 years (but not before the 
compliance date) in which the fund's weekly liquid assets had 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.\962\ As discussed previously, the final 
amendments contain modified thresholds for imposing fees and gates from 
what was proposed,\963\ and we are therefore modifying the disclosure 
requirements to conform to these amended threshold levels.
---------------------------------------------------------------------------

    \962\ See Proposing Release, supra note 25, at section 
III.B.8.d.
    \963\ See supra section III.A.2.
---------------------------------------------------------------------------

    As proposed, the SAI disclosure requirements would not have 
directly required a fund to disclose the size of any liquidity fee 
imposed. We are modifying the SAI disclosure requirements to require a 
fund to disclose the size of any liquidity fee it has imposed during 
the specified look-back period. As discussed below in the context of 
the Form N-CR disclosure requirements we are adopting, because we are 
revising the default liquidity fee from the proposed 2% to 1%, and thus 
we expect that there may be instances where liquidity fees are above or 
below the default fee (rather than just lower as permitted under the 
proposal), we are requiring that funds disclose the size of the 
liquidity fee, if one is imposed.\964\
---------------------------------------------------------------------------

    \964\ See infra note 1316 and accompanying text.
---------------------------------------------------------------------------

    One commenter specifically supported the proposed 10-year ``look-
back'' period for the historical disclosure, noting that a 10-year 
period should capture a number of different market stresses delivering 
a meaningful sample.\965\ Another commenter suggested limiting SAI 
disclosure to a five-year period prior to the effective date of the 
registration statement incorporating the SAI disclosure, although this 
commenter did not provide specific reasons why this shortened look-back 
period would be appropriate.\966\ After further consideration, and 
given that commenters did not provide any specific reasons for 
implementing a shortened look-back period, we continue to believe that 
a 10-year look-back period provides shareholders and the Commission 
with a historical perspective that would be long enough to provide a 
useful understanding of past events. We believe that this period would 
provide a meaningful sample of stresses faced by individual funds and 
in the market as a whole, and to analyze patterns with respect to fees 
and gates, but would not be so long as to include circumstances that 
may no longer be a relevant reflection of the fund's management or 
operations.
---------------------------------------------------------------------------

    \965\ See HSBC Comment Letter.
    \966\ See Federated VIII Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we continue to believe that 
money market funds' current and prospective shareholders should be 
informed of historical occasions in which the fund's weekly liquid 
assets

[[Page 47821]]

have fallen below 10% and/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. The DERA Study analyzed the distribution of weekly 
liquid assets and found that 83 prime funds per year, corresponding to 
2.7% of the prime funds' weekly liquid asset observations, saw the 
percentage of their total assets that were invested in weekly liquid 
assets fall below 30%. The DERA Study further showed that less than one 
(0.6) fund per year, corresponding to 0.01% of the prime funds' weekly 
liquid asset observations, experienced a decline of total assets that 
were invested in weekly liquid assets to below 10%.\967\ We believe 
that funds will, in general, try to avoid the need to disclose 
decreasing percentages of weekly liquid assets and/or the imposition of 
a liquidity fee or gate, as required under the new amendments to Form 
N-1A,\968\ by keeping the percentage of their total assets invested in 
weekly liquid assets at or above 30%. Of those 83 funds that reported a 
percentage of total assets invested in weekly liquid assets below 30%, 
it is unclear how many, if any, would have attempted to keep the 
percentage of their total assets invested in weekly liquid assets at or 
above 30% to avoid having to report this information on their SAI 
(assuming they were to impose, at their board's discretion, a liquidity 
fee or gate).
---------------------------------------------------------------------------

    \967\ See DERA Study, supra note 24, at 27.
    \968\ See supra notes 960 and 961 and accompanying text.
---------------------------------------------------------------------------

    The required disclosure will permit current and prospective 
shareholders to assess, among other things, 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 declines in 
portfolio liquidity. This disclosure also provides 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 impose market discipline on portfolio managers to 
monitor and manage portfolio liquidity in a manner that lessens the 
likelihood that the fund would need to implement a liquidity fee or 
gate.\969\ One commenter explicitly supported the utility of these 
disclosure requirements in providing investors with useful information 
regarding the frequency of the money market fund's breaching of certain 
liquidity thresholds, whether a fee or gate was applied, and the level 
of fee imposed, stating that ``[t]his will allow investors to make 
informed decisions when determining whether to invest in [money market 
funds] and when comparing different [money market funds].'' \970\ No 
commenter argued that disclosure about the historical fact of 
occurrence of fees and gates would not be useful to investors. However, 
some commenters raised concerns about the potential redundancy of the 
proposed registration statement, Web site, and Form N-CR disclosure 
requirements.\971\
---------------------------------------------------------------------------

    \969\ See supra notes 157 and 162 and accompanying text.
    \970\ HSBC Comment Letter.
    \971\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we also have determined not to adopt the 
proposed requirement for a fund to disclose ``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'' in its SAI (or as discussed below, on its Web site).\972\ 
We note that Form N-CR, as proposed, also would have required a fund 
imposing a fee or gate to disclose a ``discussion of the board's 
analysis'' supporting its decision, and a number of commenters objected 
to this proposed requirement.\973\ In particular, commenters raised 
concerns that the disclosures proposed to be required in Form N-CR and 
Form N-1A would not be material to investors, would be burdensome to 
disclose, would chill deliberations among board members and hinder 
board confidentiality, and would encourage opportunistic 
litigation.\974\ Commenters also argued that disclosure of the board's 
analysis is not necessary to disclose patterns of stress in a fund and 
that this disclosure is not likely to be a meaningful indication of the 
board's analytical process going forward.\975\
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    \972\ However, as discussed below in section III.F.5, Form N-CR 
will require a fund to disclose the primary considerations or 
factors taken into account by the fund's board in its decision to 
impose a liquidity fee or gate.
    \973\ See infra section III.F.5.
    \974\ See infra notes 1289-1293 and accompanying text. Most 
commenters made these arguments in reference to the proposed Form N-
CR disclosure requirement; however, several commenters also 
specifically referenced the proposed identical Form N-1A disclosure 
requirement. See SIFMA Comment Letter; Stradley Ronon Comment 
Letter.
    \975\ See SIFMA Comment Letter; Stradley Ronon Comment Letter 
(both stating that requiring disclosure of the board's analysis is 
not necessary to disclose patterns of stress in a fund, and that 
patterns of stress will be apparent via the proposed disclosures of 
historical sponsor support and liquidity shortfalls). We note that 
the Proposing Release does not specifically state that disclosure of 
the board's analysis supporting its decision to impose a liquidity 
fee or temporarily suspend the fund's redemptions would permit 
shareholders to assess patterns of stress. Rather, the Proposing 
Release states that the proposed historical disclosure of liquidity 
fees and gates (which disclosure would include a discussion of the 
board's analysis supporting its decision to impose a liquidity fee 
or gate) generally would assist shareholders in assessing patterns 
of stress. See Proposing Release, supra note 25, at section 
III.B.8.d. We continue to believe that historical disclosure of fees 
and gates, which would include disclosures of historical liquidity 
shortfalls, would assist shareholders in understanding patterns of 
stress faced by the fund. See supra notes 969-970 and accompanying 
text. We believe that this historical disclosure complements the 
disclosure of historical instances of sponsor support in 
understanding patterns of stress.
---------------------------------------------------------------------------

    We discuss these commenters' concerns in detail in section III.F 
below and also provide our analysis supporting our attempt to balance 
these concerns with our interest in permitting the Commission and 
shareholders to understand why a board imposed (or did not impose) a 
liquidity fee or gate. As a result of these considerations and the 
analysis discussed in section III.F below, we have adopted a Form N-CR 
requirement to require disclosure of the primary considerations or 
factors taken into account by the fund's board in its decision to 
impose a liquidity fee or gate. However, in order to avoid unnecessary 
duplication in the disclosure that will appear in a fund's SAI and on 
Form N-CR, we have determined not to require parallel disclosure of 
these considerations or factors in the fund's SAI. Instead, a fund will 
only be required to present certain summary information about the 
imposition of fees and/or gates in its SAI (as well as on the fund's 
Web site \976\), and will be required to present more detailed 
discussion solely on Form N-CR.\977\ To inform investors about the 
inclusion of this more detailed information on Form N-CR, funds will be 
instructed to include the following statement as part of their SAI 
disclosure about the historical occasions in which the fund has 
considered or imposed liquidity fees or gates: ``The Fund was required 
to disclose additional information about this event [or ``these 
events,'' as appropriate] on Form N-CR and to file this form with the 
Securities and Exchange Commission. Any Form

[[Page 47822]]

N-CR filing submitted by the Fund is available on the EDGAR Database on 
the Securities and Exchange Commission's Internet site at http://www.sec.gov.'' \978\ In adopting these modified SAI disclosure 
requirements, we have attempted to balance concerns about potentially 
duplicative disclosure \979\ with our interest in presenting the 
primary information about the fund's historical imposition of fees or 
gates that we believe shareholders may find useful in assessing fund 
risks.
---------------------------------------------------------------------------

    \976\ See infra section III.E.9.f.
    \977\ See infra section III.F.5.
    \978\ See instructions to amended Item 16(g)(1) of Form N-1A.
    \979\ See supra note 971 and accompanying text. As discussed in 
more detail in section III.F.5 below, while similar information is 
required to be included on Form N-CR and on Form N-1A, we believe 
each of these different disclosures to be appropriate because they 
serve distinct purposes. See infra notes 1308-1309 and accompanying 
text.
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6. Prospectus Fee Table
    As proposed, we are 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.\980\ Commenters on this aspect of our proposal agreed that the 
liquidity fee should not be included in the prospectus fee table.\981\ 
For example, one commenter stated that the fees and expenses table is 
intended to show a typical investor the range of anticipated costs that 
will be borne by the investor directly or indirectly as a shareholder, 
but is not an ideal presentation for the kind of highly contingent cost 
that would be represented by a liquidity fee.\982\
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    \980\ See Instruction 2(b) to amended Item 3 of Form N-1A.
    \981\ See, e.g., HSBC Comment Letter; NYC Bar Committee Comment 
Letter; Dreyfus Comment Letter.
    \982\ See NYC Bar Committee Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release and as adopted today, a 
liquidity fee will only be imposed when a fund experiences stress, and 
because we anticipate that a particular fund would impose this fee 
rarely, if at all,\983\ we continue to believe that the prospectus fee 
table, which is intended to help shareholders compare the costs of 
investing in different mutual funds, should not include the liquidity 
fee.\984\ We also note, as discussed above, that shareholders will be 
adequately informed about liquidity fees through other disclosures in 
funds' SAI and summary section of the statutory prospectus (and, 
accordingly, in any summary prospectus, if used).\985\ If a fund 
imposes a liquidity fee, shareholders will also be informed about the 
imposition of this fee on the fund's Web site \986\ and possibly by 
means of a prospectus supplement.\987\ A fund could also provide 
complementary shareholder communications, such as a press release or 
social media update.\988\ Accordingly, we are adopting the clarifying 
instruction to Item 3 as proposed.
---------------------------------------------------------------------------

    \983\ See supra note 247 and accompanying text.
    \984\ 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.
    \985\ See supra section III.E.4.
    \986\ See infra section III.E.9.f.
    \987\ See infra text accompanying notes 1126 and 1127.
    \988\ See infra text following note 1123.
---------------------------------------------------------------------------

7. Historical Disclosure of Affiliate Financial Support
    As discussed above in section II.B.4, voluntary support provided by 
money market fund sponsors and affiliates has played a role in helping 
some money market funds maintain a stable share price, and, as a 
result, may have lessened investors' perception of the level of risk in 
money market funds. Such discretionary sponsor support was, in fact, 
not unusual during the financial crisis.\989\ Today we are adopting, 
with certain modifications from the proposal to address commenter 
concerns, amendments that require that money market funds disclose 
current and historical instances of affiliate ``financial support.'' 
The final amendments define ``financial support'' in the same way it is 
defined in Form N-CR,\990\ and specify that funds should incorporate 
certain information that the fund is required to report on Form N-CR in 
their SAI disclosure.\991\ We discuss this definition in detail, 
including the modifications we have made to address commenter concerns, 
in section III.F.\992\ This represents a slight change from the 
proposal, in that the required disclosure is now identical to what 
would be disclosed in the initial filings of Form N-CR. We have made 
this change to reduce the burdens associated with such disclosure so 
that funds need only prepare this information once in a single 
manner.\993\
---------------------------------------------------------------------------

    \989\ See, e.g., DERA Study, supra note 24, at nn.23-24 and 
accompanying text.
    \990\ See Instruction 1 to Item 16(g)(2) of Form N-1A; Form N-CR 
Part C (defining financial support as ``including any (i) capital 
contribution, (ii) purchase of a security from the Fund in reliance 
on Sec.  270.17a-9, (iii) purchase of any defaulted or devalued 
security at par, (iv) execution of letter of credit or letter of 
indemnity, (v) capital support agreement (whether or not the Fund 
ultimately received support), (vi) performance guarantee, or (vii) 
any other similar action reasonably intended to increase or 
stabilize the value or liquidity of the Fund's portfolio; excluding, 
however, any (i) routine waiver of fees or reimbursement of Fund 
expenses, (ii) routine inter-fund lending (iii) routine inter-fund 
purchases of Fund shares, or (iv) any action that would qualify as 
financial support as defined above, that the board of directors has 
otherwise determined not to be reasonably intended to increase or 
stabilize the value or liquidity of the Fund's portfolio.'').
    \991\ See Instruction 3 to Item 16(g)(2) of Form N-1A.
    \992\ See infra section III.F.3.
    \993\ See Item 16(g)(2) of Form N-1A. The disclosure required by 
Item 16(g)(2) should incorporate, as appropriate, any information 
that the fund is required to report to the Commission on Items C.1, 
C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR. See Instruction 2 to 
Item 16(g)(2).
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on amending rule 
17a-9 (which allows for the discretionary support of money market funds 
by their sponsors and other affiliates) to potentially restrict the 
practice of sponsor support, but did not propose any specific changes 
to the rule. While a few commenters suggested, in response to this 
request for comment, that we prohibit affiliates from providing 
discretionary support to maintain a money market fund's share 
value,\994\ other commenters opposed making any changes to rule 17a-9, 
arguing that transactions facilitated by the rule are in the best 
interests of shareholders.\995\ We continue to believe, as discussed in 
the Proposing Release, that permitting financial support (with adequate 
disclosure) will provide fund affiliates with the flexibility to 
protect shareholder interests, and we are not amending rule 17a-9 at 
this time.\996\ Many commenters supported the various financial support 
disclosures we are adopting today.\997\ We believe that these 
disclosure requirements will provide transparency to shareholders and 
the Commission about the frequency, nature, and amount of affiliate 
financial support.
---------------------------------------------------------------------------

    \994\ See, e.g., Systemic Risk Council Comment Letter; Capital 
Advisors Comment Letter; see also HSBC Comment Letter (supporting 
amending rule 17a-9, arguing that transactions facilitated by the 
rule can result in shareholders having unjustified expectations of 
future support being provided by sponsors).
    \995\ See ICI Comment Letter; Dreyfus Comment Letter; ABA 
Business Law Comment Letter.
    \996\ See Proposing Release, supra note 25, at text accompanying 
n.607.
    \997\ See, e.g., Oppenheimer Comment Letter (``We support the 
SEC's proposal to require money market funds to disclose current and 
historical instances of sponsor support for stable NAV funds [. . 
.].''). See also, e.g., Angel Comment Letter; American Bankers Ass'n 
Comment Letter; Federated VIII Comment Letter; Comment Letter of 
Occupy the SEC (Sept. 16, 2013) (``Occupy the SEC Comment Letter''); 
Thrivent Comment Letter.
---------------------------------------------------------------------------

a. General Requirements
    We are adopting, with some changes from the proposal, amendments to 
Form N-1A to require a money market fund

[[Page 47823]]

to disclose in its SAI historical instances in which the fund has 
received financial support from a sponsor or fund affiliate.\998\ 
Specifically, each money market fund will be required to disclose any 
occasion during the last 10 years (but not for occasions that occurred 
before the compliance date of these amended rules) on which an 
affiliated person, promoter, or principal underwriter of the fund, or 
an affiliated person of such person,\999\ provided any form of 
financial support to the fund. For the reasons discussed in the 
Proposing Release, we believe that the disclosure of historical 
instances of sponsor support will allow investors, regulators, 
academics, market observers and market participants, and other 
interested members of the public to understand better whether a 
particular fund has required financial support in the past and the 
extent of sponsor support across the fund industry.\1000\ As proposed, 
with respect to each such occasion, funds would have been required to 
describe the nature of support, the person providing support, the 
relationship between the person providing support and the fund, the 
date the support provided, the amount of support,\1001\ the security 
supported and its value on the date support was initiated (if 
applicable), the reason for support, the term of support, and any 
contractual restrictions relating to support.\1002\ We are adopting the 
proposed disclosure requirements, with the exception of the 
requirements for a fund to describe the reason for support, the term of 
support, and any contractual restrictions relating to support.
---------------------------------------------------------------------------

    \998\ See Item 16(g)(2) of Form N-1A.
    \999\ Rule 2a-7 currently requires a money market fund to notify 
the Commission by electronic mail, directed to the Director of 
Investment Management or the Director's designee, of any 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 current rule 2a-
7(c)(7)(iii)(B). As proposed, we are eliminating this requirement 
today, as it would be duplicative with the proposed Form N-CR 
reporting requirements discussed below. See rule 2a-7(f)(3); see 
also infra note 1254. However, because the definition of ``financial 
support'' as adopted today 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 definition should reflect 
the scope of persons covered by current rule 2a-7(c)(7)(iii)(B). The 
term ``affiliated person'' is defined in section 2(a)(3) and, in the 
context of an investment company, includes, among other persons, the 
investment adviser of the investment company.
    \1000\ See Proposing Release, supra note 25, at text following 
n.607.
    \1001\ See infra section III.F.3 for Commission guidance on the 
amount of support to be disclosed.
    \1002\ See proposed Item 16(g)(2) of Form N-1A. See infra notes 
1226-1243 and accompanying text for a discussion of actions that 
would be deemed to constitute ``financial support'' and additional 
discussion of what is required to be reported.
---------------------------------------------------------------------------

    While multiple commenters supported the proposed requirement for 
money market funds to disclose historical instances of financial 
support in the fund's SAI,\1003\ other commenters expressed a number of 
concerns about this proposed requirement.\1004\ For example, one 
commenter opposed this disclosure, stating that ``many investors would 
extrapolate such disclosure as an implied guarantee of future support 
by the sponsor of the fund.'' \1005\ Another commenter rejected the 
notion that past sponsor support is indicative of a sponsor's 
management style and further observed that disclosure of historical 
support contradicts the proposed disclosure that a fund's sponsor has 
no legal obligation to provide support.\1006\ While we acknowledge 
these concerns, we believe it is important for investors to understand 
the nature and extent that a fund's sponsor has discretionarily 
supported the fund in order to allow them to fully appreciate the risks 
of investing in the fund.\1007\ Although we recognize that historical 
occurrences are not necessarily indicative of future events and that 
support does not equate to poor fund management, we continue to expect 
that these disclosures will permit investors to assess the sponsor's 
past ability and willingness to provide financial support to the fund. 
This disclosure also should help investors gain a better context for, 
and understanding of, the fund's risks, historical performance, and 
principal volatility.
---------------------------------------------------------------------------

    \1003\ See supra note 997.
    \1004\ See, e.g., U.S. Bancorp Comment Letter; Dreyfus Comment 
Letter.
    \1005\ See U.S. Bancorp Comment Letter.
    \1006\ See Dreyfus Comment Letter.
    \1007\ See supra notes 51-55 and accompanying discussion; see 
also, e.g., Proposing Release, supra note 25, at n.607 and 
accompanying text.
---------------------------------------------------------------------------

    A number of commenters stated that any disclosure of financial 
support, including the historical disclosures, should only apply to 
stable NAV funds.\1008\ We disagree. Transparency of financial support 
is important for stable NAV funds, given the potential for a ``breaking 
the buck'' event absent the receipt of affiliate financial support. It 
is equally important, for both floating and stable NAV money market 
funds, that investors have transparency about the extent to which the 
fund's principal stability or liquidity profile is achieved through 
financial support as opposed to portfolio management. This is 
particularly the case when financial support for a floating NAV fund 
could obviate the need for it to impose a liquidity fee or redemption 
gate.\1009\ We therefore believe that transparency of such support will 
help investors better evaluate the risks with respect to both stable 
and floating NAV funds.\1010\
---------------------------------------------------------------------------

    \1008\ See, e.g., ICI Comment Letter; IDC Comment Letter; 
Oppenheimer Comment Letter; Comment Letter of State Street Global 
Advisors (Sept. 17, 2013) (``SSGA Comment Letter'').
    \1009\ See generally, ABA Business Law Section (with respect to 
retaining rule 17a-9, stating that ``the possibility of economic 
support from an affiliated person would remain important to money 
market funds that have a floating NAV because [. . .] liquidity 
concerns [remain] significant to money market funds (and other funds 
holding the same investments). [. . . .] In addition, retaining 
[rule 17a-9] would not undercut the Commission's goal of providing 
transparency of money market fund risks, particularly in light of 
the Commission's companion proposals calling for disclosure of 
historical instances of economic support from sponsors of money 
market funds.'').
    \1010\ See Proposing Release, supra note 25, at section 
III.F.1.a (discussing reasons why funds should disclose historical 
sponsor support).
---------------------------------------------------------------------------

    Some commenters also suggested we shorten the look-back period. For 
example, one commenter proposed a look-back period of 3 to 5 years 
(rather than 10 years, as proposed).\1011\ We believe, however, that a 
look-back period of less than 10 years would be too short to achieve 
our goals. As we noted in the Proposing Release,\1012\ the 10-year 
look-back period will provide shareholders and the Commission with a 
historical perspective that is 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 also note that, historically, episodes of 
financial support have occurred on average every 5 to 10 years.\1013\ 
Accordingly, a shorter look-back period would result in disclosure that 
not does reflect the typical historical frequency of instances of 
financial support.
---------------------------------------------------------------------------

    \1011\ See, e.g., Dreyfus Comment Letter (stating that 
``[s]imilar kinds of information (e.g., management fees and 12b-1 
fees paid, officers and directors biographies, financial highlights) 
generally [are] required in the registration statement only for a 3-
5 year period.''); Federated VIII Comment Letter (recommending five 
years). But see Occupy the SEC Comment Letter (explicitly supporting 
the proposed 10-year look-back period for disclosing events of 
financial support).
    \1012\ See Proposing Release, supra note 25, at discussion 
following n.614.
    \1013\ See Proposing Release, supra note 25, at section II.B, 
Table 1.
---------------------------------------------------------------------------

    We proposed to limit historical disclosure of events of affiliate 
financial support to instances that occur after the compliance date of 
the amendments to Form N-1A.\1014\ Several commenters

[[Page 47824]]

generally supported this approach, suggesting that this disclosure 
requirement should only apply to events that occur after the compliance 
date of the disclosure reforms.\1015\ We continue to believe that these 
disclosures should only apply to affiliate financial support events 
that occur after the compliance date of the disclosure reforms, in 
large part because to do otherwise would require funds and their 
affiliates to incur significant costs as they reexamine a variety of 
past transactions to determine whether such events fit our new 
definition of affiliate financial support.
---------------------------------------------------------------------------

    \1014\ As we proposed, this historical disclosure would only 
apply to such events that occurred after the compliance date of the 
amendments. See Proposing Release, supra note 25, at text 
accompanying n.983.
    \1015\ See Federated VII Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    Finally, a few commenters suggested disclosing historical financial 
support in Form N-MFP, N-CR, or N-CSR, rather than in the SAI (as 
proposed).\1016\ One commenter noted that to the extent this disclosure 
will serve as a reporting function for analysis by regulators, other 
forms such as Form N-MFP have been developed for that particular 
purpose.\1017\ Commenters also raised concerns about the potential 
redundancy of the proposed registration statement, Web site, and Form 
N-CR disclosure requirements.\1018\ Because these historical sponsor 
support disclosures are intended to benefit investors, as well as 
regulators, we believe that the SAI is the most accessible and 
efficient format for such disclosure. As discussed in section III.F.3, 
we note that the contemplated SAI disclosure would consolidate 
historical instances of sponsor support that have occurred in the past 
10 years, which would permit investors to view this information in a 
user-friendly manner, without the need to review prior form filings to 
piece together a fund's history of sponsor support. We also believe 
that, to the extent investors may not be familiar with researching 
filings on EDGAR, including this disclosure in a fund's SAI, which 
investors may receive in hard copy through the U.S. Postal Service or 
may access on a fund's Web site, as well as on EDGAR, may make this 
information more readily available to these investors than disclosure 
on other SEC forms that are solely accessible on EDGAR.
---------------------------------------------------------------------------

    \1016\ See, e.g., Dreyfus Comment Letter; U.S. Bancorp Comment 
Letter.
    \1017\ See Dreyfus Comment Letter.
    \1018\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we are not adopting the proposed requirements 
that a fund include the reason for support, the term of support, and 
any contractual restrictions relating to support in its required SAI 
disclosure.\1019\ Instead, a fund will only be required to present 
certain summary information about the receipt of financial support in 
its SAI (as well as on the fund's Web site \1020\), and will be 
required to present more detailed discussion solely on Form N-CR.\1021\ 
To inform investors about the inclusion of this more detailed 
information on Form N-CR, funds will be instructed to include the 
following statement as part of the historical disclosure of affiliate 
financial support appearing in the fund's SAI: ``The Fund was required 
to disclose additional information about this event [or ``these 
events,'' as appropriate] on Form N-CR and to file this form with the 
Securities and Exchange Commission. Any Form N-CR filing submitted by 
the Fund is available on the EDGAR Database on the Securities and 
Exchange Commission's Internet site at http://www.sec.gov.'' \1022\ In 
adopting these modified SAI disclosure requirements, we have attempted 
to appropriately consider concerns about potentially duplicative 
disclosure \1023\ as well as our belief, as discussed above, that the 
SAI is the most accessible and efficient format for investors to 
receive historical disclosures about affiliate financial support, and 
our interest in presenting the primary information about such financial 
support that we believe shareholders may find useful in assessing fund 
risks.
---------------------------------------------------------------------------

    \1019\ See supra note 1002 and accompanying text.
    \1020\ See infra section III.E.9.g.
    \1021\ See infra section III.F.3.
    \1022\ See Instructions to amended Item 16(g)(2) of Form N-1A.
    \1023\ See supra note 1018 and accompanying text. As discussed 
in more detail in section III.F.3 below, while similar information 
is required to be included on Form N-CR and Form N-1A, we believe 
each of these different disclosures to be appropriate because they 
serve distinct purposes. See discussion following infra notes 1248 
and 1249 and accompanying text.
---------------------------------------------------------------------------

b. Historical Support of Predecessor Funds
    We also are amending, generally as we proposed, the instructions to 
Form N-1A 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 10-year look-back period. As discussed in 
the Proposing Release, this amendment will provide additional 
transparency by providing investors the full extent of historical 
support provided to a fund or its predecessor. Specifically, except as 
noted below, the amended instructions state that if the fund has 
participated in a merger or other reorganization with another 
investment company during the last 10 years, the fund must additionally 
provide the required disclosure with respect to the other investment 
company.\1024\
---------------------------------------------------------------------------

    \1024\ See Instruction 2 to Item 16(g)(2). Additionally, if a 
fund's name has changed (but the corporate or trust entity remains 
the same), the fund may want to consider providing the required 
disclosure with respect to the entity or entities identified by the 
fund's former name. See Proposing Release, supra note 25, at n.619.
---------------------------------------------------------------------------

    Rather than require that funds disclose financial support provided 
to a predecessor fund in all cases (as proposed), we are revising the 
instruction to permit a fund to exclude such disclosure where the 
person or entity that previously provided financial support to the 
predecessor fund is not currently an affiliated person (including the 
adviser), promoter, or principal underwriter of the disclosing 
fund.\1025\ A few commenters expressed concern about historical 
disclosures with respect to third-party reorganizations, asserting that 
past financial support would be irrelevant to shareholders where the 
surviving fund had a new manager unaffiliated with the prior 
manager.\1026\ These commenters noted that this disclosure requirement 
could adversely affect potential merger transactions with funds that 
have received sponsor support.\1027\
---------------------------------------------------------------------------

    \1025\ Id. In the Proposing Release we had proposed to require 
disclosure of financial support provided to a predecessor fund in 
all cases. See Proposing Release, supra note 25, at n.618 and 
accompanying discussion.
    \1026\ See, e.g., Federated VIII Comment Letter; SIFMA Comment 
Letter.
    \1027\ See id.
---------------------------------------------------------------------------

    We agree with these commenters that historical sponsor support 
information about a predecessor fund may be less relevant when the fund 
is not advised by, or otherwise affiliated with, the entity that had 
previously provided financial support to the predecessor fund. 
Accordingly, we are adopting an exclusion to this disclosure 
requirement based on whether the current fund continues to have any 
affiliation with the predecessor fund's affiliated persons (including 
the predecessor fund's adviser), promoter, or principal 
underwriter.\1028\ We expect this approach should mitigate commenter 
concerns of adverse effects on fund mergers.
---------------------------------------------------------------------------

    \1028\ See Instruction 2 to Item 16(g)(2).
---------------------------------------------------------------------------

8. Economic Analysis
    As discussed above, we are adopting a number of amendments to 
requirements for disclosure documents that are related to both our fees 
and

[[Page 47825]]

gates and floating NAV requirements, as well as other disclosure 
enhancements discussed in the proposal. We believe that these 
amendments improve transparency and will better inform shareholders 
about the risks of investing in money market funds, which should result 
in shareholders making investment decisions that better match their 
investment preferences. We believe that many of these amendments will 
have effects on efficiency, competition, and capital formation that are 
similar to those that are outlined in the Macroeconomic Consequences 
section below,\1029\ but some of the amendments introduce additional 
effects.
---------------------------------------------------------------------------

    \1029\ See infra section III.K.
---------------------------------------------------------------------------

    Many of the new disclosure requirements are designed to make 
investors aware of the more substantive amendments discussed earlier in 
the Release, i.e., the ability of certain funds to impose redemption 
fees and gates and the requirement that certain funds float their NAV. 
Increasing investor awareness via enhanced disclosure may lead to more 
efficient capital allocations because investors will possess greater 
knowledge of risks and thus will be able to make better informed 
investment decisions when deciding how to allocate their assets. 
Increased investor awareness also may promote capital formation if 
investors find a floating NAV and/or redemption fees and gates 
attractive and are more willing to invest in this market. For instance, 
investors may find fees and gates attractive insofar as imposing fees 
and gates during a time of market stress could help protect the 
interests of shareholders, or could permit a fund manager to invest the 
proceeds of maturing assets in short-term securities while the gate is 
down, thereby helping to protect the short-term financing 
markets.\1030\ Moreover, enhanced investor awareness of fund risks may 
incentivize fund managers to hold less risky portfolio securities, 
which could also increase capital formation. Capital formation could be 
negatively impacted if investors find a floating NAV and/or redemption 
fees and gates unattractive or too complicated to understand. For 
instance, an investor could find it unattractive that imposing a fee or 
gate would prevent them from moving their investment into other 
investment alternatives or using their assets to satisfy liquidity 
needs.\1031\ Additionally, disclosing a general risk of investment loss 
may negatively impact capital formation if this disclosure leads 
investors to decide that money market funds pose too great of an 
investment risk, and investors consequently decide not to invest in 
money market funds or to move their invested assets from money market 
funds. As such, capital formation could be negatively impacted if 
investors move their money from these types of funds to a different 
style of fund, for example, from an institutional prime fund to a 
government fund and thus affecting the short-term funding market. 
However, if investors move from a money market fund to a money market 
fund alternative that invests in similar types of assets, then there 
should not be an impact on capital formation with respect to the 
overall economy, but only within the money market fund industry.
---------------------------------------------------------------------------

    \1030\ See supra section III.A.1.b.ii.
    \1031\ See supra section III.A.1.c.iii.
---------------------------------------------------------------------------

    To the extent that the disclosure amendments increase investor 
awareness of the more substantive reforms, there may be an effect on 
competition because some of the disclosure requirements are specific to 
the structure of the funds. As such, these funds will be competing with 
each other based on, among other things, what is stated in their 
advertisements, sales materials, and the summary section of their 
statutory prospectus. Disclosure providing that funds with a stable NAV 
seek to preserve the value of their investment at $1.00 per share, that 
share prices of floating NAV funds will fluctuate, that taxable 
investors in institutional prime money market funds may experience 
taxable gains or losses, or that non-government funds may impose a fee 
or gate may make investors more aware of different investment options, 
which could increase competition between funds.
    The amendments that require money market funds to disclose current 
and historical information about affiliate financial support and 
historical information about the implementation of redemption fees and 
gates may also affect efficiency, competition, and capital formation. 
As discussed in the Proposing Release, these amendments may 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,\1032\ as well 
as the frequency and duration of redemption fees and gates. 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, the 
disclosure of sponsor support 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. The disclosure of fees 
and gates also could advantage larger funds and fund groups if the 
ability to provide financial support reduces or eliminates the need to 
impose fees and/or gates (the imposition of which presumably would be 
perceived to be a competitive detriment). Additionally, 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, the competitive stance of certain 
money market funds, or the money market fund industry generally, could 
be adversely affected.
---------------------------------------------------------------------------

    \1032\ See Proposing Release, supra note 25, at text following 
n.629.
---------------------------------------------------------------------------

    The disclosure of affiliate financial support could have additional 
effects on capital formation, depending on whether 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 requirements could 
enhance capital formation by promoting stability within the money 
market fund industry. On the other hand, the disclosure requirements 
could detract from capital formation if sponsor support were understood 
to indicate fund weakness and make 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 
and not put it into an alternative with similar types of assets as a 
result. We did not receive comments on this aspect of our economic 
analysis. Similarly, the requirement to disclose historical redemption 
fees and gates could either promote or hinder capital formation. 
Disclosing the prior imposition of fees or gates may negatively impact 
capital formation if investors view the imposition of fees and gates 
unfavorably. Conversely, the requirement to disclose will allow 
investors to differentiate funds based on the extent to which funds 
have imposed fees and gates in the past, which could increase capital 
formation if investors perceive the absence of past fees and gates as a 
sign of greater stability within the money market fund industry. 
Furthermore, these required disclosures could assist the Commission in 
overseeing money market funds and

[[Page 47826]]

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. The Commission cannot estimate the 
quantitative benefits of the amendments to the disclosure forms because 
of uncertainty about how increased transparency may affect different 
investors' or groups of investors' understanding of the risks 
associated with money market funds. Uncertainty regarding how the 
proposed disclosure may affect different investors' behavior likewise 
makes it difficult for the Commission to measure the quantitative 
benefits of the proposed requirements.
    As a possible alternative, we could have chosen to require 
disclosure, as suggested by commenters, of the historical information 
on Form N-MFP, Form N-CR, or Form N-CSR instead of through the SAI. 
Because the historical disclosures are intended to benefit both 
investors and regulators, we believe that the SAI is the most suitable 
format for such disclosure. As discussed above, we believe that 
including historical information about affiliate financial support and 
the imposition of fees and gates in the fund's SAI may make this 
information more readily available to investors than disclosure on 
other SEC forms that are solely accessible on EDGAR. We therefore 
believe that requiring this disclosure to appear in a fund's SAI could 
increase informational efficiency by facilitating the provision of this 
information to investors.
    We believe that all money market funds will incur one-time and 
ongoing annual costs to update their registration statements, as well 
as their advertising and sales materials. The proposal estimated the 
costs that would be incurred under the fees and gates alterative 
separately from those that would be incurred under the floating NAV 
alternative. Under the fees and gates alternative, the proposal 
estimated that the average one-time costs for a money market fund 
(except government money market funds that are not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) to amend its 
registration statement and to update its advertising and sales 
materials would be $3,092,\1033\ and the average one-time costs for a 
government fund that is not subject to the fees and gates requirements 
pursuant to rule 2a-7(c)(2)(iii) would be $2,204.\1034\ The proposal 
also estimated that the average annual costs for a money market fund 
(except government money market funds that are not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) to amend its 
registration statement would be $296,\1035\ and the average annual 
costs for a government fund that is not subject to the fees and gates 
requirements pursuant to rule 2a-7(c)(2)(iii) would be $148.\1036\
---------------------------------------------------------------------------

    \1033\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the fees and gates proposal, as well as the Form N-1A requirements 
relating to the fees and gates proposal that would not necessitate 
form amendments ($1,480) + the costs estimated for each fund to 
comply with the proposed Form N-1A sponsor support disclosure 
requirements ($148) = $1,628. The estimated costs included in 
section III.B.8 of the Proposing Release inadvertently omitted the 
costs estimated for each fund to update the fund's advertising and 
sales materials to include the required risk disclosure statement; 
however, these costs ($1,464) were discussed in the Paperwork 
Reduction Act Analysis section of the Proposing Release. Adding 
these costs ($1,464) to the costs of complying with the new 
requirements of Form N-1A ($1,628) results in total estimated costs 
of $3,092. See Proposing Release, supra note 25, at nn.461, 628, 
1214 and accompanying text.
    \1034\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the fees and gates proposal, as well as the Form N-1A requirements 
relating to the fees and gates proposal that would not necessitate 
form amendments ($592) + the costs estimated for each fund to comply 
with the proposed Form N-1A sponsor support disclosure requirements 
($148) = $740. The estimated costs included in section III.B.8 of 
the Proposing Release inadvertently omitted the costs estimated for 
each fund to update the fund's advertising and sales materials to 
include the required risk disclosure statement; however, these costs 
($1,464) were discussed in the Paperwork Reduction Act Analysis 
section of the Proposing Release. Adding these costs ($1,464) to the 
costs of complying with the proposed amendments to Form N-1A ($740) 
results in total estimated costs of $2,204. See Proposing Release, 
supra note 25, at nn.461, 628, 1214 and accompanying text.
    \1035\ This figure incorporates the costs estimated for a fund 
to: (i) Review and update the disclosure in its registration 
statement regarding historical occasions on which the fund has 
considered or imposed liquidity fees or gates, and to inform 
investors of any fees or gates currently in place by means of a 
prospectus supplement ($148); and (ii) to review and update the 
disclosure in its registration statement regarding historical 
instances in which the fund has received financial support from a 
sponsor or fund affiliate ($148). See Proposing Release, supra note 
25, at nn.463, 628 and accompanying text.
    \1036\ This figure reflects the costs estimated for a fund to 
review and update the disclosure in its registration statement 
regarding historical instances in which the fund has received 
financial support from a sponsor or fund affiliate ($148). See 
Proposing Release, supra note 25, at n.628 and accompanying text.
---------------------------------------------------------------------------

    Under the floating NAV alternative, the proposal estimated that the 
average one-time costs that would be incurred for a floating NAV money 
market fund to amend its registration statement and update its 
advertising and sales materials would be $3,092,\1037\ and the average 
one-time costs for a government or retail money market fund would be 
$2,204.\1038\ The proposal also estimated that the average annual costs 
for a money market fund to amend its registration statement would be 
$148.\1039\
---------------------------------------------------------------------------

    \1037\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the floating NAV proposal, as well as the Form N-1A requirements 
relating to the floating NAV proposal that would not necessitate 
form amendments ($1,480) + the costs estimated for each fund to 
comply with the proposed Form N-1A sponsor support disclosure 
requirements ($148) = $1,628. The estimated costs included in 
section III.A.8 of the Proposing Release inadvertently omitted the 
costs estimated for each fund to update the fund's advertising and 
sales materials to include the required risk disclosure statement; 
however, these costs ($1,464) were discussed in the Paperwork 
Reduction Act Analysis section of the Proposing Release. Adding 
these costs ($1,464) to the costs of complying with the proposed 
amendments to Form N-1A ($1,628) results in total estimated costs of 
$3,092. See Proposing Release, supra note 25, at nn.330, 628, 1121-
1125 and accompanying text.
    \1038\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the floating NAV proposal, as well as the Form N-1A requirements 
relating to the floating NAV proposal that would not necessitate 
form amendments ($592) + the costs estimated for each fund to comply 
with the proposed Form N-1A sponsor support disclosure requirements 
($148) = $740. The estimated costs included in section III.A.8 of 
the Proposing Release inadvertently omitted the costs estimated for 
each fund to update the fund's advertising and sales materials to 
include the required risk disclosure statement; however, these costs 
($1,464) were discussed in the Paperwork Reduction Act Analysis 
section of the Proposing Release. Adding these costs ($1,464) to the 
costs of complying with the proposed amendments to Form N-1A 
($1,628) results in total estimated costs of $2,204. See Proposing 
Release, supra note 25, at nn.330, 628, 1121-1125 and accompanying 
text.
    \1039\ This figure reflects the costs estimated for a fund to 
review and update the disclosure in its registration statement 
regarding historical instances in which the fund has received 
financial support from a sponsor or fund affiliate ($148). See 
Proposing Release, supra note 25, at n.628 and accompanying text.
---------------------------------------------------------------------------

    We requested comment on the estimates of the operational costs 
associated with the amended disclosure requirements. Certain commenters 
generally noted that complying with all of the new disclosure 
requirements, including the disclosure requirements involving the 
fund's advertisements and sales materials and its registration 
statement, would involve some additional costs.\1040\ Several 
commenters provided dollar estimates

[[Page 47827]]

of the initial costs to implement a fees and gates or floating NAV 
regime and noted that these estimates would include the costs of 
related disclosure, but these commenters did not specifically break out 
the disclosure-related costs in their estimates.\1041\ One commenter 
stated that the costs to update a fund's registration statement to 
reflect the new fees and gates and floating NAV requirements would be 
``minimal when compared to other costs.'' \1042\ Another commenter 
stated that it did not consider the disclosure requirements burdensome 
and noted that it did not believe the disclosure requirements would 
impose unnecessary costs.\1043\ We have considered the comments we 
received on the new disclosure requirements, and we have determined not 
to change the assumptions we used in our cost estimates in response to 
these comments, as the comments provided no specific suggestions or 
critiques regarding our methods for estimating these costs. However, 
our current estimates reflect the fact that the amendments we are 
adopting today combine the floating NAV and fees and gates proposal 
alternatives into one unified approach, and also incorporate updated 
industry data.
---------------------------------------------------------------------------

    \1040\ See, e.g., Fin. Svcs. Roundtable Comment Letter (noting 
that the proposed disclosure requirements generally would produce 
``significant cost to the fund and ultimately to the fund's 
investors''); SSGA Comment Letter (urging the Commission to consider 
the ``substantial administrative, operational, and expense burdens'' 
of the proposed disclosure-related amendments); Chapin Davis Comment 
Letter (noting that the disclosure- and reporting-related amendments 
will result in increased costs in the form of fund staff salaries, 
or consultant, accountant, and lawyer hourly rates, that will 
ultimately be borne in large part by investors and portfolio 
issuers).
    \1041\ See, e.g., Chamber I Comment Letter; Fidelity Comment 
Letter.
    \1042\ See State Street Comment Letter, at Appendix A.
    \1043\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We anticipate that money market funds will incur costs to (i) amend 
the fund's advertising and sales materials (including the fund's Web 
site) to include the required risk disclosure statement; (ii) amend the 
fund's registration statement to include the required risk disclosure 
statement, disclosure of the tax consequences and effects on fund 
operations of a floating NAV (as applicable), and the effects of fees 
and gates on redemptions (as applicable); (iii) amend the fund's 
registration statement to disclose post-compliance-period historical 
occasions on which the fund has considered or imposed liquidity fees or 
gates; and (iv) amend the fund's registration statement to disclose 
post-compliance-period historical instances in which the fund has 
received financial support from a sponsor or fund affiliate. These 
costs will include initial, one-time costs, as well as ongoing costs. 
Each money market fund in a fund complex might not incur these costs 
individually.
    We estimate that the average one-time costs for a money market fund 
(except government money market funds that are not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii), and floating 
NAV money market funds) to comply with these disclosure requirements 
would be $3,059 (plus printing costs).\1044\ We estimate that the 
average one-time costs for a government money market fund that is not 
subject to the fees and gates requirements pursuant to rule 2a-
7(c)(2)(iii) to comply with these disclosure requirements would be 
$2,102 (plus printing costs).\1045\ Finally, we estimate that the 
average one-time costs for floating NAV money market funds to comply 
with these disclosure requirements would be $4,016 (plus printing 
costs).\1046\
---------------------------------------------------------------------------

    \1044\ This figure incorporates the costs we estimated for each 
fund to update its registration statement to include the required 
disclosure statement, the required disclosure about the effects that 
fees and gates may have on shareholder redemptions, disclosure about 
historical occasions on which the fund has considered or imposed 
liquidity fees or gates, and disclosure about financial support 
received by the fund ($1,595) + the costs we estimated for each fund 
to update the fund's advertising and sales materials to include the 
required risk disclosure statement ($1,464) = $3,059. The costs 
associated with these activities are all paperwork-related costs and 
are discussed in more detail infra at sections IV.F and IV.G.
    \1045\ This figure incorporates the costs we estimated for each 
fund to update its registration statement to include the required 
disclosure statement and disclosure about financial support received 
by the fund ($638) + the costs we estimated for each fund to update 
the fund's advertising and sales materials to include the required 
risk disclosure statement ($1,464) = $2,102. The costs associated 
with these activities are all paperwork-related costs and are 
discussed in more detail infra at sections IV.F and IV.G.
    \1046\ This figure incorporates the costs we estimated for each 
fund to update its registration statement to include the required 
disclosure statement, the required disclosure about the effects that 
fees and gates may have on shareholder redemptions, disclosure about 
historical occasions on which the fund has considered or imposed 
liquidity fees or gates, the required tax- and operations-related 
disclosure about a floating NAV, and disclosure about financial 
support received by the fund ($2,552) + the costs we estimated for 
each fund to update the fund's advertising and sales materials to 
include the required risk disclosure statement ($1,464) = $4,016. 
The costs associated with these activities are all paperwork-related 
costs and are discussed in more detail infra at sections IV.F and 
IV.G.
---------------------------------------------------------------------------

    Ongoing compliance costs include the costs for money market funds 
periodically to: (i) Review and update the fund's registration 
statement disclosure regarding historical occasions on which the fund 
has considered or imposed liquidity fees or gates (as applicable); (ii) 
review and update the fund's registration statement disclosure 
regarding historical instances in which the fund has received financial 
support from a sponsor or fund affiliate; and (iii) inform investors of 
any fees or gates currently in place (as applicable) or the transition 
to a floating NAV (as applicable) by means of a prospectus supplement. 
Because the required registration statement disclosure overlaps with 
the information that a fund must disclose on Parts C, E, F, and G of 
Form N-CR, 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.F. We estimate that a fund 
(besides a government money market fund that is not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) will incur 
average annual costs of $319 to comply with these disclosure 
requirements.\1047\ We also estimate that a government money market 
fund that is not subject to the fees and gates requirements pursuant to 
rule 2a-7(c)(2)(iii) will incur average annual costs of $160 to comply 
with these disclosure requirements.\1048\
---------------------------------------------------------------------------

    \1047\ This figure incorporates the costs we estimated for each 
fund to review and update its registration statement disclosure 
regarding historical occasions on which the fund has considered or 
imposed liquidity fees or gates, and to inform investors of any fees 
or gates currently in place (as appropriate) or the transition to a 
floating NAV (as appropriate) by means of a prospectus supplement 
($159.5) + the costs we estimated for each fund to review and update 
its registration statement disclosure regarding historical instances 
in which the fund has received financial support from a sponsor or 
fund affiliate ($159.5) = $319. The costs associated with these 
activities are all paperwork-related costs and are discussed in more 
detail infra at section IV.G.
    \1048\ This figure incorporates the costs we estimated for each 
fund to review and update its registration statement disclosure 
regarding historical instances in which the fund has received 
financial support from a sponsor or fund affiliate (approximately 
$160). The costs associated with these activities are all paperwork-
related costs and are discussed in more detail infra at section 
IV.G.
---------------------------------------------------------------------------

9. Web site Disclosure
a. Daily Disclosure of Daily and Weekly Liquid Assets
    We are adopting, as proposed, amendments to rule 2a-7 that 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 of the end of each business day during the 
preceding six months.\1049\ The amendments we are adopting would 
require, as proposed, 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 for the 
previous six

[[Page 47828]]

months,\1050\ and would require the fund to update this historical 
information each business day, as of the end of the preceding business 
day. Several commenters supported the disclosure on a fund's Web site 
of the fund's daily liquid assets and weekly liquid assets.\1051\ 
Commenters supporting such disclosure noted that daily disclosure of 
this information would promote transparency and help investors better 
understand money market fund risks.\1052\ A few commenters stated that 
providing this information could help investors evaluate whether a fund 
is positioned to meet redemptions or could approach a threshold where a 
fee or gate could be imposed.\1053\ A number of commenters suggested 
that daily disclosure likely would impose external market discipline on 
portfolio managers and encourage careful management of daily and weekly 
assets.\1054\ Finally, several commenters indicated that many money 
market funds are already disclosing such information on either a daily 
or a weekly basis, a fact we noted in the Proposing Release.\1055\
---------------------------------------------------------------------------

    \1049\ See rule 2a-7(a)(4). As proposed, 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.
    \1050\ For purposes of the required Web site disclosure of daily 
and weekly liquid assets, the six-month look-back period for 
disclosure would encompass fund data that occurs prior to the 
compliance date. Accordingly, if a fund were to update its Web site 
on the compliance date to include the required schedule, chart, 
graph, or other depiction showing historical data for the previous 
six months, the depiction would show data from six months prior to 
the compliance date. See infra note 2201.
    \1051\ See, e.g., Boston Federal Reserve Comment Letter; 
Oppenheimer Comment Letter; Fidelity Comment Letter.
    \1052\ See, e.g., Oppenheimer Comment Letter; Blackrock II 
Comment Letter; Fidelity Comment Letter.
    \1053\ See, e.g., U.S. Bancorp Comment Letter; Goldman Sachs 
Comment Letter.
    \1054\ See, e.g., ICI Comment Letter; Dreyfus Comment Letter; 
American Bankers Ass'n Comment Letter.
    \1055\ See, e.g., U.S. Bancorp Comment Letter; Blackrock II 
Comment Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

    Other commenters, however, opposed certain aspects of the proposed 
amendment. Two commenters opposed daily disclosure of this information 
and thought the information could be provided on a weekly basis.\1056\ 
We disagree. In times of market stress, money market funds may face 
rapid, heavy redemptions, which could quickly affect their 
liquidity.\1057\ Having daily information in times of market stress can 
reduce uncertainty, providing investors assurance that a money market 
fund has sufficient liquidity to withstand the potential for heavy 
redemptions. One commenter opposed the six-month look-back because it 
would require a restructuring of fund Web sites that are already 
disclosing this data.\1058\ We recognize, as discussed below, that the 
amendments will impose costs on funds. We believe, however, that it is 
important for funds to provide historical information for the prior six 
months, and updating such information daily will help investors place 
current information in context and thus have a more complete picture of 
current events.
---------------------------------------------------------------------------

    \1056\ See Schwab Comment Letter; Federated VIII Comment Letter.
    \1057\ See generally DERA Study, supra note 24, at section 3.
    \1058\ See UBS Comment Letter.
---------------------------------------------------------------------------

    One commenter argued that daily disclosure of this information 
would not be meaningful to investors,\1059\ while another commenter 
expressed concern that daily disclosure, in combination with 
discretionary fees and gates, could cause reactionary 
redemptions.\1060\ We recognize and have considered the risk that daily 
disclosure of weekly liquid assets and daily liquid assets could 
trigger heavy redemptions in some situations, particularly the risk of 
pre-emptive redemptions in anticipation of a potential fee or gate. 
However, as discussed in detail above, the board's discretion to impose 
a fee or a gate, among other things, mitigates the concern that 
investors will be able to accurately predict such an event which in 
turn would lead them to pre-emptively withdraw their assets from the 
fund.\1061\ In addition, as discussed above, other aspects of today's 
amendments further mitigate the risks of pre-emptive runs. We believe 
that daily disclosure of weekly liquid assets and daily liquid assets 
ultimately benefits investors and could both increase stability and 
decrease risk in the financial markets.\1062\ As mentioned above, while 
there is a potential for heavy redemptions in response to a decrease in 
liquidity, the increased transparency could reduce run risk in cases 
where it shows investors that a fund has sufficient liquidity to 
withstand market stress events. We also agree with commenters and 
believe that daily disclosure will increase market discipline, which 
could ultimately deter situations that could lead to heavy 
redemptions.\1063\ Also, as noted elsewhere in this Release, we believe 
that the reforms we are adopting concerning fees and gates are a tool 
for handling heavy redemptions once they occur. Finally, we note that 
several funds have already voluntarily begun disclosing liquidity 
information on their Web sites.\1064\
---------------------------------------------------------------------------

    \1059\ See Schwab Comment Letter.
    \1060\ See Federated VIII Comment Letter; see also supra section 
III.A.1.c.i.
    \1061\ See supra note 171 and accompanying text.
    \1062\ Although not a principal basis for our decision, we note 
that certain literature suggests that suspensions of withdrawals can 
prevent bank runs. See, e.g., Diamond, Douglas W., Spring 2007, 
``Banks and Liquidity Creation: A Simple Exposition of the Diamond-
Dybvig Model,'' Economic Quarterly, Volume 93, Number 2, 189-200.
    \1063\ See supra note 1054.
    \1064\ See, e.g., BlackRock II Comment Letter; Boston Federal 
Reserve Comment Letter.
---------------------------------------------------------------------------

    A few commenters also believed that the proposed disclosures should 
apply only to stable NAV funds.\1065\ We disagree with these 
commenters. We believe that the benefits we discuss throughout this 
section regarding disclosure apply regardless of whether a fund has a 
stable or floating NAV. As we have noted in several instances, a 
floating NAV may reduce but does not eliminate the risk of heavy 
redemptions if the fund comes under stress. Liquidity information can 
help investors understand a fund's ability to withstand heavy 
redemptions. Additionally, this information is relevant to investors to 
understand the potential for either a floating NAV fund or a stable NAV 
fund to impose a fee or a gate. We also believe that it is important 
for all money market funds, both floating NAV funds and stable NAV 
funds, to disclose liquidity information so that investors will easily 
be able to compare this data point, which could be seen as a risk 
metric, across funds when making investment decisions among types of 
money market funds (e.g., comparing an institutional prime money market 
fund to a government money market fund), as well as between money 
market funds of the same type (e.g., comparing two government money 
market funds).
---------------------------------------------------------------------------

    \1065\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI 
Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that daily Web site disclosure of a fund's 
daily liquid assets and weekly liquid assets will increase transparency 
and enhance investors' understanding of money market fund risks. This 
disclosure will help investors understand how funds are managed, as 
well as help them monitor, in near real-time, a fund's ability to 
satisfy redemptions in various market conditions, including episodes of 
market turbulence. We also agree with commenters and believe that this 
disclosure will encourage market discipline on fund managers.\1066\ In 
particular, we believe that this disclosure will encourage fund 
managers to manage the fund's liquidity in a manner that makes it less 
likely that the fund crosses a threshold where a fee or gate could be 
imposed, and also discourage month-end ``window dressing'' (in this 
context, the practice

[[Page 47829]]

of periodically increasing the daily liquid assets and/or weekly liquid 
assets in a fund's portfolio, such that the fund's month-end reporting 
will reflect certain liquidity levels, and then decreasing the fund's 
investment in such assets shortly after the fund's month-end reporting 
calculations have been made).
---------------------------------------------------------------------------

    \1066\ See supra note 1054.
---------------------------------------------------------------------------

b. Daily Disclosure of Net Shareholder Flows
    We are also adopting, as proposed, amendments to rule 2a-7 that 
require money market funds to disclose prominently on their Web sites 
the fund's daily net inflows or outflows, as of the end of the previous 
business day, during the preceding six months.\1067\ As proposed, the 
amendments we are adopting would require a fund to maintain a schedule, 
chart, graph, or other depiction on its Web site showing historical 
information about its net inflows or outflows for the previous six 
months,\1068\ and would require the fund to update this historical 
information each business day, as of the end of the preceding business 
day. One commenter expressed support for daily disclosure of a fund's 
net inflows and outflows, though it opposed the requirement to report 
and continually update historical information.\1069\ Several commenters 
objected to Web site disclosure of net shareholder flows, noting that 
money market funds often have large inflows and outflows as a normal 
course of business, and these flows are often anticipated.\1070\ A 
number of commenters suggested that shareholders could misinterpret 
large inflows and outflows as a sign of stress even if the flows are 
anticipated and the fund's liquidity is adequate to handle them.\1071\ 
Two commenters also expressed concern that a large net inflow or 
outflow could signal to the market that the money market fund would 
need to buy or sell securities in the market, potentially facilitating 
front running.\1072\
---------------------------------------------------------------------------

    \1067\ See rule 2a-7(h)(10)(ii); see also supra note 1049.
    \1068\ For purposes of the required Web site disclosure of net 
fund inflows or outflows, the six-month look-back period for 
disclosure would encompass fund data that occurs prior to the 
compliance date. See supra note 1050.
    \1069\ See UBS Comment Letter.
    \1070\ See Federated VIII Comment Letter; Vanguard Comment 
Letter; U.S. Bancorp Comment Letter; Legg Mason & Western Asset 
Comment Letter; IDC Comment Letter.
    \1071\ See U.S. Bancorp Comment Letter; Blackrock II Comment 
Letter; Dreyfus Comment Letter.
    \1072\ See ICI Comment Letter; Legg Mason & Western Asset 
Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that daily disclosure of net inflows or 
outflows will provide beneficial information to shareholders, and thus 
we are adopting this requirement as proposed. In our view, information 
on shareholder redemptions can help provide important context to data 
regarding the funds' liquidity, as a fund that is experiencing 
increased outflow volatility will require greater liquidity. We 
understand, as commenters pointed out, that many funds can experience 
periodic and expected large net inflows or outflows on a regular basis. 
We believe that disclosure of this information over a rolling six-month 
period, however, will mitigate the risk that investors will 
misinterpret this information. Information about the historical context 
of fund inflows and outflows, which funds can include on their Web 
sites, should help investors distinguish between periodic large 
outflows that can occur in the normal course from periods of increased 
volatility in shareholder flow. Finally, we are not persuaded by 
commenters who suggested that information regarding net shareholder 
flows will promote front-running because we believe that front-running 
concerns are not especially significant for money market funds on 
account of the specific characteristics of these funds and their 
holdings.\1073\
---------------------------------------------------------------------------

    \1073\ See, e.g., Investment Company Institute, Report of the 
Money Market Working Group, at 93 (Mar. 17, 2009), available 
athttp://www.ici.org/pdf/ppr_09_mmwg.pdf (``Because of the 
specific characteristics of money market funds and their holdings . 
. . the frontrunning concerns are far less significant for this type 
of fund. For example, money market funds' holdings are by definition 
very short-term in nature and therefore would not lend themselves to 
frontrunning by those who may want to profit by trading in a money 
market fund's particular holdings. Rule 2a-7 also restricts the 
universe of Eligible Securities to such an extent that front 
running, to the extent it exists at all, tends to be immaterial to 
money market fund performance.'').
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c. Daily Disclosure of Current NAV
    We are adopting, as proposed, 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 (calculated based on current 
market factors), 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 \1074\ (the fund's ``current NAV'') 
as of the end of the previous business day during the preceding six 
months.\1075\ The amendments 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 six 
months,\1076\ and would require the fund to update this historical 
information each business day as of the end of the preceding business 
day.\1077\ These amendments complement the current requirement for a 
money market fund to disclose its shadow price monthly on Form N-MFP 
(broken out weekly).\1078\ Disclosing the NAV per share to the fourth 
decimal would conform to the precision of NAV reporting that funds will 
be required to report on Form N-MFP and to what many funds are 
currently voluntarily disclosing.\1079\
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    \1074\ E.g., $10,000 or $100.00 per share.
    \1075\ See rule 2a-7(h)(10)(iii).
    \1076\ For purposes of the required Web site disclosure of the 
fund's current NAV per share, the six-month look-back period for 
disclosure would encompass fund data that occurs prior to the 
compliance date. See supra note 1050.
    \1077\ See supra note 1049.
    \1078\ See infra section III.G.1.b.
    \1079\ See infra note 1087 and accompanying text.
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    Several commenters supported the proposed disclosure requirement of 
funds' current NAV per share. These commenters suggested that daily 
disclosure of the current NAV per share would increase transparency and 
investor understanding of money market funds.\1080\ One commenter noted 
that the disclosure could impose discipline on portfolio managers, 
preventing, for example, month-end ``window dressing.'' \1081\ Finally, 
as we noted in the Proposing Release, several commenters indicated that 
many money market funds are already disclosing such information on 
either a daily or a weekly basis.\1082\
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    \1080\ See, e.g., MFDF Comment Letter; Blackrock II Comment 
Letter.
    \1081\ See J.P. Morgan Comment Letter.
    \1082\ See, e.g., U.S. Bancorp Comment Letter; Blackrock II 
Comment Letter; J.P. Morgan Comment Letter. But see Federated VIII 
Comment Letter (noting that it has not received many ``hits'' on its 
Web site after it began voluntarily posting information about the 
current market-based NAV per share of its funds, suggesting that 
allowing market forces to determine when such disclosure is valuable 
to investors is preferable to a ``one size fits all'' regulation).
---------------------------------------------------------------------------

    Some commenters opposed certain aspects or questioned the 
usefulness of the proposed disclosure requirement. One commenter 
believed that frequent publication of a fund's current NAV per share 
would increase the risk of heavy redemptions for stable NAV funds 
during a period of market stress, noting the incentive for investors to 
redeem if they see the shadow price fall.\1083\ We recognize and have 
considered the risk that daily disclosure of the current NAV per share 
could encourage heavy redemptions when it declines. We believe, 
however, that daily disclosure will not lead to significant redemptions 
and could, as we describe below, both

[[Page 47830]]

increase stability and decrease risk in the financial markets.\1084\ In 
particular, we believe that greater transparency regarding the current 
and historical NAV per share could help investors better assess the 
effects of market events on a fund's NAV and understand the context of 
a fund's principal stability during particular market stresses. For 
example, if an investor believes the values of one or more securities 
held by a fund are impaired, but does not see that impairment reflected 
in the NAV because it is only required to be disclosed once a month, 
they may sell their shares in the funds even though there is no actual 
impairment. Lack of transparency was one of the reasons cited in the 
DERA Study as a possible explanation for the large redemption activity 
during the financial crisis.\1085\ As one commenter noted, such 
disclosure could allay concerns about how a money market fund might be 
affected by the occurrence of negative market events.\1086\ We also 
believe that daily disclosure will increase market discipline, which 
could ultimately deter heavy redemptions. Also, as noted elsewhere in 
this Release, we believe that the reforms we are adopting concerning 
fees and gates are a tool for handling heavy redemptions when they 
occur. Finally, we note that many funds have voluntarily begun 
disclosing information about their current market-based NAV per share 
on their Web sites, and such disclosures have not led to significant 
redemptions.\1087\
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    \1083\ See HSBC Comment Letter.
    \1084\ For a discussion of how disclosure of a fund's daily 
liquid assets and weekly liquid assets could similarly increase 
stability and decrease risk in the financial markets, see supra 
notes 1062-1064 and accompanying text.
    \1085\ See DERA Study, supra note 24.
    \1086\ See Goldman Sachs Comment Letter.
    \1087\ 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).
---------------------------------------------------------------------------

    As with the proposed requirement regarding daily disclosure of 
liquidity levels, several commenters supported daily disclosure of a 
fund's current NAV per share only for stable NAV funds.\1088\ We 
disagree with commenters who suggested that daily Web site disclosure 
of the current NAV per share would only be useful for shareholders of 
stable NAV funds. We believe that the benefits we discuss above 
regarding disclosure apply regardless of whether a fund has a stable or 
floating NAV. For example, we believe that it is important for all 
money market funds, both floating NAV funds and stable NAV funds, to 
disclose NAV information so that investors will easily be able to 
compare this data point, which could be seen as a risk metric, across 
funds when making investment decisions among types of money market 
funds (e.g., comparing an institutional prime money market fund to a 
government money market fund), as well as between money market funds of 
the same type (e.g., comparing two institutional prime money market 
funds). The disclosure of the current NAV per share will enhance 
investors' understanding of money market funds and their inherent risks 
and allow investors to invest according to their risk preferences. This 
information will make changes in a money market fund's market-based NAV 
a regularly observable occurrence, which could promote investor 
confidence and generally provide investors with a greater understanding 
of the money market funds in which they invest.\1089\ We note that this 
disclosure could make floating NAV money market funds appear to be 
volatile compared to alternatives like ultra-short bond funds, which 
are registered mutual funds that transact at three decimal places (and 
disclosure of these alternative funds' NAV per share, consequently, 
would likewise show three and not four decimal places).\1090\ It is 
possible that investors might be incentivized to move their money to 
these alternatives because they appear more stable than money market 
funds.\1091\
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    \1088\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI 
Comment Letter; IDC Comment Letter.
    \1089\ See J.P. Morgan Comment Letter; BlackRock II Comment 
Letter.
    \1090\ But see supra note 521 and accompanying text (discussing 
staff analysis showing that, historically, over a twelve-month 
period, 100% of ultra-short bond funds have fluctuated in price 
(using 10 basis point rounding), compared with 53% of money market 
funds that have fluctuated in price (using basis point rounding)).
    \1091\ See infra section III.K, for an in-depth discussion about 
the macroeconomic consequences of the amendments, including the 
extent to which the requirements for institutional prime funds to 
transact at prices rounded to the fourth decimal place (and also, 
like all money market funds, disclose their current NAV to the 
fourth decimal place each day) could cause investors to reallocate 
their investments to alternatives outside the money market fund 
industry.
---------------------------------------------------------------------------

    The Commission continues to believe that requiring each fund to 
disclose daily its current NAV per share and also to provide six months 
of historical information about its current NAV per share will increase 
money market funds' transparency and permit investors to better 
understand money market funds' risks. This information will permit 
shareholders to reference funds' current NAV per share in near real 
time to assess the effect of market events on funds' portfolios, and 
will also provide investors the ability to discern trends through the 
provision of the six months of historical data.\1092\ While some 
historical data regarding the current NAV per share will be available 
through monthly N-MFP filings,\1093\ we believe that requiring funds to 
place this data on the fund's Web site will allow investors to consider 
this information in a more convenient and accessible format. In 
addition to increasing investors' understanding of money market funds' 
risks, we believe that this disclosure will encourage market discipline 
on fund managers, and particularly discourage month-end ``window 
dressing.''
---------------------------------------------------------------------------

    \1092\ One commenter opposed the disclosure of six months of 
historical information about a fund's current NAV per share because 
it would require a restructuring of fund Web sites that are already 
disclosing data. See UBS Comment Letter. We estimate the costs of 
modifications to fund Web sites in the Economic Analysis section 
infra.
    \1093\ See infra note 1179 and accompanying text (discussing our 
expectation that money market funds will be able generally to 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).
---------------------------------------------------------------------------

d. Daily Calculation of Current NAV per Share for Stable Value Money 
Market Funds
    We are adopting, generally as proposed, amendments to rule 2a-7 
that would require stable value money market funds to calculate the 
fund's current NAV per share (which the fund must calculate based on 
current market factors before applying the amortized cost or penny-
rounding method, if used), 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 per 
share) as of the end of each business day.\1094\ Rule 2a-7 currently 
requires

[[Page 47831]]

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.\1095\ 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, and thus we are adopting amendments to rule 2a-7 that 
would require this disclosure.\1096\ Because we are requiring money 
market funds to disclose their current NAV daily on the fund Web site, 
we correspondingly are amending rule 2a-7 to require funds to make this 
calculation as of the end of each business day, rather than at the 
board's discretion. We received no comments on this calculation 
requirement separate from comments on the related current NAV 
disclosure requirement. As discussed above, 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.\1097\
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    \1094\ See rule 2a-7(h)(10)(iii); see also text accompanying 
supra note 1074 for definition of ``current NAV.'' Under rule 2a-7 
as amended, a floating NAV money market fund is required, like any 
mutual fund not regulated under rule 2a-7, to price its securities 
at the current NAV by valuing its 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 rule 2a-7(c)(1); section 2(a)(41)(B); rules 2a-4 and 22c-1; see 
also supra note 5 and accompanying text. In addition, under rule 2a-
7 as amended, a floating NAV money market fund is required to 
compute its price per share for purposes of distribution, 
redemption, and repurchase by rounding the fund's current NAV per 
share to a minimum of the fourth decimal place in the case of a fund 
with a $1.0000 share price or an equivalent or more precise level of 
accuracy for money market funds with a different share price (e.g., 
$10.000 per share, or $100.00 per share). See rule 2a-7(c)(1)(ii). 
Therefore, we did not propose amendments to rule 2a-7 that would 
specifically require floating NAV money market funds to calculate 
their current NAV per share daily, because these funds already would 
be required to calculate their current NAV in order to price and 
sell their securities each day. As proposed, rule 2a-7 as amended 
would have permitted stable value funds to compute their current 
price per share, for purposes of distribution, redemption, and 
repurchase, by use of the penny-rounding method but not the 
amortized cost method. See Proposing Release, supra note 25, at 
n.170. Therefore, the proposed daily current NAV calculation 
requirement would have specified that stable value funds calculate 
their current NAV per share based on current market factors before 
applying the penny rounding method. As adopted, rule 2a-7 permits 
stable value funds to compute their current price per share, for 
purposes of distribution, redemption, and repurchase, by use of the 
amortized cost method and/or the penny rounding method. See rule 2a-
7(c)(1)(i). Therefore, the daily calculation requirement we are 
adopting, as discussed in this section III.E.9.d, specifies that 
stable value funds calculate their current NAV per share based on 
current market factors before applying the amortized cost or penny-
rounding method. See rule 2a-7(c)(1)(i).
    \1095\ Current rule 2a-7(c)(1). As adopted today, Items A.20 and 
B.5 of Form N-MFP will require money market funds to provide NAV 
data as of the close of business on each Friday during the month 
reported.
    \1096\ See supra section III.E.9.c.
    \1097\ See supra note 1082 and accompanying text. 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 
note 1179 and accompanying text.
---------------------------------------------------------------------------

e. 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. We are adopting 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 required to be 
reported on Form N-MFP pursuant to amendments to Form N-MFP, with 
changes to conform to modifications we are making to Form N-MFP from 
the proposal. We believe that these amendments will benefit money 
market fund investors by providing additional, and more precise, 
information about portfolio holdings, which should allow investors to 
better evaluate the current risks of the fund's portfolio investments.
    Specifically, in a change from the proposal, we are adopting 
amendments to the categories of portfolio investments reported on Form 
N-MFP, and are therefore also adopting conforming amendments to the 
categories of portfolio investments currently required to be reported 
on a money market fund's Web site.\1098\ We are adopting, as proposed, 
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 adopting, as proposed, conforming amendments to the current 
Web site disclosure requirements regarding portfolio securities' 
maturity dates.\1099\ 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 (because of the current 60-day 
delay before Form N-MFP information becomes publicly available). 
Because we are removing this 60-day delay, we are also requiring funds 
to 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.\1100\ One commenter supported the proposed 
amendments to harmonize portfolio information on Form N-MFP and 
information that funds disclose on their Web sites.\1101\
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    \1098\ See rule 2a-7(h)(10)(i)(B); Form N-MFP, Item C.6.
    \1099\ See rule 2a-7(h)(10)(i)(B); Form N-MFP, Item C.12.
    \1100\ See rule 2a-7(h)(10)(i)(B).
    \1101\ See ICI Comment Letter.
---------------------------------------------------------------------------

    The information that money market funds currently are required to 
disclose about the fund's portfolio holdings on the fund's Web site 
includes, with respect to each security held by the money market fund, 
the security's amortized cost value.\1102\ As part of the reforms to 
rule 2a-7, we proposed to eliminate the use of the amortized cost 
valuation method for stable value money market funds, and to correspond 
with that elimination, we also proposed to remove references to 
amortized cost from Form N-MFP.\1103\ To harmonize the Web site 
disclosure of funds' portfolio holdings with these changes to Form N-
MFP, we additionally proposed amendments to the current requirement for 
funds to disclose the amortized cost value of each portfolio security; 
instead, funds would be required to disclose the ``value'' of each 
portfolio security.\1104\ As discussed previously in section III.B.5, 
the final amendments will permit the continued use of the amortized 
cost valuation method for stable value money market funds, and 
therefore to conform the changes to Form N-MFP to the final amendments 
to rule 2a-7, we are not adopting certain proposed Form N-MFP 
amendments that would have removed references to the amortized cost of 
securities in certain existing items.\1105\ However, as proposed, we 
are amending Items 13 and 41 of Form N-MFP by replacing amortized cost 
with ``value'' as defined in section 2(a)(41) of the Act (generally the 
market-based value but can also be the amortized cost value, as 
appropriate),\1106\ and therefore we are also adopting, as proposed, 
the requirement for funds to disclose the ``value'' (and not 
specifically the amortized cost value) of each portfolio security on 
the fund's Web site. Because the new information that a fund will be 
required to present on its Web site overlaps with the information that 
a fund will 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 on its Web site will largely be incurred

[[Page 47832]]

when the fund files Form N-MFP, as discussed below in section 
III.G.\1107\
---------------------------------------------------------------------------

    \1102\ See current rule 2a-7(c)(12)(ii)(H).
    \1103\ See Proposing Release, supra note 25, at section III.H.
    \1104\ See id.
    \1105\ See infra section III.G.1.a.
    \1106\ See infra note 1446 and accompanying text.
    \1107\ This disclosure may largely duplicate the Form N-MFP 
filing, but merely providing a link to the EDGAR N-MFP filing of 
this data would not suffice to meet this requirement. We understand 
that investors have, in past years, become accustomed to obtaining 
money market fund information on funds' Web sites (see infra note 
1123 and accompanying text), and providing the disclosure directly 
on a fund's Web site would permit these investors to view this 
information in conjunction with other required Web site disclosure 
about the fund's liquidity and current net asset value (see rule 2a-
7(h)(10)(ii) and (iii)) without the need to independently locate and 
consolidate the information provided by this disclosure.
---------------------------------------------------------------------------

f. Disclosure of the Imposition of Liquidity Fees and Gates
    We are adopting, largely as proposed, an amendment to rule 2a-7 
that requires a fund to post prominently on its Web site certain 
information that the fund is required to report to the Commission on 
Form N-CR \1108\ regarding the imposition of liquidity fees, temporary 
suspension of fund redemptions, and the removal of liquidity fees and/
or resumption of fund redemptions.\1109\ The amendment requires 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,\1110\ 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.\1111\ This amendment 
requires a fund only to present certain summary information about the 
imposition of fees and gates on its Web site,\1112\ whereas the fund 
will be required to present more detailed discussion solely on Form N-
CR.\1113\ The Web site disclosure requirements we are adopting 
regarding the imposition of fees and gates are similar to the proposed 
requirements in that they, like the proposed requirements, require a 
fund to post on its Web site only that information about the imposition 
of fees and gates that the fund is required to disclose in an initial 
report on Form N-CR.\1114\ In addition, the amendments to rule 2a-7 
that we are adopting also require a fund to include the following 
statement as part of its Web site disclosure: ``The Fund was required 
to disclose additional information about this event [or ``these 
events,'' as appropriate] on Form N-CR and to file this form with the 
Securities and Exchange Commission. Any Form N-CR filing submitted by 
the Fund is available on the EDGAR Database on the Securities and 
Exchange Commission's Internet site at http://www.sec.gov.'' \1115\
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    \1108\ See infra section III.F.
    \1109\ See rule 2a-7(h)(10)(v); Form N-CR Parts E, F, and G; see 
also infra section III.F (discussing 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 is 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 Form N-CR Parts E and F. A link to the EDGAR N-CR filing would 
not suffice to meet this requirement. We understand that investors 
have, in past years, become accustomed to obtaining money market 
fund information on funds' Web sites (see infra note 1123 and 
accompanying text), and providing the disclosure directly on a 
fund's Web site would permit these investors to view this 
information in conjunction with other required Web site disclosure 
about the fund's liquidity and current net asset value (see rule 2a-
7(h)(10)(ii) and (iii)) without the need to independently locate and 
consolidate the information provided by this disclosure.
    \1110\ 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 
(generally, the imposition or lifting of liquidity fees or gates) 
within one business day after the occurrence of any such event. A 
fund need not post on its Web site the additional information 
required in the follow-up Form N-CR filing 4 business days after the 
event, if such a filing is required. For additional discussion of 
the filing requirements provided in Parts E, F, and G of Form N-CR, 
see infra section III.F.5.
    \1111\ See rule 2a-7(h)(10)(v).
    \1112\ A fund also will be required to present summary 
information about the historical imposition of fees and/or gates in 
the fund's SAI. See supra section III.E.5.
    \1113\ See infra section III.F.5.
    \1114\ As discussed below, we have made changes to the proposed 
requirements of Form N-CR, and the information that a fund will be 
required to file on Parts E, F, and G of Form N-CR is therefore 
different than that which was proposed. See infra section III.F.5. 
The information a fund is required to post on its Web site mirrors 
certain of the information that the fund is required to disclose on 
Form N-CR. To the extent Form N-CR disclosure requirements that we 
are adopting have been modified from the proposed requirements, the 
Web site disclosure requirements have also been modified.
    \1115\ See rule 2a-7(h)(10)(v).
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    One commenter stated that it supported the proposed requirement 
that money market funds should post on their Web sites certain of the 
information required by Form N-CR, noting that although Form N-CR is 
publicly available upon filing with the SEC, investors will more 
readily find and make use of this information if posted on a particular 
funds' Web site.\1116\ Another commenter, however, argued that the 
proposed Web site disclosure (and proposed Form N-CR) filings are 
redundant and that it would be challenging to comply with a one-day 
time frame, and also argued that the registration statement and Web 
site disclosure to investors should take priority over the Form N-CR 
filing.\1117\ One commenter also supported a requirement for a money 
market fund to notify shareholders individually in order to allow a 
money market fund to apply a fee or gate.\1118\
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    \1116\ See CFA Institute Comment Letter.
    \1117\ See Dreyfus Comment Letter; see also infra notes 1308 and 
1309 and accompanying text.
    \1118\ See HSBC Comment Letter. We are not imposing such an 
individual shareholder notification requirement because we believe 
the costs of such notification may be extremely high, the 
notification process might take significant time, and shareholders 
should be able to get effective notice on a fund's Web site.
---------------------------------------------------------------------------

    As discussed below, we continue to believe that certain information 
required to be disclosed on Form N-CR must be filed with the Commission 
within one business day and that this information should also be posted 
on the fund's Web site within the same time-frame to help ensure that 
the Commission, investors generally, shareholders in each particular 
fund, and other market observers are all provided with these critical 
alerts as quickly as possible.\1119\ Because we believe that these 
different parties all have a significant interest in receiving this 
information very quickly, we do not agree with the commenter who argued 
that Web site and registration disclosure should take priority over the 
Form N-CR filing.\1120\ We believe that it is important for a money 
market fund that may impose fees and gates to inform existing and 
prospective shareholders on its Web site when: (i) The fund's weekly 
liquid assets fall below 10% of its total assets; (ii) the fund's 
weekly liquid assets fall below 30% of its total assets and the board 
of directors imposes a liquidity fee pursuant to rule 2a-7; (iii) the 
fund's board of directors temporarily suspends the fund's redemptions 
pursuant to rule 2a-7; or (iv) a liquidity fee has been removed or fund 
redemptions have been resumed. This information is particularly 
meaningful 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. 
We also note, as discussed in more detail in the Paperwork Reduction 
Act analysis section below,\1121\ that we believe the burdens a fund 
would incur to draft and finalize the disclosure that would appear on 
its Web site would largely be incurred when the fund files Form N-CR, 
and therefore we do not believe that the one-day time-frame for 
updating the disclosure on the fund's Web site should be overly 
burdensome.
---------------------------------------------------------------------------

    \1119\ See infra section III.F.7.
    \1120\ See id.; see also text following this note 1120 
(discussing Web site disclosure of fees and gates); infra notes 
1124-1127 (discussing prospectus supplements informing money market 
fund investors of the imposition of a fee or gate).
    \1121\ See infra section IV.A.6.d.
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    We maintain our belief that Web site disclosure provides important

[[Page 47833]]

transparency to shareholders regarding occasions on which a particular 
fund's weekly liquid assets have dropped below certain thresholds, or a 
fund has imposed or removed a liquidity fee or gate, because many 
investors currently obtain important fund information on the fund's Web 
site.\1122\ We understand that investors have become accustomed to 
obtaining money market fund information on funds' Web sites, and 
therefore we believe that Web site disclosure provides significant 
informational accessibility to shareholders and the format and timing 
of this disclosure serves a different purpose than the Form N-CR filing 
requirement.\1123\ While we believe that it is important to have a 
uniform, central place for investors to access the required disclosure, 
we note that nothing in these amendments 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.
---------------------------------------------------------------------------

    \1122\ 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.
    \1123\ See, e.g., 2010 Adopting Release, supra note 16 (adopting 
amendments to rule 2a-7 requiring money market funds to disclose 
information about their portfolio holdings each month on their Web 
sites); Comment Letter of the Securities Industry and Financial 
Markets Association (Jan. 14, 2013) (available in File No. FSOC-
2012-0003) (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 1454 (discussing recent decisions by a number of 
money market fund firms to begin reporting funds' daily shadow 
prices on the fund Web site).
---------------------------------------------------------------------------

    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 would incorporate the same 
information.\1124\ Although a fund may inform prospective investors of 
any redemption fee or gate currently in place by means of a prospectus 
supplement,\1125\ the prospectus supplement would not inform 
prospective and current shareholders of any fees or gates that were 
imposed, and then were removed, during the previous 12 months.
---------------------------------------------------------------------------

    \1124\ See supra notes 960-961 and accompanying text.
    \1125\ See infra notes 1126-1127 and accompanying text.
---------------------------------------------------------------------------

    In addition, 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. In order to meet this requirement, and as 
discussed in the Proposing Release,\1126\ a money market fund that 
imposes a redemption fee or gate should consider informing prospective 
investors of any fees or gates currently in place by means of a 
prospectus supplement.\1127\
---------------------------------------------------------------------------

    \1126\ See Proposing Release, supra note 25, at section 
III.B.8.c.
    \1127\ We expect that this supplement would include revisions to 
the disclosure in the registration statement concerning restrictions 
on fund redemptions. See supra section III.E.4. The costs of filing 
such a supplement are discussed in section III.E.8, supra.
---------------------------------------------------------------------------

g. Disclosure of Sponsor Support
    We are also amending rule 2a-7 to require that a fund 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.\1128\ The amendments that 
we are adopting reflect certain modifications from the proposal to 
address commenter concerns. Specifically, the proposal would have 
required a fund to post 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. As 
discussed in more detail below, we are adopting amendments to rule 2a-7 
that would require a fund to post on its Web site only a subset of this 
information.\1129\ In addition, the amendments would require a fund to 
include the following statement as part of its Web site disclosure: 
``The Fund was required to disclose additional information about this 
event [or ``these events,'' as appropriate] on Form N-CR and to file 
this form with the Securities and Exchange Commission. Any Form N-CR 
filing submitted by the Fund is available on the EDGAR Database on the 
Securities and Exchange Commission's Internet site at http://www.sec.gov.'' \1130\ A fund would be required 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.\1131\
---------------------------------------------------------------------------

    \1128\ See rule 2a-7(h)(10)(v); Form N-CR Part C; see also infra 
section III.F.3 (discussing the Form N-CR requirements).
    \1129\ See rule 2a-7(h)(10)(v).
    \1130\ See id.
    \1131\ See id.
---------------------------------------------------------------------------

    For the reasons discussed in the Proposing Release and below, 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.\1132\ In particular, we believe 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. While commenters also raised 
concerns about the potential redundancy of the proposed registration 
statement, Web site, and Form N-CR disclosure requirements,\1133\ we 
believe that Web site disclosure provides significant informational 
accessibility to shareholders and that format and timing of this 
disclosure serves a different purpose than the Form N-CR filing 
requirement.\1134\
---------------------------------------------------------------------------

    \1132\ See Proposing Release, supra note 25, at text in 
paragraph prior to note 620; see also infra section III.F.3.
    \1133\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
    \1134\ See supra notes 1122 and 1123.
---------------------------------------------------------------------------

    However, in response to commenter concerns about potentially 
duplicative disclosure requirements, we have modified the proposed 
disclosure requirements and are adopting amendments to rule 2a-7 that 
would require a fund to post on its Web site only a subset of the 
information that the fund is required to file on Form N-CR. A fund will 
only be required to present certain summary information about the 
receipt of financial support on its Web site (as well as in the fund's 
SAI \1135\), and will be required to present more detailed discussion 
solely on Form N-CR.\1136\ Specifically, a fund will be required to 
disclose on its Web site only that information that the fund is 
required to file on Form N-CR within one business day after the 
occurrence of any one or more of the events specified in Part C of Form 
N-CR (``Provision of Financial Support to Fund'').\1137\ A fund thus 
will not be required, as proposed, to disclose the reason for support, 
term of support, and any contractual restrictions relating to support 
on its Web site, although a fund will be required to disclose this 
information on

[[Page 47834]]

Form N-CR.\1138\ We believe that the disclosure requirements we are 
adopting appropriately consider commenters' concerns about duplicative 
disclosure as well as our interest in requiring funds to disclose the 
primary information about affiliate financial support that we believe 
shareholders may find useful in assessing fund risks and determining 
whether to purchase fund shares. We also address general commenter 
concerns \1139\ about the possible duplicative effects of the 
concurrent Web site and Form N-CR disclosures in section III.F.3 below, 
where we discuss how Form N-CR and Web site disclosure serve different 
purposes.\1140\
---------------------------------------------------------------------------

    \1135\ See supra section III.E.7.
    \1136\ See infra section III.F.3 (Concerns of Potential 
Redundancy).
    \1137\ See rule 2a-7(h)(10)(v).
    \1138\ See id.; Form N-CR Part C.
    \1139\ See, e.g., Dreyfus Comment Letter.
    \1140\ See infra section III.F.3 (Concerns over Potential 
Redundancy).
---------------------------------------------------------------------------

    As proposed, we are requiring the Web site disclosure 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.\1141\ As we stated in the 
Proposing Release, 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 would incorporate the same 
information.\1142\ We received no comments on this requirement, and we 
are adopting it as proposed.
---------------------------------------------------------------------------

    \1141\ See rule 2a-7(h)(10)(v).
    \1142\ See supra notes 1126-1127 and accompanying text. Of 
course, in the 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.
---------------------------------------------------------------------------

h. Economic Analysis
    As discussed above, and in our proposal, we are adopting a number 
of amendments to rule 2a-7 to amend a number of requirements that money 
market funds post certain information to funds' Web sites. These 
amendments require disclosure of information about money market funds' 
liquidity levels, shareholder flows, market-based NAV per share 
(rounded to four decimal places), and the use of affiliate financial 
support.\1143\ The qualitative benefits and costs of these requirements 
are discussed above. These amendments should improve transparency and 
better inform shareholders about the risks of investing in money market 
funds, which should result in shareholders making investment decisions 
that better match their investment preferences. We believe that this 
will have effects on efficiency, competition, and capital formation 
that are similar to those that are outlined in the Macroeconomic 
Consequences section below.\1144\
---------------------------------------------------------------------------

    \1143\ We believe that the effects on efficiency, competition, 
and capital formation related to the amendments to conform the 
portfolio holdings Web site disclosure to our amendments to Form N-
MFP will be the same as those described in the section discussing 
our amendments to Form N-MFP. See infra section III.G. We also note 
that the economic effects related to disclosure of information 
related to the imposition of fees and/or gates and sponsor support 
reported on Form N-CR will be similar to economic effects we discuss 
relating to new Form N-CR. See infra section III.F.8.
    \1144\ See infra section III.K.2.
---------------------------------------------------------------------------

    We believe that the requirements could increase informational 
efficiency by providing additional information about money market 
funds' liquidity, shareholder flows, market-based NAV per share, 
imposition of fees and/or gates, and use of affiliate financial 
support, to investors and the Commission. This in turn could assist 
investors in analyzing the risks associated with certain funds. In 
particular, the daily disclosure of daily and weekly liquid assets, 
along with the daily disclosure of NAV to four decimal places, should 
better enable investors to understand the risks of a specific fund, 
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 result of the 
disclosure requirements, this could adversely affect the competitive 
stance of certain money market funds, or the money market fund industry 
generally.
    Certain parts of the disclosure amendments may have other specific 
effects on competition. To the extent some money market funds do not 
currently and voluntarily calculate and disclose daily market-based NAV 
per share data (rounded to the fourth decimal place), our amended 
disclosure requirements may promote competition by helping to level the 
associated costs incurred by all money market funds and neutralize any 
competitive advantage associated with determining not to calculate and 
disclose daily current per-share NAV. We also note that our amendment 
to require disclosure of affiliate sponsor support may adversely affect 
competition if investors move their assets to larger fund complexes on 
the theory that they may be more likely than smaller entities to 
provide financial support to their funds.
    The requirements to disclose certain information about money market 
funds' liquidity, shareholder flows, market-based NAV per share, 
imposition of fees and/or gates, and use of affiliate financial support 
also could have effects on capital formation. The required disclosures 
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 requirements could detract from 
capital formation by decreasing market stability if investors redeem 
more quickly during times of stress as a result of the disclosure 
requirements, and one commenter noted this increased risk as a 
potential cost to the fund.\1145\ 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.
---------------------------------------------------------------------------

    \1145\ See State Street Comment Letter, at Appendix A. The 
commenter did not provide a quantitative estimate of such risk.
---------------------------------------------------------------------------

    The requirement to disclose the fund's current NAV to four decimal 
places should not have any effect on capital flows because funds will 
also transact at four decimal places. When compared to alternatives 
like ultra-short bond funds, which disclose and transact at three 
decimal places, money market prices may appear more volatile on a day-
to-day basis if the greater precision in NAV disclosure leads to a 
greater frequency of fluctuations in NAV.\1146\ This could incentivize 
investors to switch to these alternatives. However, over longer 
horizons like a month or a year these alternatives are likely to have 
more volatile NAVs than money market funds. The disclosure of daily and 
weekly liquid assets may increase the volatility of capital flows for 
money market funds, as it may create an incentive for investors to 
redeem shares when liquid assets fall or reach the threshold at which 
the board may impose a redemption fee or gate. Disclosing levels of 
liquid assets could lead to pre-emptive redemptions if daily

[[Page 47835]]

or weekly liquid assets drop to a level at which investors anticipate 
that there is a greater likelihood of the fund imposing a redemption 
fee or gate. However, as discussed in detail above, the board's 
discretion to impose a fee or a gate mitigates the concern that 
investors will be able to accurately forecast such an event, leading 
them to pre-emptively withdraw their assets from the fund. We discuss 
this concern in more detail in section III.A.
---------------------------------------------------------------------------

    \1146\ But see supra note 521 and accompanying text (discussing 
staff analysis showing that, historically, over a twelve-month 
period, 100% of ultra-short bond funds have fluctuated in price 
(using 10 basis point rounding), compared with 53% of money market 
funds that have fluctuated in price (using basis point rounding)).
---------------------------------------------------------------------------

    A possible alternative suggested by commenters was to only have Web 
site disclosure apply to stable NAV funds.\1147\ Allowing floating NAV 
funds not to disclose information on their Web site would lower the 
costs for these funds. Nevertheless, we rejected this alternative 
because we believe that the benefits we discuss above regarding 
disclosure apply regardless of whether a fund has a stable or floating 
NAV. Both types of funds, for example, could impose a fee or a gate so 
this information is valuable to both types of investors and, if only 
offered to one, could affect competition. For example, if a stable NAV 
investor has more information than a floating NAV investor about a 
possible fee or gate, then it is reasonable to assume that a stable NAV 
investor would have more confidence in his or her investment. The added 
disclosure for stable NAV funds could also increase market discipline 
in these funds, leading to investors' increased willingness to 
participate in this market and increase capital formation in these 
funds.
---------------------------------------------------------------------------

    \1147\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI 
Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    Another alternative would have been to require weekly instead of 
daily Web site disclosure of the daily and weekly liquid assets and net 
shareholder flow.\1148\ Being required to disclose this information 
weekly instead of daily would lower the costs on funds because they 
would not have to report daily. However, we rejected this alternative 
because, as discussed above, in times of market stress, money market 
funds may face rapid, heavy redemptions, which could quickly affect 
their liquidity. These stresses could happen over a period of a day. As 
such, if investors have confidence that they will have the necessary 
information to make an informed decision quickly in a time of stress, 
then this may lead to additional capital for funds. Likewise, we also 
believe that daily disclosure instead of weekly could lead to more 
market discipline among funds, resulting in investors' increased 
willingness to participate in this market, which could also lead to 
additional capital for funds.
---------------------------------------------------------------------------

    \1148\ See Schwab Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

i. Costs of Disclosure of Daily and Weekly Liquid Assets and Net 
Shareholder Flows
    Costs associated with the requirement for a fund to disclose 
information about its daily liquid assets, weekly liquid assets, and 
net shareholder flows on the fund's Web site 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 and flow 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. Funds also 
would incur ongoing costs to update the depiction of daily liquid 
assets and weekly liquid assets and net shareholder flows each business 
day.\1149\ The Proposing Release estimated 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, as well as 
the fund's net inflows or outflows, would be $20,150.\1150\ The 
Proposing Release also estimated that the average ongoing annual costs 
that each fund would incur to update the required disclosure would be 
$9,184.\1151\
---------------------------------------------------------------------------

    \1149\ See State Street Comment Letter.
    \1150\ See Proposing Release, supra note 25, at n.642.
    \1151\ See Proposing Release, supra note 25, at n.643.
---------------------------------------------------------------------------

    In the Proposing Release, we stated that we believed funds should 
incur no additional costs in obtaining the percentage of daily liquid 
assets and weekly liquid assets, as funds are currently required to 
make such calculation under rule 2a-7. One commenter disagreed, noting 
that there would be costs because of additional controls associated 
with public disclosure, but did not provide a quantitative estimate of 
such costs.\1152\ Two commenters generally believed that weekly 
disclosure of the data, as opposed to daily disclosure, would 
substantially reduce costs to funds, but they did not provide a 
quantitative estimate of the difference between the cost of daily and 
weekly disclosure.\1153\ Additionally, one commenter objected to 
including historical information regarding weekly and daily liquid 
assets and net shareholder flows on a fund's Web site because of the 
expense involved in restructuring fund Web sites and maintaining such 
information, but did not provide a quantitative estimate of such 
expenses.\1154\ One commenter also noted the potential cost of the risk 
of shareholders making redemption decisions in reliance on the 
disclosed information.\1155\ The commenter, however, did not provide a 
quantitative estimate for this risk.\1156\
---------------------------------------------------------------------------

    \1152\ See State Street Comment Letter, at Appendix A.
    \1153\ See Federated VIII Comment Letter; Schwab Comment Letter.
    \1154\ See UBS Comment Letter.
    \1155\ Id.
    \1156\ See supra section III.E.8 for a discussion of the reasons 
that the Commission cannot measure the quantitative benefits of 
these proposed requirements at this time.
---------------------------------------------------------------------------

    We agree that the costs for certain money market funds to upgrade 
internal systems and software, and/or engage third-party service 
providers if a money market fund does not have existing relevant 
systems, could be higher than those average one-time costs estimated in 
the Proposing Release. However, because the estimated one-time costs 
were based on the mid-point of a range of estimated costs, the higher 
costs that may be incurred by certain industry participants have 
already been factored into our estimates.\1157\ While requiring weekly 
disclosure instead of daily disclosure could reduce costs for funds, we 
continue to believe that daily disclosure would convey important 
information to shareholders that weekly disclosure may not.\1158\ We 
also believe that the benefits of increased transparency that would 
result from the disclosure requirements at hand outweigh the potential 
costs of reactionary redemptions resulting from the disclosure.\1159\ 
The Commission agrees that money market funds may incur additional 
costs associated with the enhanced controls required to publicly 
disseminate daily and weekly liquid asset data, which costs were not 
estimated in the Proposing Release. The Commission has incorporated 
these additional costs into its new estimates of ongoing annual costs.
---------------------------------------------------------------------------

    \1157\ See Proposing Release, supra note 25, at n.1044.
    \1158\ See supra notes 1056-1057 and accompanying text.
    \1159\ See supra notes 1060-1063 and accompanying text.
---------------------------------------------------------------------------

    Based on these considerations, as well as updated industry data, we 
now 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, as well as the fund's net inflows or 
outflows, would be $20,280.\1160\ We

[[Page 47836]]

also estimate that the average ongoing annual costs that each fund 
would incur to update the required disclosure would be $10,274.\1161\ 
Our estimate of average ongoing annual costs incorporates the costs 
associated with the enhanced controls required to publicly disseminate 
daily and weekly liquid asset data.\1162\
---------------------------------------------------------------------------

    \1160\ We estimate 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 
and net shareholder flows), as well as project development, 
implementation, and testing. The costs associated with these 
activities are all paperwork-related costs and are discussed in more 
detail below. See infra section IV.A.6.b.
    \1161\ See id.
    \1162\ See id.
---------------------------------------------------------------------------

ii. Costs of Disclosure of Fund's Current NAV Per Share
    Costs associated with the requirement for a fund to disclose 
information about its daily current NAV on the fund's Web site 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 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. Funds also would incur ongoing costs to update the depiction of 
the fund's current NAV each business day. Because floating NAV money 
market funds will 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 disclosure requirements. Stable 
price money market funds, which will be required to calculate their 
current NAV per share daily pursuant to amendments to rule 2a-7, 
likewise should incur no additional costs in obtaining this data for 
purposes of the disclosure requirements. The Proposing Release 
estimated that the average one-time costs for each money market fund to 
design and present the fund's current NAV each business day would be 
$20,150.\1163\ The Commission also estimated that the average ongoing 
annual costs that each fund would incur to update the required 
disclosure would be $9,184.\1164\
---------------------------------------------------------------------------

    \1163\ See Proposing Release, supra note 25, at n.664.
    \1164\ See id., at n.665.
---------------------------------------------------------------------------

    Certain commenters generally noted that complying with the new Web 
site disclosure requirements would add costs for funds, including costs 
to upgrade internal systems and software relevant to the Web site 
disclosure requirements, as well as costs to engage third-party service 
providers for those money market fund managers that do not have 
existing relevant systems.\1165\ One commenter noted that these costs 
could potentially be ``significant to [a money market fund] and higher 
than those estimated in the Proposal.'' \1166\ However, another 
commenter stated that it agrees that those money market funds that 
presently publicize their current NAV per share daily on the fund's Web 
site will incur few additional costs to comply with the proposed 
disclosure requirements, and also that it agrees with the Commission's 
estimates for the ongoing costs of providing a depiction of the fund's 
current NAV each business day.\1167\
---------------------------------------------------------------------------

    \1165\ See, e.g., UBS Comment Letter (``The SEC also proposed 
additional information regarding the posting of: (i) The categories 
of a money fund's portfolio securities; (ii) maturity date 
information for each of the fund's portfolio securities; and (iii) 
market-based values of the fund's portfolio securities at the same 
time as this information becomes publicly available on Form N-MFP. 
We believe this information is too detailed to be useful to most 
investors and would be cost prohibitive to provide. Complying with 
these new Web site disclosure requirements would add notable costs 
for each money fund that UBS Global AM advises.''); Chamber II 
Comment Letter (``With respect to the Web site disclosure 
requirements, internal systems and software would need to be 
upgraded or, for those MMF managers that do not have existing 
systems, third-party service providers would need to be engaged. The 
costs (which ultimately would be borne by investors through higher 
fees or lower yields) could potentially be significant to an MMF and 
higher than those estimated in the Proposal.''); Dreyfus Comment 
Letter (noting that ``several of the new Form reporting and Web site 
and registration statement disclosure requirements . . . come with . 
. . material cost to funds and their sponsors''); see also Fin. 
Svcs. Roundtable Comment Letter (noting that the disclosure 
requirements would produce ``significant cost to the fund and 
ultimately to the fund's investors''); SSGA Comment Letter (urging 
the Commission to consider the ``substantial administrative, 
operational, and expense burdens'' of the proposed disclosure-
related amendments); Chapin Davis Comment Letter (noting that the 
disclosure- and reporting-related amendments will result in 
increased costs in the form of fund staff salaries, or consultant, 
accountant, and lawyer hourly rates, that will ultimately be borne 
in large part by investors and portfolio issuers).
    \1166\ See Chamber II Comment Letter.
    \1167\ See State Street Comment Letter, at Appendix A; see also 
HSBC Comment Letter (stating that the proposed disclosure 
requirements should not produce any ``meaningful cost'').
---------------------------------------------------------------------------

    We agree that the costs for certain money market funds to upgrade 
internal systems and software, and/or engage third-party service 
providers if a money market fund does not have existing relevant 
systems, could be higher than those average one-time costs estimated in 
the Proposing Release. However, because the estimated one-time costs 
were based on the mid-point of a range of estimated costs, the higher 
costs that may be incurred by certain industry participants have 
already been factored into our estimates.\1168\ Based on these 
considerations, as well as updated industry data, we now estimate that 
the average one-time costs for each money market fund to design and 
present the fund's daily current NAV would be $20,280.\1169\ We also 
estimate that the average ongoing annual costs that each fund would 
incur to update the required disclosure would be $9,024.\1170\
---------------------------------------------------------------------------

    \1168\ See Proposing Release, supra note 25, at n.1056.
    \1169\ We estimate 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. The costs 
associated with these activities are all paperwork-related costs and 
are discussed in more detail below. See infra section IV.A.6.c.
    \1170\ See id.
---------------------------------------------------------------------------

iii. Costs of Daily Calculation of Current NAV per Share
    The primary costs associated with the requirement for a fund to 
calculate its current NAV per share each day are the costs for funds to 
determine the current values of their portfolio securities each 
day.\1171\ We estimate that 25% of active money market funds, or 140 
funds, will incur new costs to comply with this requirement,\1172\ 
because the 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.\1173\ The Proposing Release estimated 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.\1174\ One commenter stated that it agrees with the 
Commission's estimates for the ongoing costs of providing a depiction 
of the fund's current NAV each business day.\1175\ However, most 
comments on the proposed current NAV disclosure requirement did not 
discuss the Commission's estimates of the costs a fund would incur to 
calculate its current NAV per share daily, separate from their 
discussion of the general costs

[[Page 47837]]

associated with the proposed NAV Web site disclosure requirement.\1176\ 
After considering these comments, our current methods of estimating the 
costs associated with the NAV calculation requirement, described in 
more detail below, are the same estimation methods we used in the 
Proposing Release.
---------------------------------------------------------------------------

    \1171\ Additionally, funds may incur some costs associated with 
adding the current values of the fund's portfolio securities and 
dividing this sum by the number of fund shares outstanding; however, 
we expect these costs to be minimal.
    \1172\ The Commission estimates that there are currently 559 
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, 2014. 559 money market funds x 25% = 
approximately 140 money market funds.
    \1173\ 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.
    \1174\ See Proposing Release, supra note 25, at n.692.
    \1175\ See State Street Comment Letter, at Appendix A.
    \1176\ See supra notes 1165-1167.
---------------------------------------------------------------------------

    All money market funds are presently required to disclose their 
market-based NAV per share monthly on Form N-MFP, and the frequency of 
this disclosure will increase to weekly.\1177\ 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.\1178\ 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 
generally would 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.\1179\ 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 such estimate would 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.\1180\ Assuming, as discussed above, that 140 money market 
funds do not presently determine and publish their current NAV per 
share daily, the average additional annual cost that these 140 funds 
will collectively incur would range from $855,540 to $3,422,160.\1181\ 
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.
---------------------------------------------------------------------------

    \1177\ See Form N-MFP Item A.21 and B.5 (requiring money market 
funds to provide NAV data as of the close of business on each Friday 
during the month reported).
    \1178\ See infra section IV.C.3.
    \1179\ One commenter agreed with this expectation. See State 
Street Comment Letter, at Appendix A.
    \1180\ 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).
    \1181\ This estimate is based on the following calculations: low 
range of $6,111 x 140 funds = $855,540; high range of $24,444 x 140 
funds = $3,422,160. See supra note 1180. This figure likely 
overestimates the costs that stable price funds would incur if the 
floating NAV proposal were adopted. This is because fewer than 559 
active money market funds would be stable price funds required to 
calculate their current NAV per share daily, and thus the estimate 
of 140 funds (25% x 559 active funds) that would be required to 
comply with this requirement is likely over-inclusive.
---------------------------------------------------------------------------

iv. Costs of Harmonization of Rule 2a-7 and Form N-MFP Portfolio 
Holdings Disclosure Requirements
    Because the new portfolio holdings information that a fund is 
required to present on its Web site overlaps with the information that 
a fund would be required to disclose on Form N-MFP, we believe that the 
costs a fund will incur to draft and finalize the disclosure that will 
appear on its Web site will largely be incurred when the fund files 
Form N-MFP, as discussed below in section III.G. The Proposing Release 
estimated that, in addition, a fund would incur annual costs of $2,484 
associated with updating its Web site to include the required monthly 
disclosure.\1182\
---------------------------------------------------------------------------

    \1182\ See Proposing Release, supra note 25, at n.672.
---------------------------------------------------------------------------

    As discussed above, certain commenters generally noted that 
complying with the new Web site disclosure requirements would add costs 
for funds, including costs to upgrade internal systems and software 
relevant to the Web site disclosure requirements, as well as costs to 
engage third-party service providers for those money market fund 
managers that do not have existing relevant systems.\1183\ One 
commenter, however, noted that the portfolio holdings disclosure 
requirements ``should not cause a significant cost increase . . . as 
long as the information is made available from relevant accounting 
systems,''\1184\ and another commenter stated that the proposed 
disclosure requirements generally should not produce any meaningful 
costs.\1185\ Another commenter urged the Commission to harmonize new 
disclosure requirements so that funds would face lower administrative 
burdens, and investors would bear correspondingly fewer costs.\1186\ As 
described above, the portfolio holdings disclosure requirements we are 
adopting have changed slightly from those that we proposed, in order to 
conform to modifications we are making to the proposed Form N-MFP 
disclosure requirements. However, we believe that these revisions do 
not produce additional burdens for funds and thus do not affect 
previous cost estimates. Because the 2010 money market fund reforms 
already require money market funds to post monthly portfolio 
information on their Web sites,\1187\ funds should not need to upgrade 
their systems and software to comply with the new portfolio holdings 
information disclosure requirements. The Commission therefore does not 
believe that comments about the costs required to upgrade relevant 
systems and software should affect its estimates of the costs 
associated with the portfolio holdings disclosure requirements. Based 
on these considerations, as well as updated industry data, we now 
estimate that each fund would incur annual costs of $2,724 in updating 
its Web site to include the required monthly disclosure.\1188\
---------------------------------------------------------------------------

    \1183\ See supra note 1165.
    \1184\ See State Street Comment Letter, at Appendix A.
    \1185\ See HSBC Comment Letter.
    \1186\ See Fin. Svcs. Roundtable Comment Letter.
    \1187\ See 2010 Adopting Release, supra note 17, at section 
II.E.1.
    \1188\ We estimate that these costs would be attributable to 
project assessment (associated with designing and presenting the 
required portfolio holdings information), as well as project 
development, implementation, and testing. The costs associated with 
these activities are all paperwork-related costs and are discussed 
in more detail below. See infra section IV.A.6.a.
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v. Costs of Disclosure Regarding Financial Support Received by the 
Fund, the Imposition and Removal of Liquidity Fees, and the Suspension 
and Resumption of Fund Redemptions
    Because the required Web site disclosure overlaps with the 
information that a fund must disclose on Form N-CR when the fund 
receives financial support from a sponsor or fund affiliate, or when 
the fund imposes or removes liquidity fees or suspends or resumes fund 
redemptions, we anticipate that the costs a fund will incur to draft 
and finalize the disclosure that will appear on its Web site will 
largely be incurred when the fund files Form N-CR, as discussed below 
in section III.F. The Proposing Release estimated that, in addition, a 
fund

[[Page 47838]]

would incur costs of $207 each time that it updates its Web site to 
include the required disclosure.\1189\
---------------------------------------------------------------------------

    \1189\ See Proposing Release, supra note 25, at nn.464, 629.
---------------------------------------------------------------------------

    While certain commenters generally noted, as discussed above, that 
complying with the new Web site disclosure requirements would add costs 
for funds,\1190\ one commenter stated that the costs of disclosing 
liquidity fees and gates and instances of financial support on the 
fund's Web site would be minimal when compared to other costs,\1191\ 
and another commenter stated that the proposed disclosure requirements 
should not produce any meaningful costs.\1192\ As described above, we 
have modified the required time frame for disclosing information about 
financial support received by a fund on the fund's Web site. However, 
this modification does not produce additional burdens for funds and 
thus does not affect previous cost estimates. Taking this into 
consideration, as well as the fact that we received no comments 
providing specific suggestions or critiques about our methods of 
estimating the burdens associated with the Form N-CR-linked Web site 
disclosure requirements, the Commission has not modified the estimated 
costs associated with these requirements, although it has modified its 
cost estimates based on updated industry data. We now estimate that a 
fund would incur costs of $227 each time that it updates its Web site 
to include the required disclosure.\1193\
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    \1190\ See supra note 1165.
    \1191\ See State Street Comment Letter, at Appendix A.
    \1192\ See HSBC Comment Letter.
    \1193\ The costs associated with these activities are all 
paperwork-related costs and are discussed in more detail below. See 
infra section IV.A.6.d.
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F. Form N-CR

1. Introduction
    Today we are adopting, largely as we proposed, a new requirement 
that money market funds file a current report with us when certain 
significant events occur.\1194\ New Form N-CR will require disclosure 
of certain specified events. Generally, a money market fund will be 
required to file Form N-CR if a portfolio security defaults, an 
affiliate provides financial support to the fund, the fund experiences 
a significant decline in its shadow price, or when liquidity fees or 
redemption gates are imposed and when they are lifted.\1195\ In most 
cases, a money market fund will be required to submit a brief summary 
filing on Form N-CR within one business day of the occurrence of the 
event, and a follow-up filing within four business days that includes a 
more complete description and information.\1196\
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    \1194\ As we proposed, this requirement will be implemented 
through our adoption of new rule 30b1-8, which requires money market 
funds to file a report on new Form N-CR in certain circumstances. 
See rule 30b1-8; Form N-CR.
    \1195\ See Form N-CR Parts B-H. More specifically, adopted 
largely as proposed, these events include instances of portfolio 
security default (Form N-CR Part B), financial support (Form N-CR 
Part C), a decline in a stable NAV fund's current NAV per share 
(Form N-CR Part D), a decline in weekly liquid assets below 10% of 
total fund assets (Form N-CR Part E), whether a fund has imposed or 
removed a liquidity fee or gate (Form N-CR Parts E, F and G), or any 
such other information a fund, at is option, may choose to disclose 
(Form N-CR Part H). In addition, as proposed, Form N-CR Part A will 
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 Form N-CR Part A. As 
proposed the name, email address, and telephone number of the person 
authorized to receive information and respond to questions about the 
filing will not be disclosed publicly on EDGAR.
    \1196\ A report on Form N-CR will be made public on the 
Commission's Electronic Data Gathering, Analysis, and Retrieval 
system (``EDGAR'') immediately upon filing.
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    We proposed requiring reporting on Form N-CR under both the 
floating NAV and fees and gates reform alternatives, but the Form 
differed in certain respects depending on the alternative.\1197\ Today 
we are adopting a combination of the alternatives, and therefore final 
Form N-CR is a combined single form.\1198\
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    \1197\ For example, under the liquidity fees and gates 
alternative, we proposed Form N-CR to include additional disclosures 
specifically related to liquidity fees and gates, which we did not 
propose to under the floating NAV alternative. See Proposing 
Release, supra note 25, at section III.G.2; proposed (Fees & Gates) 
Form N-CR Parts E, F and G. In addition to other changes we are 
making today to the form, the final version of Form N-CR includes 
these additional Parts. See Form N-CR Parts E, F and G. We are also 
reconciling the introduction of Part D, which was worded differently 
under each of the respective main alternatives. See proposed (FNAV) 
Form N-CR Part D; proposed (Fees & Gates) Form N-CR Part D; see 
also, infra note 1263.
    \1198\ Id.
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    As we stated in the Proposing Release,\1199\ the information 
provided on Form N-CR will enable the Commission to enhance its 
oversight of money market funds and its ability to respond to market 
events. The Commission will be able to use the information provided on 
Form N-CR in its regulatory, disclosure review, inspection, and 
policymaking roles. Requiring funds to report these events on Form N-CR 
will provide important transparency to fund shareholders, and also will 
provide information more uniformly and efficiently to the Commission. 
It will also provide investors and other market observers with better 
and more timely disclosure of potentially important events.
---------------------------------------------------------------------------

    \1199\ See Proposing Release at paragraph containing n.697.
---------------------------------------------------------------------------

    Commenters generally supported new Form N-CR.\1200\ For example, 
one commenter noted that Form N-CR would generally ``[alert] the SEC to 
issues the funds may be having'' and ``[provide] the public with 
current information that investors need.''\1201\ On the other hand, 
some commenters also voiced objections, suggesting that the form may be 
burdensome or redundant, and also offered specific improvements.\1202\ 
As discussed in more detail below, we are making various changes to 
Form N-CR to address some of these concerns. However, while we 
appreciate commenters' concerns about possible redundancies of Form N-
CR in light of the concurrent Web site or SAI disclosures, we believe 
each of these different disclosures to be appropriate because they 
serve distinct purposes.\1203\
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    \1200\ See, e.g., CFA Institute Comment Letter; American Bankers 
Ass'n Comment Letter; Vanguard Comment Letter; Schwab Comment 
Letter; ICI Comment Letter.
    \1201\ See CFA Institute Comment Letter.
    \1202\ See, e.g., Dreyfus Comment Letter; Fidelity Comment 
Letter; ICI Comment Letter; Federated VIII Comment Letter; SIFMA 
Comment Letter.
    \1203\ See discussion following infra notes 1248 and 1249 and 
accompanying text.
---------------------------------------------------------------------------

2. Part B: Defaults and Events of Insolvency
    Part B of Form N-CR is being adopted largely as proposed.\1204\ We 
are

[[Page 47839]]

adopting, as proposed, the requirement that a money market fund report 
to us if the issuer or guarantor of a security that makes up more than 
one half of one percent of a fund's total assets defaults or becomes 
insolvent.\1205\ Such a report will, also as proposed, include the 
nature and financial effect of the default or event of insolvency, as 
well as the security or securities affected.\1206\ As we noted in the 
Proposing Release, the Commission believes that the factors specified 
in the required disclosure are necessary to understand the nature and 
extent of a default, as well as the potential effect of a default on 
the fund's operations and its portfolio as a whole.\1207\
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    \1204\ See proposed (FNAV) Form N-CR Part B; proposed (Fees & 
Gates) Form N-CR Part B. In the Proposing Release, we proposed Form 
N-CR to 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.
    Among the other changes discussed in this section, in the final 
amendments we are also adding the clause ``or has taken'' to the 
``brief description of actions fund plans to take, or has taken, in 
response to the default(s) or event(s) of insolvency'' as required 
by Item B.5 of Form N-CR. See Form N-CR Item B.5. We are clarifying 
that filers should not omit in Item B.5 any actions that they may 
have already taken in response to a default or event of insolvency 
prior to their filing of Form N-CR. In particular, if a fund were 
able to complete all actions in response to a default before the 
deadline of the follow-up filing, it could have otherwise 
effectively omitted its entire response to the default from being 
disclosed in Item B.5. We believe such an omission would 
significantly diminish the informational utility of Form N-CR to the 
Commission and investors in understanding how a fund has responded 
to a default.
    \1205\ See Form N-CR Part B (requiring filing if the issuer of 
one or more of the fund's portfolio securities, or the issuer of a 
demand feature or guarantee to which one of the fund's portfolio 
securities is subject, and on which the fund is relying to determine 
the quality, maturity, or liquidity of a portfolio security, 
experiences a default or event of insolvency (other than an 
immaterial default unrelated to the financial condition of the 
issuer), and the portfolio security or securities (or the securities 
subject to the demand feature or guarantee) accounted for at least 
\1/2\ of 1 percent of the fund's total assets immediately before the 
default or event of insolvency).
    \1206\ Form N-CR Part B, adopted largely as proposed, will 
require a fund to disclose the following information: (i) The 
security or securities affected, including the name of the issuer, 
the title of the issue (including coupon or yield, if applicable) 
and at least two identifiers, if available; (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, or 
has taken, in response to such event. As proposed, 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 asset-backed security pursuant to rule 
2a-7(a)(16)(ii) 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 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 
current rule 2a-7(c)(7)(iv).
    \1207\ See Proposing Release, supra note 25, at text following 
n.703.
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    As stated above, we proposed to require disclosure of the security 
or securities affected by the default.\1208\ In a change from the 
proposal, to help us better identify defaulted portfolio securities, 
the final form now requires funds to report the name of the issuer, the 
title of the issue and at least two identifiers, if available (e.g., 
CUSIP, ISIN, CIK, Legal Entity Identifier (``LEI'')) when they file a 
report under part B of the form.\1209\ This requirement is similar to 
what we proposed and are adopting with respect to Items C.1 to C.5 of 
Form N-MFP.\1210\ In particular, better identification of the 
particular fund portfolio security or securities subject to a default 
or event of insolvency at the time of notice to the Commission will 
facilitate the staff's monitoring and analysis efforts, as well as 
inform any action that may be required in response to the risks posed 
by such an event. Fund shareholders and potential investors will 
similarly benefit from the clear identification of defaulted fund 
portfolio securities when evaluating their investments.\1211\
---------------------------------------------------------------------------

    \1208\ Proposed (FNAV) Form N-CR Item B.1; Proposed (Fees & 
Gates) Form N-CR Item B.1.
    \1209\ See Form N-CR Item B.1. These requirements are similar to 
Form N-MFP Items C.1 to C.5 but are reported on a more timely basis 
on Form N-CR. Much like under Form N-MFP, we note that the 
requirement to include multiple identifiers is only required if such 
identifiers are actually available.
    \1210\ See Proposing Release, supra note 25, at nn.754-757 and 
accompanying text; see supra section III.G.
    \1211\ Although current rule 2a-7(c)(7)(iii)(A) requires money 
market funds to report defaults or events of insolvency to the 
Commission by email, as proposed, we are eliminating this now 
duplicative requirement.
---------------------------------------------------------------------------

    One commenter expressed concern that publicly identifying a single 
security that has defaulted could be problematic if other contextual 
information about the quality of the fund's other holding is not 
immediately available.\1212\ We note that the Form N-CR report will 
provide the value as well as the relative size of any defaulted 
security compared to the rest of a fund's portfolio, providing some 
context for the default. In addition, as further described in section 
III.F.6 below, we are also adopting a new Part H of Form N-CR that will 
permit money market funds, in their discretion, to discuss any other 
events or information that they may consider material or relevant, 
which should allow for additional context if necessary.
---------------------------------------------------------------------------

    \1212\ See Dreyfus Comment Letter.
---------------------------------------------------------------------------

3. Part C: Financial Support
    We are also adopting a requirement that money market funds report 
instances of financial support by sponsors or other affiliates on Part 
C of Form N-CR \1213\ with several changes from the proposal.\1214\ We 
have modified the definition of financial support from the proposal in 
response to comments, as discussed below. This revised definition will 
affect when Part C needs to be filed. When filed, the Part C report 
will, as proposed, require disclosure of the nature, amount, and terms 
of the support, as well as the relationship between the person 
providing the support and the fund \1215\

[[Page 47840]]

except that, in a change from the proposal, the report will also 
require certain identifying information about securities that are the 
subject of any financial support.\1216\
---------------------------------------------------------------------------

    \1213\ See Form N-CR Part C. 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. See current rule 2a-
7(c)(7)(iii)(B). As proposed, we are eliminating this requirement, 
as it would duplicate the Form N-CR reporting requirements discussed 
in this section. As we stated in the text following note 711 of the 
Proposing Release, the Form N-CR reporting requirement will permit 
the 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 will also assist investors in 
understanding the extent to which money market funds receive 
financial support from their sponsors or other affiliates.
    \1214\ See proposed (FNAV) Form N-CR Part C; proposed (Fees & 
Gates) Form N-CR Part C. In particular, in the Proposing Release we 
proposed the term ``financial support'' to 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 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. See Proposing 
Release, supra note 25, at nn.705-712 and accompanying discussion. 
We also proposed Form N-CR to 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, we 
proposed that the money market fund would be required to provide the 
purchase price of the security, as well as certain other 
information. See Instruction to proposed (FNAV) Form N-CR Part C; 
Instruction to proposed (Fees & Gates) Form N-CR Part C.
    \1215\ See id. Form N-CR Items C.1 through C.10 will require, 
with changes from the proposal, 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) the date the support was provided; (v) the amount of support, 
including the amount of impairment and the overall amount of 
securities supported; (vi) the security supported, including the 
name of the issuer, the title of the issue (including coupon or 
yield, if applicable) and at least two identifiers, if available; 
(vii) the market-based value of the security supported on the date 
support was initiated, if applicable; (viii) a brief description of 
the reason for the support; (ix) the term of support; and (x) a 
brief description of any contractual restrictions relating to 
support. We have also rearranged proposed Item C.4 (description of 
the reason for the support) to be new Item C.8 in order to better 
streamline the disclosures required to be filed within one business 
day (Items C.1 through C.7) versus four business days (Items C.8 
through C.10). See infra section III.F.7.
    \1216\ See Form N-CR Item C.6 (now requiring, for any security 
supported, disclosure of the name of the issuer, the title of the 
issue (including coupon or yield, if applicable) and at least two 
identifiers, if available. We are including the new securities 
identification requirements for the same reasons we are including it 
in Part B, as discussed above.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, we believe that requiring 
disclosure of financial support from a fund sponsor or affiliate will 
provide important, near real-time transparency to shareholders and the 
Commission, and will therefore help shareholders better understand the 
ongoing risks associated with an investment in the fund.\1217\ The 
information provided in the required disclosure is necessary for 
investors to understand the nature and extent of the sponsor's 
discretionary support of the fund and will also assist Commission staff 
in analyzing the economic effects of such financial support.\1218\
---------------------------------------------------------------------------

    \1217\ See Proposing Release, supra note 25, at n.705 and 
accompanying text. See also, e.g., Schwab Comment Letter (noting 
that the ``[p]roposed disclosures around instances of sponsor 
support would provide investors with useful context for analyzing 
the stability of the fund''). In addition, as we discussed at n.712 
in the Proposing Release, money market funds' receipt of financial 
support from sponsors and other affiliates has not historically been 
prominently disclosed to investors, which has resulted in a lack of 
clarity among investors about which money market funds have received 
such financial support.
    \1218\ See Proposing Release, supra note 25, at text following 
n.708. Another commenter also suggested that disclosure of financial 
support on Form N-CR may have the effect of reducing the likelihood 
that funds will need such support in the future. See American 
Bankers Ass'n Comment Letter (``[k]nowing that any form of sponsor 
support would be required to be disclosed within 24 hours, fund 
managers would likely do everything they could to avoid the need for 
sponsor support.'').
---------------------------------------------------------------------------

a. Definition of Financial Support
    Although a number of commenters generally supported the proposed 
financial support disclosure,\1219\ many of these supporters and other 
commenters also argued that the proposed definition of ``financial 
support'' was ambiguous and could trigger unnecessary filings.\1220\ 
Many commenters suggested that the catchall provision of the proposed 
definition, which would require reporting of ``any other similar action 
to increase the value of the Fund's portfolio or otherwise support the 
Fund during times of stress,'' was too broad.\1221\ Some commenters 
stated that the proposed definition would trigger reports on Form N-CR 
of routine transactions that occur in the ordinary course of business, 
which do not indicate stress on the fund.\1222\ For example, a few 
commenters suggested that the proposed definition would result in Form 
N-CR filings with respect to ordinary fee waivers and expense 
reimbursements, inter-fund lending, purchases of fund shares, 
reimbursements made by the sponsor in error, and certain other routine 
fund transactions.\1223\ Because many of the above actions likely would 
not indicate stress on a fund, commenters noted that reporting these 
actions would not enhance investors' ability to fully appreciate the 
risks of investing in a fund, potentially lead to further investor 
confusion and possibly even cause ``disclosure fatigue'' among 
investors.\1224\ We also were asked to clarify what constitutes 
financial support in order to standardize disclosures by different 
funds.\1225\
---------------------------------------------------------------------------

    \1219\ See, e.g., Oppenheimer Comment Letter (``. . . we support 
the SEC's proposal to require money market funds to disclose current 
and historical instances of sponsor support for stable NAV funds [. 
. .].''); Schwab Comment Letter; T. Rowe Price Comment Letter; 
American Bankers Ass'n Comment Letter; Federated VIII Comment 
Letter.
    \1220\ See, e.g., Schwab Comment Letter (noting that the 
``[p]roposed disclosures around instances of sponsor support would 
provide investors with useful context for analyzing the stability of 
the fund, though we would note that not all instances of sponsor 
support are indicative of a fund under even mild stress, let alone 
nearing the point of breaking the buck.''); ICI Comment Letter (``We 
are concerned that the definition of `financial support' for 
purposes of the required disclosures is overly broad and would 
include the reporting of routine fund matters.''); Federated II 
Comment Letter; Deutsche Comment Letter; UBS Comment Letter.
    \1221\ See, e.g., Dreyfus Comment Letter, Deutsche Comment 
Letter, ICI Comment Letter, Fidelity Comment Letter; UBS Comment 
Letter.
    \1222\ See, e.g., Dechert Comment Letter (stating that the 
``definition of `financial support' is over-inclusive and would 
capture certain actions taken in the ordinary course of business 
that would not signal any financial distress on the part of the 
money fund.''); SIFMA Comment Letter, ICI Comment Letter, Federated 
II Comment Letter, Vanguard Comment Letter.
    \1223\ See, e.g., PWC Comment Letter (``. . . an expense waiver 
is more often than not a means to limit a fund's expense ratio, and 
not to avoid the NAV falling below $1.00 per share.''); BlackRock II 
Comment Letter (``[a]ffiliates and fund sponsors often use a fund as 
a cash management vehicle and routinely purchase fund shares. These 
purchases in no way indicate a fund is under stress.''); Fidelity 
Comment Letter (noting that ``a `(iv) purchase of fund shares' may 
be interpreted to include a sponsor's investment of seed money to 
launch a new fund and investment by affiliated funds or transfer 
agents on behalf of either funds using MMFs as an overnight cash 
sweep or central funds investing pursuant to the terms of an 
exemptive order.'' and that other routine items might include 
``expense caps, inter-fund lending, loans and overdrafts due to 
settlement timing issues, and credits that service providers of a 
MMF may give as a result of cash held at the service provider''). 
See also, e.g., Vanguard Comment Letter, Federated VIII Comment 
Letter, SIFMA Comment Letter, Deutsche Comment Letter, ICI Comment 
Letter.
    \1224\ See, e.g., Federated VIII Comment Letter; Fidelity 
Comment Letter; ICI Comment Letter; SIFMA Comment Letter; Chamber II 
Comment Letter.
    \1225\ See SIFMA Comment Letter (stating that clarifying the 
definition of financial support is ``necessary to standardize 
disclosures across the industry.''). With respect to the ``catch-
all'' provision of the definition, see discussion infra and cf., 
e.g., Dreyfus Comment Letter. Certain of our final changes to the 
definition of ``financial support'' are intended to address concerns 
about inconsistent disclosures by different funds. See, e.g., infra 
notes 1226 and 1232 and the respective accompanying discussions.
---------------------------------------------------------------------------

    We appreciate these commenters' concerns, and are today amending 
the final definition of ``financial support'' to minimize unnecessary 
filings of Form N-CR and reduce inconsistencies among different filers. 
In response to these comments, we are, among other things, modifying 
the rule text to specify that certain routine actions, and actions not 
reasonably intended to increase or stabilize the value or liquidity of 
the fund's portfolio, do not need to be reported as financial support 
on Form N-CR, as discussed below.\1226\ The revised definition should 
help avoid Form N-CR filings that do not represent actions that the 
Commission, shareholders, and other market observers would consider 
significant enough in evaluating or monitoring for financial support. 
Each item of financial support in the definition is the same as was 
proposed, except we have deleted ``purchase of fund shares'' from the 
definition, we have refined the ``catch-all provision,'' and we have 
added several exclusions, all discussed below.
---------------------------------------------------------------------------

    \1226\ In addition, in the Proposing Release, we explained that 
the instructions specified that the term financial support included, 
but was not limited to certain examples of financial support. See 
Proposing Release, supra note 25, at n.617 and accompanying text. 
Similarly, in the proposed Form N-CR, we had included the phrase 
``for example'' before the definition of financial support, 
suggesting that this definition was a non-exhaustive list of actions 
that constitute financial support. See proposed (FNAV) Form N-CR 
Part C; proposed (Fees & Gates) Form N-CR Part C. In the final 
amendments, we are eliminating these qualifications in order to 
reduce any ambiguity over what else might constitute sponsor 
support. We also clarify that the final definition encompasses the 
entire universe of what does (and does not) constitute financial 
support for purposes of Form N-CR. We believe these clarifications, 
in addition to our other changes to the definition of ``financial 
support,'' will provide for more standardized disclosures across the 
industry.
---------------------------------------------------------------------------

    As we are adopting it today, the term ``financial support'' is 
defined to include (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) execution of letter of 
credit or

[[Page 47841]]

letter of indemnity, (v) capital support agreement (whether or not the 
fund ultimately received support), (vi) performance guarantee, (vii) or 
any other similar action reasonably intended to increase or stabilize 
the value or liquidity of the fund's portfolio; excluding, however, any 
(i) routine waiver of fees or reimbursement of fund expenses, (ii) 
routine inter-fund lending, (iii) routine inter-fund purchases of fund 
shares, or (iv) any action that would qualify as financial support as 
defined above, that the board of directors has otherwise determined not 
to be reasonably intended to increase or stabilize the value or 
liquidity of the fund's portfolio.\1227\
---------------------------------------------------------------------------

    \1227\ See Form N-CR Part C. This definition is the same as the 
one we are adopting today for purposes of the Web site disclosure of 
sponsor support. See supra section III.F.3. See also, supra note 
1214 for a description of the proposed definition in the Proposing 
Release.
---------------------------------------------------------------------------

    As some commenters suggested,\1228\ we are refining the ``catch-
all'' provision of the financial support definition.\1229\ In the 
Proposing Release, we had proposed to require disclosure of ``any other 
similar action to increase the value of the fund's portfolio or 
otherwise support the fund during times of stress.'' \1230\ Under the 
final definition, we are changing this provision to read: ``any other 
similar action reasonably intended to increase or stabilize the value 
or liquidity of the Fund's portfolio.'' \1231\ In particular, we have 
eliminated the phrases ``otherwise support'' and ``during times of 
stress'' contained in the proposed definition to address more general 
concerns that the ``catch-all'' provision was too vague and could be 
subject to different interpretations by different funds.\1232\ We also 
eliminated the phrase ``during times of stress'' because sponsors may 
also provide support pre-emptively, before a fund is experiencing any 
actual stress. Instead, we believe this new intentionality standard 
\1233\ should serve to reduce the chance that a fund would need to 
report an action on Form N-CR that does not represent true financial 
support that the Commission or investors would likely be concerned 
with. By focusing on the primary intended effects of sponsor support--
increasing or stabilizing the value or liquidity of a fund's portfolio 
\1234\--we believe the revised ``catch-all'' provision will better 
capture actions that the Commission, shareholders, and other market 
observers would consider significant in evaluating or monitoring for 
financial support.\1235\ Actions that would likely fall within this 
``catch-all'' provision include, for example, the purchase of a 
defaulted or devalued security at a price above fair value, or 
exchanges of securities with longer maturities for ones with shorter 
maturities.
---------------------------------------------------------------------------

    \1228\ See, e.g., Dreyfus Comment Letter (``we recommend that 
`or otherwise support the fund during times of market stress' be 
eliminated from subparagraph (viii), or revised to be made more 
specific as to actual financial support provided. As proposed, this 
broad `catch-all' provision re-opens the door for debate about what 
constitutes `instances of sponsor support.' ''); ICI Comment Letter.
    \1229\ See Form N-CR Part C.
    \1230\ See Proposing Release, supra note 25, at n.617 and 
accompanying text; proposed (FNAV) Form N-CR Part C; proposed (Fees 
& Gates) Form N-CR Part C.
    \1231\ See Form N-CR Part C.
    \1232\ See Dreyfus Comment Letter. See generally, e.g., SIFMA 
Comment Letter (with respect to definition of financial support 
generally, stating that clarifications are ``necessary to 
standardize disclosures across the industry.''). But cf., ICI 
Comment Letter (proposing a modified ``catch-all'' provision that 
would retain the phrase ``during periods of stress.'').
    \1233\ See Form N-CR Part C. As noted above, if increasing or 
stabilizing the value or liquidity of the Fund's portfolio is an 
intended effect of an action, even if not the primary purpose, then 
it would need to be reported on Form N-CR.
    \1234\ To that end, we have also added ``or stabilize'' and ``or 
liquidity'' to what we had originally proposed as the catch-all 
provision. See supra note 1231 and accompanying text. We are doing 
so because we believe that increasing the value of a fund may not be 
the only primary intended effect of financial support. Rather, we 
believe that stabilizing the value of a fund (e.g., where a sponsor 
provides support to counter foreseeable adverse market effects that 
may otherwise depress the fund's value), as well as increasing or 
stabilizing the fund's liquidity (e.g., where a sponsor might 
exchange securities with longer maturities for ones of equal value 
but with shorter maturities) may also be intended effects of 
financial support.
    \1235\ We also considered whether to make this ``catch-all'' 
provision (or the definition of financial support generally) subject 
to a specific threshold or general materiality qualification. See, 
e.g., T. Rowe Price Comment Letter (stating that ``if the sponsor is 
investing in its own fund in order to support the NAV, we agree that 
the SEC could consider requiring disclosure [on Form N-CR] if a 
money market fund's NAV has dropped below a certain threshold and 
the sponsor's investment in the fund materially changes the market-
based NAV.''); Cf., e.g., ICI Comment Letter (among other things, 
proposing to qualify purchases of fund shares by adding ``to support 
the fund during periods of stress (e.g., when the fund's NAV 
deviates by more than \1/4\ of 1 percent)'' behind it). However, we 
are not including a specific threshold (e.g., a specific drop in the 
fund's NAV or liquidity) at this time (to the ``catch-all'' 
provision or any other part of the definitions) because not all 
types of sponsor support (e.g., a capital support agreement or 
performance guarantee) may result in an immediate change in a fund's 
NAV or liquidity. The utility of the reporting might also be 
diminished with such a threshold if sponsors provided support pre-
emptively, before the specified threshold is met.
---------------------------------------------------------------------------

    We have also added exclusions to the definition in a change from 
the proposal. The revised definition of financial support explicitly 
excludes routine waivers of fees or reimbursement of fund expenses, 
routine inter-fund lending, and routine inter-fund purchases of fund 
shares.\1236\ We agree with commenters that the actions we are 
excluding from the final definition are not generally indicative of 
stress at a fund.\1237\ Correspondingly, we have also deleted purchases 
of fund shares as one of the items that had been explicitly included in 
the proposed definition.\1238\ We note that these actions must be 
``routine'' meaning that any such actions are excluded only to the 
extent they are not reasonably intended to increase or stabilize the 
value or liquidity of the fund's portfolio.\1239\
---------------------------------------------------------------------------

    \1236\ Cf., e.g., ICI Comment Letter (proposing to add 
``nonroutine'' before ``purchase of fund shares'' to ``make it clear 
that routine affiliate purchases normally should not be deemed 
``financial support.'').
    \1237\ See generally, commenters' concerns at supra note 1223 
and accompanying discussion.
    \1238\ See clause (iv) of the proposed definition, supra note 
1227.
    \1239\ If increasing or stabilizing the value or liquidity of 
the Fund's portfolio is an intended effect of an action, even if not 
the primary purpose, then it would need to be reported on Form N-CR.
---------------------------------------------------------------------------

    The final definition of financial support also includes a new 
intentionality exclusion that may be invoked by boards.\1240\ Under 
this new exclusion, a particular action need not be reported as 
financial support under Part C of Form N-CR if the board of directors 
of the fund finds that the action was not ``reasonably intended to 
increase or stabilize the value or liquidity of the Fund's portfolio.'' 
We are adding this exclusion as a way to address certain remaining 
concerns by commenters about the reporting of actions that might 
otherwise still technically fall within the definition of financial 
support, but are not intended as such.\1241\ During times of fund or 
market stress, however, we believe that boards likely would find it 
difficult to determine that a particular action that is otherwise 
captured by the definition of financial support should be excluded 
under this intentionality exception. We recognize that an action may be 
made for a number of reasons, but note that if an intent of the action 
is to increase or stabilize the value or liquidity of the Fund's 
portfolio, even if that is not the primary or sole purpose of the 
action, then it must be reported on the

[[Page 47842]]

Form.\1242\ As is the case with any board determination, boards would 
typically record in the board minutes the bases of any such 
determinations by the board.\1243\
---------------------------------------------------------------------------

    \1240\ See Form N-CR Part C.
    \1241\ See, e.g., Fidelity Comment Letter (``For example, `(i) 
any capital contribution' could be interpreted to include a 
reimbursement of error, as a MMF adviser or sponsor may reimburse a 
MMF for an error that occurred whether part of investment 
operations, investment activity or other services provided by a 
service provider to the funds.'') In such a case, a fund's board 
might be able to determine that such reimbursement was not 
``reasonably intended to increase or stabilize the value or 
liquidity of the Fund's portfolio'' and thus would not report the 
action on Form N-CR.
    \1242\ For example, a sponsor might purchase a security from a 
fund (or take another similar action) to eliminate potential future 
risk associated with that security, and may engage in such an action 
primarily out of concern for their reputation or other reasons. 
Nonetheless, if any intent of the action, even if it is not the 
primary intent, is to increase or stabilize the value or liquidity 
of the fund's portfolio (in the present or future), then such an 
action would be reportable on Form N-CR. Similarly, one commenter 
suggested that we exclude certain capital contributions provided by 
the sponsor of an acquired fund in the case of a merger or 
reorganization from the definition of financial support for purposes 
of Form N-CR. See Federated VIII Comment Letter. We have not done so 
because in some cases such a contribution might be reasonably 
intended to increase or stabilize the value or liquidity of the 
fund's portfolio, even if the primary intent was to facilitate the 
merger or reorganization. In particular, such a contribution may 
qualify as a ``capital contribution'' for purposes of clause (i) of 
the proposed definition of financial support. Given that the capital 
contribution in the commenter's example was intended to cover ``any 
net losses previously realized by the acquired fund'' or ``if the 
shadow price of the acquired fund differs materially from the 
acquiring fund's shadow price,'' the recipient fund's board would 
likely find it difficult to conclude that such a capital 
contribution was not reasonably intended to increase or stabilize 
the value or liquidity of the fund's portfolio. Id.
    \1243\ See supra note 709.
---------------------------------------------------------------------------

b. Amount of Support
    In the Proposing Release, we proposed that filers disclose, among 
other things, the ``amount of support'' in Part C of Form N-CR.\1244\ 
One commenter asked the Commission to clarify the ``amount'' of 
financial support that they must report under Part C of the form to 
avoid misleading disclosures and to facilitate comparability in 
disclosures across the industry.\1245\ For example, in the case of a 
purchase of a security from the fund, this commenter believed that it 
may be misleading to report the size of the position purchased as the 
``amount'' supported and rather thought the amount of support should be 
the increase in the fund's NAV that results from the purchase. This 
commenter also asked that the Commission clarify that SEC staff 
interpretations relating to reporting the valuation of capital support 
agreements on Form N-MFP would be applicable for these purposes.\1246\
---------------------------------------------------------------------------

    \1244\ See proposed (FNAV) Form N-CR Item C.6; proposed (Fees & 
Gates) Form N-CR Item C.6.
    \1245\ See SIFMA Comment Letter.
    \1246\ This commenter was discussing Staff Responses to 
Questions about Rule 30b1-7 and Form N-MFP updated July 29, 2011, 
available at http://www.sec.gov/divisions/investment/guidance/formn-mfpqa.htm.
---------------------------------------------------------------------------

    Below we are providing guidance to clarify what amounts should be 
reported specifically with respect to share purchases on Part C of Form 
N-CR. With respect to share purchases in particular, we disagree with 
the commenter that when financial support is provided through the 
purchase of a fund portfolio security, the size of the security 
position purchased is not relevant in considering the amount of 
support. When a distressed or potentially distressed security is 
purchased out of a fund's portfolio, support can be provided in two 
ways. First, if it is purchased at amortized cost and the security's 
market-based value is below amortized cost, one measure of the amount 
of support is the amount of the security's impairment below amortized 
cost. However, the purchase of the security position from the fund also 
removes this entire risk exposure from the fund and protects the fund 
from subsequent further price declines in the security. Accordingly, we 
believe that the size of the position purchased from the fund is also 
relevant when considering the ``amount'' of financial support. 
Therefore, in such a case filers should report under Part C of Form N-
CR the following two separate items with respect to the ``amount'' of 
financial support: (i) The amount of the impairment below amortized 
cost in the security purchased and (ii) the amortized cost value of the 
securities purchased.
    In the case of a capital support agreement, historically such 
agreements have supported a particular security position while others, 
as noted by a commenter, may support the market-based NAV per share of 
the fund as a whole.\1247\ Where a capital support agreement is 
supporting a particular security position, we would consider the amount 
of reportable financial support on Form N-CR similar to that described 
above relating to purchases of portfolio securities. That is, the 
``amount'' of financial support is the amount of security impairment 
effectively removed through the capital support agreement as well as 
the amortized cost value of the overall position supported (assuming 
the entire position is subject to the capital support agreement). For a 
capital support agreement that supports the fund as a whole, the amount 
of reportable financial support is the amount of impairment to the 
fund's NAV per share effectively removed through the capital support 
agreement with a notation describing that the capital support agreement 
supports the value of the fund as a whole (or the extent of the fund's 
value that is supported, if less than the full amortized cost value).
---------------------------------------------------------------------------

    \1247\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    This guidance differs somewhat from the staff guidance relating to 
capital support agreement disclosures on Form N-MFP because the context 
differs. Form N-MFP already requires reporting on the overall size of 
the security position reported (and information about the size of the 
fund), so the additional capital support agreement reporting focuses on 
valuing the impairment effectively removed through the capital support 
agreement. Our guidance regarding ``amount'' of financial support 
reportable on Form N-CR for capital support agreements thus provides 
similar information to that which could be collectively determined by 
reviewing various Form N-MFP line items.
c. Concerns Over Potential Redundancy
    One commenter argued that the financial support disclosure in Form 
N-CR is redundant in light of the corresponding financial support 
disclosures in the SAI, raising concerns about the additional 
preparation costs and burdens on fund personnel.\1248\ More generally, 
commenters were also concerned about the redundancy of various other 
Parts of Form N-CR, Form N-CR as a whole, and even the various proposed 
disclosures in the aggregate.\1249\ While we appreciate these concerns 
and have considered the costs and burdens of Form N-CR,\1250\ we note 
that each of the Form N-CR and the corresponding Web site and SAI 
disclosure requirements serves a distinct purpose.\1251\ Therefore, 
although we acknowledge there will be some textual overlap between 
these different formats, we believe there are strong public policy 
reasons for requiring the various different disclosures. We also note 
that we have required other such parallel reporting for similar 
reasons.\1252\
---------------------------------------------------------------------------

    \1248\ See Dreyfus Comment Letter.
    \1249\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter; 
Federated II Comment Letter; Fin. Svcs. Roundtable Comment Letter.
    \1250\ We consider and estimate the various costs and burdens of 
Form N-CR in more detail in infra section III.F.8 as well as in 
infra section IV.D.2.a.
    \1251\ We note that there are also certain overlapping 
disclosures with respect to Form N-MFP, which we generally discuss 
in supra section III.G.
    \1252\ For example, money market funds are currently required to 
disclose much of the portfolio holdings information they disclose on 
Form N-MFP on the fund's Web site as well. See current rule 2a-
7(c)(12)(ii); current rule 30b1-7; Form N-MFP, General Instruction 
A.
---------------------------------------------------------------------------

    Most significantly, Form N-CR will alert Commission staff, 
shareholders and other market observers about any reportable events on 
Form N-CR

[[Page 47843]]

(including any financial support) on a near real-time basis.\1253\ In 
particular, Form N-CR will enable the Commission and other market 
observers to better monitor the entire fund industry, as they will be 
able to locate on EDGAR all Form N-CR reports specific to any 
particular time frame without having to search through the SAIs of all 
the funds in the industry. We expect financial news services to be 
among the market observers who will benefit from Form N-CR, which in 
turn could then also alert investors about these important developments 
more expeditiously.\1254\ Although any corresponding SAI disclosures 
will also be available on EDGAR, because SAI filings contain many other 
disclosures (including those unrelated to financial support or the 
other reportable events on Form N-CR), it could take significant 
amounts of time for the Commission and other market observers (such as 
the aforementioned financial news services) to continually review all 
SAI filings for any relevant alerts.\1255\ Similarly, we believe it 
would be significantly more time-consuming, if not impractical, if the 
Commission and other market observers had to continually check each 
fund's Web site for any relevant updates.\1256\ We therefore believe 
that the corresponding Web site and SAI disclosures alone would not 
accomplish the primary goal of Form N-CR in alerting the Commission, 
investors and other market observers about important events in a timely 
and meaningful manner. Moreover, we note that certain Parts of Form N-
CR as amended today will require more extensive disclosures than either 
the corresponding Web site or SAI disclosures,\1257\ which further 
minimizes the degree to which there would have been any functionally 
overlapping disclosures. Finally, Form N-CR filings will also provide a 
permanent historical record of any financial support provided to the 
entire money market fund industry, which will be accessible on EDGAR.
---------------------------------------------------------------------------

    \1253\ With respect to the need of the Commission staff, 
shareholders and other market observers to receive the alerts on 
Form N-CR on a near real-time basis, cf. infra notes 1329-1333 and 
the accompanying text for a discussion on the importance of the one 
and four business day deadlines of Form N-CR.
    \1254\ As noted in supra notes 1211 and 1213, with respect to 
any portfolio defaults or fund share purchases under rule 17a-9, we 
are eliminating the corresponding email notifications to the 
Director of Investment Management or the Director's designee under 
current rules 2a-7(c)(7)(iii)(A) and (B). Among other reasons, we 
are replacing them with Form N-CR is because these email 
notifications are currently not publicly available to investors and 
other market observers.
    \1255\ Even where a fund updates its registration statement with 
equal promptness as Form N-CR, as noted by the commenter cited 
below, it would still likely take the Commission and other market 
observers extensive effort and time to continually review all SAI 
filings for any relevant alerts. See Dreyfus Comment Letter (stating 
that ``[w]hile the Commission may feel that Form N-CR will provide 
the information on a more real-time basis, we expect registration 
statements also will have to be updated with equal promptness with 
these disclosures (via Rule 497 filings with the Commission).''). In 
addition, as discussed below, we note that certain Parts of Form N-
CR as amended today will require more extensive disclosures than 
either the corresponding Web site or SAI disclosures.
    \1256\ Such Web site monitoring could be particularly burdensome 
because the presentation of this information would likely be 
different on each fund's Web site.
    \1257\ For example, with respect to disclosure of any financial 
support, funds will be required to disclose on their Web sites and 
in their SAIs only that information that the fund is required to 
report to the Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and 
C.7 of Form N-CR. See supra notes 993 and 1137-1138 and accompanying 
text. We also note that Parts E, F, and G of Form N-CR as amended 
today will require more extensive disclosures than the rule 2a-7 and 
Form N-1A provisions requiring funds to disclose certain information 
about the imposition of fees or gates on the fund's Web site and in 
the fund's SAI. See supra notes 960 and 1112 and accompanying text.
---------------------------------------------------------------------------

    On the other hand, we believe that the consolidated discussion in 
the SAI will be the most accessible format for disclosing historical 
instances of sponsor support in the past 10 years, as it would be a 
significant burden on the Commission, investors and other market 
observers if they had to review various prior Form N-CR filings to 
piece together a specific fund's history of sponsor support,\1258\ even 
in light of the additional costs and burdens faced by funds in 
providing these SAI disclosures.\1259\ We also believe that, to the 
extent investors may not be familiar with researching filings on EDGAR, 
including these disclosures in a fund's SAI (which investors may 
receive in hard copy through the U.S. Postal Service or may access on a 
fund's Web site, as well as accessing on EDGAR) may make this 
information more readily available to these investors than disclosure 
on other SEC forms that are solely accessible on EDGAR.
---------------------------------------------------------------------------

    \1258\ Given that funds will be required to disclose historical 
instances of sponsor support for the past 10 years, the 
corresponding filings on Form N-CR will provide a permanent record 
for any instances of financial support that occurred more than 10 
years ago in a single place.
    \1259\ We generally consider and estimate the costs and burdens 
of the SAI disclosures in infra sections III.F.8 and IV.G.
---------------------------------------------------------------------------

    Similarly, the Web site disclosures are intended to be more 
accessible than Form N-CR for individual investors interested in 
information about particular funds, in particular to the extent such 
investors may not be familiar with researching filings on EDGAR.\1260\ 
Given that individual investors are typically most interested in 
information about their own (or potential) investments and do not 
necessarily monitor the entire fund industry, visiting the Web sites of 
a few particular funds would likely not become overly time-consuming or 
burdensome for these investors.\1261\
---------------------------------------------------------------------------

    \1260\ See CFA Institute Comment Letter (``We particularly 
endorse the proposed requirement that money market funds would have 
to post on their Web sites much of the information required in Form 
N-CR. While Form N-CR information is publicly available upon SEC 
filing, investors will more readily find and make use of this 
information if posted on a particular fund's Web site.'')
    \1261\ We also generally consider and estimate the costs and 
burdens of the related Web site disclosures in infra section III.F.8 
as well as in infra section IV.A.6.
---------------------------------------------------------------------------

4. Part D: Declines in Shadow Price
    Part D of Form N-CR will, as proposed, require funds that transact 
at a stable price to file a report when the fund's current NAV per 
share deviates downward from its intended stable price (generally, 
$1.00) by more than \1/4\ of 1 percent (i.e., generally below 
$0.9975).\1262\ Today we are adopting Part D of Form N-CR largely as 
proposed.\1263\ As we discussed in the

[[Page 47844]]

Proposing Release,\1264\ this requirement will 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 will help 
increase money market funds' transparency and permit investors to 
better understand money market funds' risks.\1265\ To better understand 
the cause of such a decline in the fund's shadow price, we are also 
requiring, largely as proposed, funds to provide the principal reason 
or reasons\1266\ for the reduction, which would involve identifying the 
particular securities or events that prompted the decline.\1267\ In a 
change from the proposal, we are also requiring the disclosure of the 
same identifying information included in other parts of the Form.\1268\ 
In particular, the final amendments to Item D.3 also now require funds 
to report the name of the issuer, the title of the issue and at least 
two identifiers, if available.\1269\ In particular, better 
identification of the particular fund portfolio security or securities 
that may have prompted a shadow price decline will facilitate the 
staff's monitoring and analysis efforts, which we expect to help us 
better understand the nature and extent of the shadow price decline, 
the potential effect on the fund, potential contagion risk across funds 
more broadly, as well as inform any action that may be required in 
response to the risks posed by such an event. Fund shareholders and 
potential investors will similarly benefit from the clear 
identification of a fund portfolio security or securities that may have 
prompted a shadow price decline when evaluating their 
investments.\1270\
---------------------------------------------------------------------------

    \1262\ Form N-CR Part D. As stated in the introduction to Part 
D, with some changes from the proposal, the disclosure requirement 
under Part D is triggered ``[if] a retail money market fund's or a 
government money market fund's current net asset value per share 
deviates downward from its intended stable price per share by more 
than \1/4\ of 1 percent [. . .].'' In turn, for each day the fund's 
current NAV is below this threshold, Part D will require, with some 
changes from the proposal, a fund to disclose the following 
information: (i) The date or dates on which such downward 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 or reasons 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.
    \1263\ See proposed (FNAV) Form N-CR Part D; proposed (Fees & 
Gates) Form N-CR Part D. Under either main alternative, in the 
Proposing Release we proposed Form N-CR to require an applicable 
fund, if its current NAV (rounded to the fourth decimal place in the 
case of a fund with a $1.00 share price, or an equivalent level of 
accuracy for funds with a different share price) deviates downward 
from its intended stable price per share by more than \1/4\ of 1 
percent, 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. 
See Proposed (FNAV) Form N-CR Part D; Proposed (Fees & Gates) Form 
N-CR Part D. In addition to the other change discussed in this 
section, we are making various conforming and clarifying changes in 
the final amendments to Part D. In the introduction to Part D, in a 
conforming change to the other amendments we are adopting today, we 
are now referring to retail and government money market funds 
instead of just to ``Fund'' as proposed under the floating NAV 
alternative or to funds ``subject to the exemption provisions of 
rule 2a-7(c)(2) or rule 2a-7(c)(3)'' as proposed under the liquidity 
fees and gates alternative). We are also pluralizing the ``principal 
reason'' in Item D.3 to principal reason or reasons,'' as there may 
be several successive or concurrent causes that resulted in a 
reduction in the shadow NAV. Furthermore, as another conforming 
change, we are inserting the word ``downward'' before ``deviation'' 
in Item D.1 to remove any doubt that only downward deviations need 
to be reported, consistent with the introduction of Part D (which 
already includes a reference to ``downward'').
    \1264\ See Proposing Release, supra note 25, at text 
accompanying n.714.
    \1265\ See generally, supra section III.B.8.a (discussing the 
potential benefits and costs of the requirement for a money market 
fund to disclose its current NAV on its Web site).
    \1266\ In a change from the Proposing Release, we are 
pluralizing the ``principal reason'' in Item D.3, as there may be 
several successive or concurrent causes that resulted in a reduction 
in the shadow NAV.
    \1267\ Form N-CR Item D.3. This item would not require 
additional analysis or explanation of the principal reason or 
reasons for the deviation, beyond identifying the particular 
securities or events that prompted the deviation.
    \1268\ See Form N-CR Item D.3 (requiring, for any such security, 
disclosure of the name of the issuer, the title of the issue 
(including coupon or yield, if applicable) and at least two 
identifiers, if available); see Form N-CR Item B.1.
    \1269\ These changes are similar to what we proposed and are 
adopting with respect to Items C.1 to C.5 of Form N-MFP. See 
Proposing Release, supra note 25, at nn.754-757 and accompanying 
text; see supra section III.G.2.f. As under Form N-MFP and with 
respect to Item B.1, we note that the requirement to include 
multiple identifiers is only required if such identifiers are 
actually available.
    \1270\ With respect to our corresponding changes to Parts B and 
C of Form N-CR, see also, supra notes 1209 and 1216 and the 
accompanying discussions.
---------------------------------------------------------------------------

    Some commenters expressed concerns about the reporting of shadow 
price declines on Form N-CR. For example, commenters argued that it 
would be redundant and unduly burdensome in light of funds' concurrent 
Web site disclosure of the shadow price.\1271\ However, as already 
discussed with respect to the various concurrent disclosures of 
financial support in section III.F.3 above, while we are sensitive to 
commenters' concerns about duplication, we believe it appropriate given 
the different audiences and uses for such information.\1272\
---------------------------------------------------------------------------

    \1271\ See Federated VIII Comment Letter (stating that ``so long 
[a]s the current shadow price is publicly available, Federated does 
not view such a deviation as a material event that necessitates a 
separate reporting.''); Dreyfus Comment Letter.
    \1272\ See discussion following supra notes 1248 and 1249 and 
accompanying text.
---------------------------------------------------------------------------

    With respect to the particular deviation threshold of \1/4\ of 1 
percent that we are adopting today as proposed, one commenter 
considered this level of deviation to be arbitrary, ``as there are no 
other implications under Rule 2a-7 for the money market fund if it has 
a 25 basis point deviation.'' \1273\ However, as noted in the Proposing 
Release,\1274\ we continue to 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). We note that we previously have similarly determined that a 
\1/4\ of one percent decline in the shadow price from its intended 
stable price is an appropriate threshold requiring money market funds 
to report to us.\1275\ Moreover, if a Form N-CR filing were not 
triggered until a higher threshold such as after a fall in the NAV that 
would require the re-pricing of fund shares (such as 0.5%),\1276\ the 
disclosures would come too late to meaningfully allow the Commission 
and others to effectively monitor and respond to indicators of stress. 
We also believe a threshold of \1/4\ of 1 percent strikes an 
appropriate balance with respect to the frequency of filings, because 
during periods of normal market activity we would expect relatively few 
Form N-CR filings for this part of the form.\1277\ In fact, our staff 
has analyzed Form N-MFP data from November 2010 to February 2014 and 
found that only one fund had a \1/4\ of 1 percent deviation from the 
stable $1.00 per share NAV, suggesting the burden to funds would be 
minimal during normal market activity. We note that funds may also 
provide additional context about the circumstances leading to the 
shadow price decline in Part H of Form N-CR, discussed below.
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    \1273\ See Federated VIII Comment Letter.
    \1274\ See Proposing Release, supra note 25, at n.715 and 
accompanying text.
    \1275\ See 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 NAV declines below 99.75% of its stable NAV).
    \1276\ See Federated VIII Comment Letter (proposing a deviation 
of 0.5% as the reporting trigger).
    \1277\ Cf., e.g., State Street Comment Letter at Appendix A 
(``During the September 2008 failure of Lehman Brothers Holdings, a 
large number of money market funds had a \1/4\ of 1% or greater 
deviation between the amortized-cost NAV and the market NAV. During 
times of market stress similar to the 2008 crisis, our expectation 
is that the percentages would be similar. However, during times of 
normal market activity, our expectation is that [a \1/4\ of 1%] or 
greater deviation between stable NAV and market NAV would be 
infrequent.'')
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    Another commenter suggested that disclosure of a deviation in the 
NAV might result in an increase in pre-emptive run risk, as 
shareholders could come to use these filings as a trigger for 
redemptions.\1278\ Although we cannot predict individual shareholder 
actions with certainty, as discussed previously, we believe that the 
transparency provided by this information is important to the ability 
of money market fund shareholders to understand and assess the risks of 
their investments. Furthermore, while we acknowledge the possibility of 
pre-emptive redemptions, some of the other reforms we are adopting 
today (such as liquidity fees and redemption gates) will provide some 
fund managers additional tools for managing such redemptions, if they 
were to occur. We also note that some of our responses in section 
III.A.1.c.i to concerns over pre-emptive run risk related to the 
liquidity fees and gates requirement would similarly apply to run risk 
concerns over the disclosure of a deviation in the NAV in Part D of 
Form N-CR.\1279\ More generally, we

[[Page 47845]]

expect that Form N-CR could decrease, rather than increase, redemption 
risk by heightening self-discipline at funds.\1280\
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    \1278\ See Federated VIII Comment Letter.
    \1279\ For example, as discussed in further detail in section 
III.A.1.c.i, we expect that the additional discretion we are 
granting fund boards to impose a fee or gate at any time after the 
fund's weekly liquid assets have fallen below the 30% required 
minimum should substantially mitigate the risk of pre-emptive 
redemptions. As discussed in supra note 171 and the accompanying 
text, board discretion concerning when to impose a fee or gate may 
reduce shareholder incentive to pre-emptively redeem shares, because 
shareholders will be less able to accurately predict specifically 
when, and under what circumstances, fees and gates will be imposed. 
See Wells Fargo Comment Letter; see also Proposing Release, supra 
note 25, at n.362. For similar reasons, we believe that it is less 
likely that investors would use these filings under Part D of Form 
N-CR as a trigger for redemptions in the first place.
    \1280\ See American Bankers Ass'n Comment Letter (noting that 
certain disclosures including Form N-CR ``would exert a discipline 
on fund advisers to manage assets so conservatively as to avoid 
raising concerns among investors about the credit quality of fund 
investments that could lead to heavy redemptions.''). See also, 
infra note 1346-1350 and the accompanying text for our additional 
discussion of concerns over widespread redemption risk as a result 
of Form N-CR.
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5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees and 
Gates
    Today we are adopting a requirement that a money market fund file a 
report on Form N-CR when a fund imposes or lifts a liquidity fee or 
redemption gate, or if a fund does not impose a liquidity fee despite 
passing certain liquidity thresholds.\1281\ As discussed in more detail 
below, we are making some changes from what we proposed.\1282\ This 
report, as adopted, will require a description of the primary 
considerations the board took into account in taking the action 
(modified from the proposal and discussed below), as well as certain 
additional basic information, such as the date when the fee or gate was 
imposed or lifted, the fund's liquidity levels, and the size of the 
fee.\1283\ Except for the change to the requirement to describe the 
primary considerations the board took into account in taking the 
action, the other changes to Parts E, F and G generally derive from the 
amendments to the liquidity fees and gates requirements that are being 
adopted today and are designed to conform these Parts of Form N-CR to 
those operative requirements. These changes are discussed below.\1284\
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    \1281\ See Form N-CR Parts E, F, and G.
    \1282\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G. 
In particular, in the Proposing Release, if, at the end of a 
business day, a fund (except any government money market fund that 
has chosen to rely on the proposed (Fees & Gates) rule 2a-7 
exemption) has invested less than 15% of its total assets in weekly 
liquid assets, we proposed to require the fund to disclose the 
following information: (i) The initial 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 
interests of the fund. Proposed Part E further included instructions 
that a fund must file a report on Form N-CR responding to items (i) 
and (ii) above on the first business day after the initial date on 
which the fund has invested less than fifteen percent of its total 
assets in weekly liquid assets, and that a fund must amend its 
initial report on Form N-CR to respond to items (iii) and (iv) above 
by the fourth business day after the initial date on which the fund 
has invested less than fifteen percent of its total assets in weekly 
liquid assets. See proposed (Fees & Gates) Form N-CR Part E.
     Similarly, a fund (except any government money market fund that 
has chosen to rely on the proposed (Fees & Gates) rule 2a-7 
exemption) that has invested less than 15% of its total assets in 
weekly liquid assets (as provided in proposed (Fees & Gates) rule 
2a-7(c)(2)) suspends the fund's redemptions pursuant to rule 2a-
7(c)(2)(ii), we proposed that the fund disclose the following 
information: (i) The initial 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 Part F further 
included instructions providing that a fund must file a report on 
Form N-CR responding to items (i) and (ii) above on the first 
business day after the initial date on which the fund suspends 
redemptions, and that a fund must amend its initial report on Form 
N-CR to respond to items (iii) and (iv) by the fourth business day 
after the initial date on which the fund suspends redemptions. See 
proposed (Fees & Gates) Form N-CR Part F.
     Finally, if a fund (except any government money market fund 
that has chosen to rely on the proposed (Fees & Gates) rule 2a-7 
exemption) that has imposed a liquidity fee and/or suspended the 
fund's redemptions pursuant to proposed (Fees & Gates) rule 2a-
7(c)(2) determines to remove such fee and/or resume fund 
redemptions, we proposed to require funds to disclose, as 
applicable, the date on which the fund removed the liquidity fee 
and/or resumed fund redemptions. See proposed (Fees & Gates) Form N-
CR Part G.
    \1283\ See Form N-CR Parts E, F, and G. We note that a fund 
would file a new Part E filing of Form N-CR if it were to change the 
size of its liquidity fee after its initial imposition. Observers 
will also be able to determine the duration of any gate by comparing 
initial filings of Part F (suspension of redemptions) with filings 
of Part G (lifting of such suspensions).
    \1284\ Also see infra note 1313 for a discussion of our related 
conforming changes and clarification to Form N-CR.
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    As we noted in the Proposing Release, we believe that the items 
required to be disclosed are necessary for investors and us better to 
understand the circumstances leading to the imposition or removal of a 
liquidity fee or redemption gate, or the decision not to impose one 
despite a reduction in liquidity.\1285\ We believe such a better 
understanding will in turn enhance the Commission's oversight of the 
fund and regulation of money market funds generally,\1286\ and could 
inform investors' decisions to purchase shares of the fund or remain 
invested in the fund.\1287\
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    \1285\ See Proposing Release, supra note 25, at text following 
n.719.
    \1286\ For example, by knowing the reason(s) for why a board 
imposed a liquidity fee or gate, we expect to be able to better 
understand the potential cause(s) that led to a fund experiencing 
stress, which could inform our determination as to whether further 
regulatory or other action on our part is warranted.
    \1287\ Government money market funds which are not subject to 
our fees and gates requirements and which have not opted to apply 
them are exempt from the reporting requirements of parts E, F, and G 
of Form N-CR.
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a. Board Disclosures
    A number of commenters objected to the proposed requirement that 
funds provide a ``short discussion of the board of director's analysis 
supporting its decision'' \1288\ whether or not to impose liquidity 
fees or when imposing redemption gates.\1289\ Many of these commenters 
raised concerns that the disclosures might chill deliberations among 
board members, hinder board confidentiality and encourage opportunistic 
litigation.\1290\ More generally, commenters also challenged the 
materiality or usefulness of the board disclosures to investors.\1291\ 
For example, one commenter stated that although ``whether the fund is 
imposing a liquidity fee or suspending redemptions'' would be material, 
the board's underlying analysis would not be.\1292\ Some commenters 
also expressed concern that such disclosure would set a precedent for 
board disclosures in other contexts.\1293\
---------------------------------------------------------------------------

    \1288\ See proposed (Fees & Gates) Form N-CR Item E.4 and Item 
F.4.
    \1289\ See, e.g., Dreyfus Comment Letter; Legg Mason & Western 
Asset Comment Letter; MFDF Comment Letter; NYC Bar Committee Comment 
Letter; SIFMA Comment Letter.
    \1290\ See, e.g., Dreyfus Comment Letter (noting that ``[t]his 
analysis will implicate significant amounts of confidential 
information, including the identity of shareholders and future 
expectations about investment flows.''); NYC Bar Committee Comment 
Letter (noting that this ``disclosure would subsequently be reviewed 
with the benefit of hindsight and could be used against the board 
and the fund in the sort of opportunistic litigation that follows 
any financial crisis.''); Legg Mason & Western Asset Comment Letter; 
MFDF Comment Letter; Stradley Ronon Comment Letter. In addition, one 
commenter stated that ``[o]utside of the advisory contract approval 
process, for which there is a statutory basis under Section 15(c) of 
the 1940 Act, the Commission has respected the confidentiality of 
board deliberations and findings that are recorded in board 
minutes.'' See Dreyfus Comment Letter.
    \1291\ See, e.g., Legg Mason & Western Asset Comment Letter; NYC 
Bar Committee Comment Letter; Stradley Ronon Comment Letter; SIFMA 
Comment Letter.
    \1292\ See Legg Mason & Western Asset Comment Letter.
    \1293\ See, e.g., SIFMA Comment Letter (stating that ``a 
requirement to disclose the board's analysis that is otherwise 
memorialized in fund minutes is unique, outside of advisory contract 
approval. We oppose setting a precedent that could imply that board 
analysis must be publicly disclosed for each important decision made 
for a fund.''); MFDF Comment Letter; Dreyfus Comment Letter.

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[[Page 47846]]

    We appreciate these concerns, but we believe that the imposition of 
a fee or gate is likely to be a very significant event for a money 
market fund \1294\ and information about why it was imposed may prove 
pivotal to shareholders, many of whom may be evaluating their 
investment decision in the money market fund at that time.\1295\ 
Accordingly, as discussed in the Proposing Release, we continue to 
believe that shareholders have a strong interest in understanding why a 
board determined to impose (or not to impose) a liquidity fee or 
gate.\1296\ For example, this information may enable investors to 
better understand the events that are affecting and potentially causing 
stress to the fund.\1297\ This information may also permit investors to 
confirm that the board is, as our rule requires, acting in the best 
interests of the fund.\1298\ And given that under our final rules a 
board can impose a fee or gate as soon as the fund's weekly liquid 
assets fall below the 30% regulatory minimum (and thus different boards 
may impose fees or gates at different times), investors' interest in 
understanding the board's reasoning is likely to be even more 
important.\1299\ For these reasons, we believe this disclosure will 
convey material information to those investors who are considering 
whether to redeem their shares in response to a fee or gate.
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    \1294\ Our conclusion that the imposition of a fee or gate may 
often be a significant event for a money market fund is supported by 
the view of many commenters that the imposition of a fee or gate 
could have significant implications for a fund that takes this step 
and that investors may engage in heavy redemptions after a fee is 
imposed or a gate is lifted. See, e.g., supra notes 189 and 190 and 
accompanying text.
    \1295\ We note that disclosure of board reasoning is not 
uncommon in context where shareholders may be evaluating their 
investment decision, such as when a fund engages in a merger or 
acquisition. In those circumstances, a fund board usually provides a 
recommendation to shareholders and the reasons for their 
recommendation. C.f., e.g., Independent Directors Council, Board 
Consideration of Fund Mergers, (June 2006), available at http://www.idc.org/pdf/ppr_idc_fund_mergers.pdf (``Directors typically 
explain the reasons for their decision to recommend that 
shareholders approve a merger in the fund's proxy statement.''). We 
note that mergers and acquisitions can also be the subject of 
litigation and nevertheless board disclosure of their primary 
reasons for their recommendation is commonplace.
    \1296\ See Proposing Release, supra note 25, at section III.G.2.
    \1297\ Cf., e.g., MFDF Comment Letter (acknowledging that 
``[d]epending on the situation, fund investors may well have an 
interest in better understanding the circumstances that led to the 
imposition of redemption fees or gates.'').
    \1298\ See, e.g., ABA Business Law Section Comment Letter (with 
respect to the liquidity fees and gates proposal, stating that the 
``Commission would assign the money market fund's board of directors 
substantial new responsibilities over `life and death' decisions in 
the event of a run on the fund.'').
    \1299\ See supra section III.A.1.b.iii.
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    With respect to concerns that the board disclosures set a precedent 
implying that the reasoning underlying every other important decision 
taken by the board should be similarly disclosed,\1300\ we disagree. As 
discussed in section II.A, ready access to liquidity is one of the 
hallmarks that has made money market funds popular cash management 
vehicles for both retail and institutional investors. Because liquidity 
fees and redemption gates could affect this core feature by potentially 
limiting the redeemability of money market fund shares under certain 
conditions,\1301\ we believe the decision whether to impose those 
measures is sufficiently different in kind from most other significant 
decisions a board could make that the disclosures required by the rule 
would not be a precedent for broadly requiring the disclosure of 
boards' rationales in other contexts.
---------------------------------------------------------------------------

    \1300\ See discussion of SIFMA Comment Letter at supra note 
1293.
    \1301\ See supra section III.A.1.b.iii. See also supra notes 
196-199 and the accompanying text for a discussion of commenters' 
concerns of the potentially detrimental effects of a liquidity fee 
or gate.
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    In addition, we have amended this disclosure requirement to address 
some of the commenters' concerns, while still eliciting useful 
information for the Commission and investors. More specifically, we are 
revising Form N-CR to require disclosure of a brief discussion of the 
``primary considerations or factors taken in account by the board of 
directors in its decision'' to impose or not impose a liquidity fee or 
gate.\1302\ One commenter suggested we make a similar change, requiring 
disclosure of ``a list of material factors considered by the board in 
making its determination.'' \1303\ Rather than just a list of material 
factors, however, we believe it important that funds provide a more 
substantive, but brief, discussion of the primary considerations or 
factors taken in account by the board, so that our staff and investors 
better understand why the board determined they were important. This 
report would not need to include every factor considered by the board, 
only the most important or primary ones that shaped the determination 
of the board's action. This should help alleviate commenters' concerns 
that funds would need to provide lists of all possible factors or 
dissect a board's internal deliberations. Instead, we would expect only 
a description of the primary considerations or factors leading to the 
action taken by the board, and a brief discussion of each.
---------------------------------------------------------------------------

    \1302\ See Form N-CR Part E.6 and Part F.4.
    \1303\ See NYC Bar Committee Comment Letter.
---------------------------------------------------------------------------

    That said, we caution that in preparing these board disclosures, 
funds should avoid ``boilerplate'' summaries of all possible factors in 
addition to or in lieu of a more substantive narrative.\1304\ Instead, 
filers generally should provide information that is tailored to their 
fund's particular situation and the context in which their board's 
decision was made. In preparing these filings, funds should consider 
discussing present circumstances as well as any potential future risks 
and contingencies to the extent the board took them into account. We 
also note that we provided a non-exhaustive list of possible factors 
that a board may have considered in imposing a liquidity fee or gate in 
section III.A.2.b above.\1305\
---------------------------------------------------------------------------

    \1304\ Cf., e.g., SIFMA Comment Letter (stating that the 
discussion of the board's analysis ``will likely be tailored to 
preempt shareholder plaintiffs' counsel who might target boards for 
liability in connection with their decisions.'' which ``. . . may 
encourage lengthy, but not necessarily useful, disclosure.'').
    \1305\ See supra section III.A.2.b.
---------------------------------------------------------------------------

    Another commenter argued that the board disclosures themselves 
might incite widespread redemptions, particularly where the board 
considered but chose not to impose a liquidity fee.\1306\ As discussed 
in section III.A.1.c above, we acknowledge the possibility that the 
prospect of a liquidity fee or gate may cause pre-emptive redemptions, 
but we believe that several aspects of our final reforms both make pre-
emptive runs less likely and substantially mitigate their broader 
effects if they occur. In addition, we believe disclosure of a board's 
reasoning is particularly important in times of stress in order to 
mitigate against investor flight to transparency that might otherwise 
occur.\1307\
---------------------------------------------------------------------------

    \1306\ See Federated V Comment Letter. But cf., e.g., American 
Bankers Ass'n Comment Letter (arguing that the disclosures of Form 
N-CR more generally will decrease redemption risk by heightening 
self-discipline at funds).
    \1307\ Moreover, with respect to a fund whose weekly liquid 
assets have dropped below 10%, we might be concerned that such a 
fund may imminently become unable to meet redemptions. Such a 
relative lack of liquidity at one fund could also be an indicator of 
larger effects that might spread to other funds. Either scenario may 
raise concerns that further action by the Commission is warranted. 
However, if the particular fund's board waived the liquidity fee, 
the related disclosure thereof (e.g., because the drop in liquidity 
is temporary and only related to the particular fund) could inform 
our determination that no further action by the Commission would be 
required.
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    Finally, we received comments discussing concerns about potentially

[[Page 47847]]

duplicative disclosures, in particular the possible redundancy of the 
board disclosures on a fund's Web site as well as Form N-CR.\1308\ 
However, as already discussed with respect to the various concurrent 
disclosures of financial support in section III.F.3 above, while we are 
sensitive to commenters' concerns about duplication, we believe it 
appropriate given the different audiences and uses for such 
information.\1309\
---------------------------------------------------------------------------

    \1308\ See Dreyfus Comment Letter. See also, generally, SIFMA 
Comment Letter (noting that the ``fund's actions and the triggering 
event for the Form N-CR filing may require prospectus disclosure or 
notification to the Commission under other rule provisions, so that 
in many cases the Form N-CR filing will be duplicative of existing 
disclosure and notice requirements.'').
    \1309\ See discussion following supra notes 1248 and 1249 and 
accompanying text.
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b. Conforming and Related Changes
    As discussed earlier, the final amendments lower the weekly liquid 
asset threshold for triggering the default liquidity fee from 15% to 
10% of total assets, and accordingly, we are making corresponding 
changes that would require reporting under Form N-CR at the lower 
weekly liquid asset threshold.\1310\ In addition, in a change from the 
proposal, the final amendments permit money market fund boards to 
institute a liquidity fee or impose a gate at any time once weekly 
liquid assets fall below 30% if they find that doing so is in the best 
interests of the fund.\1311\ We are therefore amending Form N-CR to 
reflect these changes.\1312\ We are making certain additional changes 
to Form N-CR for clarity and to be consistent with our final amendments 
to the liquidity fees and gates requirement.\1313\ Accordingly, under 
the revised reporting standard, Parts E and/or F of Form N-CR must be 
filed: (i) When a fund, at the end of a business day, has invested less 
than 10% of its portfolio in weekly liquid assets and is required to 
impose a liquidity fee (unless the board determines otherwise), or (ii) 
when a fund voluntarily imposes a liquidity fee or redemption gate any 
time it has invested less than 30% of its portfolio in weekly liquid 
assets.\1314\
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    \1310\ See supra section III.A.2.a.ii; see also, Form N-CR Part 
E, (where applicable, now referencing 10% instead of 15% of weekly 
liquid assets).
    \1311\ See supra section III.A.2.
    \1312\ See Form N-CR Parts E and F.
    \1313\ In particular, for clarity, in the introduction to Part E 
we now define any affected fund as ``a fund (except a government 
money market fund that is relying on the exemption in rule 2a-
7(c)(2)(iii))'' as opposed to ``a Fund (except any Fund that is 
subject to the exemption provisions of rule 2a-7(c)(2)(iii) and that 
has chosen to rely on the rule 2a-7(c)(2)(iii) exemption 
provisions'' as proposed. See proposed (Fees & Gates) Form N-CR Part 
E, Introduction. Similarly, for clarity and because of fund's 
additional flexibility under our final amendments to the liquidity 
fees and gates requirement, in the introduction to Part F we now 
simply refer to ``fund'' as opposed to ``a Fund (except any Fund 
that is subject to the exemption provisions of rule 2a-7(c)(2)(iii) 
and that has chosen to rely on the rule 2a-7(c)(2)(iii) exemption 
provisions) that has invested less than fifteen percent of its Total 
Assets in weekly liquid assets (as provided in rule 2a-7(c)(2)).'' 
In addition, we received no comments on Part G of Form N-CR 
(requiring reporting when a liquidity fee or redemption gate is 
removed) and are adopting it unchanged from the proposal. See Form 
N-CR Part G. However, in the Proposing Release, the introduction to 
Part G contained a parenthesis specifying that certain exempt funds 
are not subject to Part G. See proposed (FNAV) Form N-CR Part G; 
proposed (Fees & Gates) Form N-CR Part G. Because we no longer 
consider this parenthesis to be necessary, we have deleted it in the 
final amendments to enhance the clarity of the instructions of Part 
G.
    \1314\ See Form N-CR Part E, clauses (i) and (ii) of the 
Introduction (generally triggering disclosure under Part E of Form 
N-CR if a non-exempt fund (i) at the end of a business day, has 
invested less than 10% of its total assets in weekly liquid assets, 
or (ii) has invested less than 30% of its total assets in weekly 
liquid assets and imposes a liquidity fee pursuant to rule 2a-7(c). 
Correspondingly, we are also adding ``if applicable'' to Item E.1 
(requiring disclosure of the initial date on which the fund invested 
less than 10% of its total assets in weekly liquid assets, if 
applicable), and amending Item E.5 (requiring a brief description of 
the facts and circumstances leading to the fund's investing in the 
amount of weekly liquid assets reported in Item E.3). See Form N-CR 
Items E.1, E.3 and E.5.
---------------------------------------------------------------------------

    In addition, revised Form N-CR includes a new requirement that 
funds report their level of weekly liquid assets at the time of the 
imposition of fees or gates.\1315\ We believe this new requirement will 
allow the Commission and investors to better track and understand 
funds' liquidity levels when boards impose a fee or gate using their 
discretion, which we expect will enhance the Commission's and 
investors' ability to evaluate the extent to which a fund is 
experiencing stress as well as the context in which the board made its 
decision. Similarly, because we are revising the default liquidity fee 
from the proposed 2% to 1%, and thus we expect that there may be 
instances where liquidity fees are above or below the default fee 
(rather than just lower as permitted under the proposal), we are 
requiring that funds disclose the size of the liquidity fee, if one is 
imposed.\1316\ In particular, we expect the particular size of the 
liquidity fee to be highly relevant to an investor determining whether 
to redeem fund shares, as it has a direct impact on the particular 
costs that such a shareholder would have to bear for redeeming fund 
shares. These changes are closely tailored to our final amendments to 
the liquidity fees and gate requirement, which we expect will enhance 
the quality and usefulness of Form N-CR to the Commission and 
investors.
---------------------------------------------------------------------------

    \1315\ Form N-CR Items E.3 and F.1. In the Proposing Release we 
did not explicitly require funds to disclose their size of weekly 
liquid assets at the time of the imposition of fees or gates, given 
that as proposed funds could only impose a fee or gate once they 
crossed the 15% weekly liquid asset threshold. Proposed (Fees & 
Gates) Form N-CR Parts E and F. Item F.1 as originally proposed 
required disclosure of the initial date on which the fund invested 
less than 15% in weekly liquid assets. See proposed (Fees and Gates) 
Form N-CR Item F.1. Today we are not requiring an analogous 
disclosure of the initial date on which the fund invested less than 
10% in weekly liquid assets, because this threshold does not have 
any impact on the imposition of a gate and, in any event, would be 
disclosed in Item E.1.
    \1316\ See Form N-CR Item E.4.
---------------------------------------------------------------------------

6. Part H: Optional Disclosure
    We are also adopting a new Part H in Form N-CR which allows money 
market funds the option to discuss any other events or information that 
they may wish to disclose. We intend new Part H to clarify and expand 
the scope and range of formats of any additional information that a 
fund may wish to provide. In particular, we are adopting Part H to 
address commenter concerns that the information provided in the other 
parts of Form N-CR may become outdated or lack context.\1317\ We 
believe that this new optional disclosure could address some of these 
concerns.
---------------------------------------------------------------------------

    \1317\ For example, one commenter cautioned ``in a rapidly 
changing environment, the reasons for which the board acted may well 
change within a period of four days or significant amounts of 
additional information may be available to the fund and its board. 
In this context, a filing requirement focused on a prior decision 
risks inadvertently misleading fund investors and others about the 
state of the fund's operations.'' See MFDF Comment Letter.
---------------------------------------------------------------------------

    This optional disclosure is intended to provide money market funds 
with additional flexibility to discuss any other information not 
required by Form N-CR, or to supplement and clarify other required 
disclosures.\1318\ This optional disclosure does not impose on money 
market funds any affirmative obligation. Rather, this is solely 
intended as a discretionary forum where funds, if they so choose, can 
disclose any other information they deem helpful or relevant. In 
addition, although we expect that funds would typically file Part H 
along with a filing under another part of Form N-CR, we are not 
imposing any particular deadline for these filings, and thus a fund may 
file an optional disclosure on Part H of Form N-CR at any time.
---------------------------------------------------------------------------

    \1318\ See Form N-CR Item H.1, Instructions.
---------------------------------------------------------------------------

7. Timing of Form N-CR
    We are requiring initial filings of Form N-CR to be submitted 
within one business day of the triggering event, and in some cases, 
requiring a follow-up

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amendment with additional detail to be submitted four days after the 
event with some modifications from the proposal. A number of commenters 
requested additional time for Form N-CR filings, expressing concern 
over the timing requirements for specific items of Form N-CR,\1319\ as 
well as objecting to the timing requirements more generally.\1320\ For 
example, one commenter recommended